Algeri; Re Colorado Group Limited [2011] VSC 260 (20 June 2011)

2 The receiver's application was to extend the period defined in s 439A(5)(a) of the Act for 'of up to nine months' so that the receivers of the assets of the group could undertake a sale process in the hope of preserving as much value as possible for creditors, as well as the jobs of employees and trading relationships. James Stewart, together with Brendon Richards and Wil Colwell, all partners of Ferrier Hodgson, Chartered Accountants, had been appointed joint and several receivers and managers of the six operating companies in the group on 30 March 2011, including Colorado Group Ltd. The receivers supported the application by the administrators.

3 The administrators' application was supported by an affidavit of Mr Algeri affirmed on 28 April 2011, an affidavit of Mr Stewart sworn on 29 April 2011 and an affidavit of Alan James Mitchell sworn on 3 May 2011.

4 The Colorado Group operates retail and wholesale businesses in Australia and New Zealand with five main apparel and footwear brands. These are 'Colorado', 'Diana Ferrari', 'Jag', 'Mathers' and 'Williams'. The group operated 428 stores in Australia and New Zealand. There were 94 Colorado brand stores in Australia and nine in New Zealand, 29 Diana Ferrari stores in Australia, 28 Jag stores in Australia, 18 Mathers stores and 148 Williams stores. There were also clearance outlets.

5 There are six active companies in the group. They were, ARH Investments (Australia) Pty Ltd, which is the holding entity of Colorado Group Ltd, which was the main trading entity. Colorado Group operated out of three main offices located in Brisbane and Melbourne, and provided centralised finance, accounting, legal, human resources, payroll, information technology and customer support functions to the group. These services were shared by all brands. No brand was able to operate independently of the infrastructure. Colorado Group was the main employer of staff and, with one exception, was the tenant in relation to all retail outlets. It was the main contracting entity of the group in relation to employees, suppliers, landlords and financial services.

6 Colorado GP was a special purpose company, incorporated for a proposed financial restructure. It was inactive with no trading history. Colorado Group Sourcing provided liaison services to Colorado Group in relation to the import and export of goods and employs approximately 15 employees. It had offices in China. Jag (Aust) held intellectual property, as did Diana Ferrari (Australia). The other four companies in the group were dormant, with no trading history. Receivers were not appointed to those entities.

7 Mr Algeri deposed that from initial investigations it was apparent that the group was profitable at certain periods, although its cash flow was insufficient to meet its interest commitments and principal repayments to senior lenders. That appeared to be due primarily to the large amount of debt. Efforts to recapitalise or refinance debt did not succeed in reducing the debt burden. The failure of those efforts led to the appointments of administrators and receivers on 30 March 2011.

8 Mr Algeri deposed that he was yet to receive statements from the directors of the companies business, property, affairs and financial circumstances. They had written to him requesting an extension of time until 29 April 2011, and he had granted that extension.

9 The main liabilities of Colorado Group were debts owed to primary secured lenders for approximately $440 million. These debts were secured by fixed and floating charges granted by each of the six active companies to ANZ Fiduciary Services Pty Ltd, as security trustee for the syndicate of lenders. Colorado Group was also indebted to approximately 537 ordinary unsecured creditors for about $28 million. There were also employee entitlements.

10 Colorado Group employed 3,477 employees, of which about 1,200 were permanent full-time employees. Employee entitlements were estimated at approximately $8.284 million. Mr Algeri deposed that the receivers were carrying on the businesses. There were 433 leases with approximately 118 landlords. The receivers had issued notices to landlords of eight premises notifying them that the lessee intended to cease to use or occupy the premises.

11 On 31 March 2011, Mr Algeri wrote to the known creditors to notify them of the appointments the administrators and receivers, and that a concurrent meeting of creditors would be held on 11 April 2011. He advised creditors that it was likely that the administrators would make application to the court to extend the convening period so as to allow the receivers sufficient time to pursue a going concern sale of the business, and to allow the administrators time to properly consider any such sale and a possible deed of company arrangement.

12 The first meeting of creditors was held on 11 April 2011. At that meeting a committee of creditors was formed in relation to each of the active companies. Mr Algeri deposed that towards conclusion of the meeting he advised those present that an application may be made to extend the convening period for the second meeting of creditors for a period up to nine months so as to give the receivers time to sell the business as a going concern, and enable the administrators to consider a possible deed of company arrangement. The extended period was also to enable an investigation to be conducted into the affairs of the Group.

13 Mr Algeri deposed that at the time of making his affidavit he did not consider that the administrators had sufficient information to enable and to prepare and circulate a report to creditors that would comply with the requirements of the Act. He described the affairs of the group as complex. Mr Algeri deposed that in his opinion it was in the best interests of the creditors of the group that the convening period be extended. From information and belief he deposed that the receivers required additional time to complete the sale process. If a sale process was successful and a purchaser bought the businesses then it was likely that many of the employees would keep their jobs. Mr Algeri said that if the second creditors' meeting was held without giving the receivers the opportunity to complete the sale process it was likely that the companies would be wound up with the result that the employees would lose their jobs. He said that the suppliers, who comprised a large part of the unsecured creditors, were continuing to supply the group in circumstances where the receivers were only paying for new debts incurred in the course of the receivership. He said that if the companies were wound up, the suppliers would lose an important cash flow. He said that extending the convening period would allow the administrators to retain the option of recapitalising the group by way of a deed of company arrangement.

14 Mr Algeri deposed that if the convening period was not extended by the court, and the second meeting of creditors was required to be held within the prescribed time, the administrators would recommend that the meeting be adjourned until the sale process was complete. This would result in there having to be more than one further meeting, resulting in substantial expenditure and waste. He estimated the cost thrown away to be in the order of $80,000. Furthermore, the maximum period for which a meeting of creditors could be adjourned was 45 days. Mr Algeri deposed that such an adjournment was unlikely to allow the administrators sufficient time to complete their tasks and that further applications to the court would be necessary in any event.

15 Mr Stewart, one of the receivers, deposed to the facts stated by Mr Algeri from information and belief. He deposed that to secure a purchaser of the business as a going concern would maximise the returns to creditors. The sale process had commenced for the sale of the business. Mr Stewart said that suppliers were being paid approximately $12 million per month for new stock. He said that the receivers had continued to pay rent for the premises they continued to occupy. Only three landlords had contacted the receivers to require that their premises be vacated on the basis that leases had expired.

16 Mr Stewart deposed to the assets and liabilities of the group. He said that the main assets were inventory, valued at $69.3 million; good will and brand names valued at $29.9 million; property plant and equipment valued at $15.9 million; cash of $9.9 million; and debtors of $11.2 million. Accordingly, there was a significant shortfall when compared with liabilities. Mr Stewart deposed that the group paid approximately $5.3 million in monthly salaries, and that if it went into liquidation employee entitlements would crystallise and the amount owing to employees would be at least $8.284 million, before allowing for severance and pay in lieu of notice.

17 Mr Stewart described the sale process. He said that the receivers had sought expressions of interest by 19 April 2011, and received 60 expressions of interest on a confidential basis. The receivers were now seeking non-binding indicative offers for the business. They had not yet decided whether to sell all of the assets and undertakings to one purchaser, or to sell different components of the group to different purchasers. He said that the receivers were seeking to expedite this process, but did not expect that any binding offers would be made before the end of May 2011. Thereafter, the receivers would be required to consider any offer with all interested parties, including the administrators, and determine how best to proceed. Mr Stewart deposed that prospective purchasers would wish to engage in negotiations with landlords and future occupation of premises. He said that in his experience the negotiations with landlords would take time. The outcome of those negotiations would affect the purchase price received from the sale.

18 Mr Stewart deposed to his experience as a receiver of Australian Discount Retail, the Sports Girl/Sports Craft group and Kleins. These were large retail groups that had collapsed. He said that while there were differences, they were groups of similar size with retailing operations and complexity similar to the group. He deposed that the time required to complete the sale process for those business was up to nine months, and that he expected the sale process of the businesses of the group to occupy a similar timeframe. He said that an extension of the convening period would allow the receivers a better opportunity to preserve the businesses and obtain a more satisfactory outcome for creditors.

19 Mr Mitchell is a solicitor at Freehills, solicitors for the applicants. He deposed to service of the affidavit of Mr Algeri and the Originating Process on each of the landlords or their nominated solicitors together with a covering letter.

20 The object of Part 5.3A of the Corporations Act is stated in s 435A as follows:

435A Object of Part

The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

21 Section 439A(1) of the Act required the administrators to convene a meeting of creditors within a prescribed period of time unless the period was extended by the court. The purpose of the meeting is to consider the company's future. The creditors may resolve to execute a deed of company arrangement, bring the administration to an end or that the company by wound up. Section 439A(4) required the administrator to provide a report to creditors to assist them in making their decision as to the future of the company. The administrators said that they would be unable to provide such a report for some time if they were to await the completion of the sale process. They said that the preparation of a report prior to the completion of the sale process would be premature. The administrators said that the group was particularly complex and that their investigation could not be completed within a short period of time. They also wanted to retain the option of preparing a deed of company arrangement.

22 Section 439A(6) of the Corporations Act provides:

(6) The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires.

23 Section 447A(1) provides:

(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

24 When an application is made for an extension of time to convene a meeting, the court will attempt to strike a balance between the expectation that the administration will be conducted relatively speedily and summarily, and the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders.[1] Where the relevant business group is large and complex, or there is a prospect of successful realisation of assets through negotiations with third parties, as in the present case, the administration process is often given more time. There is no place for a predisposition against granting an extension.[2] In Re FEA Plantations Ltd [2010] FCA 468, at para 19, Dodd-Streeton J said:

Relevant authorities recognise that strict compliance with the tight timeframes for convening the second meeting (statutorily imposed to avoid the prolongation of the voluntary administration procedure and its concomitant moratorium and impact on rights) may not be feasible in large and complex administrations, if the administrators are to produce informed recommendations based on adequate investigations, and a sufficiently comprehensive and detailed report capable of providing meaningful assistance to the creditors in deciding the fate of the company.

25 In Re Riviera Group,[3] Austin J noted that extensions had been granted in cases falling within the following broad categories:

The reasons given for an extension in subsequent cases can be grouped into the following broad categories:

• the size and scope of the business: Re Lombe; Babcock & Brown Ltd (admins apptd) [2009] FCA 349 (Re Lombe); Re Worrell; Storm Financial Ltd (recs and mgrs apptd) (2009) 69 ACSR 584 ; [2009] FCA 70 (Re Worrell); Re ABC Learning Centres Ltd; Application by Walker (No 5) [2008] FCA 1947;
• substantial offshore activities: Re Lehman Bros Australia Ltd [2008] NSWSC 1132;
• large number of employees with complex entitlements: Re S & D International Pty Ltd (in liq); Malhotra v Tiwari [2005] VSC 496; Re Ansett Australia Ltd and Korda; sub nom Ansett Australia Ltd (No 3) (FCR) (2002) 115 FCR 409 ; 40 ACSR 433 ; [2002] FCA 90;
• complex corporate group structure and intercompany loans: Re Lombe; Re Octaviar Ltd (admins apptd) (recs and mgrs apptd) (ACN 107 863 436) [2008] QSC 272; Re LED Builders Pty Ltd (admin apptd) [2008] NSWSC 633; Hall; Re Australian Capital Reserve Ltd (admins apptd) [2007] FCA 1328;
• complex transactions entered into by the company (for example securities lending or derivatives transactions): In Re Lift Capital Partners Pty Ltd (admin apptd) [2008] NSWSC 446 (Re Lift Capital);
• complex prospects of recovery proceedings: Re Worrell; Coal Developments (German Creek) Pty Ltd v Cmr of Taxation (2007) 241 ALR 667 ; [2007] FCA 1324;
• lack of access to corporate financial records: Re Sims; Destra Corp Ltd [2008] FCA 2002; Re Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192 ; [2007] NSWSC 363;
• the time needed to execute an orderly process of disposal of assets: Re Carter, SFM Australasia Pty Ltd (admin apptd) (ACN 105 317 333) (No 2) [2009] FCA 419; Re ABC Learning Centres Ltd; Application by Walker (No 7) (2009) 71 ACSR 560 ; [2009] FCA 454;
• the time needed for thorough assessment of a proposal for a deed of company arrangement: Silvia, Re Austcorp Group Ltd (admin apptd) [2009] FCA 636;
• where the extension will allow sale of the business as a going concern: Re Lombe; Australian Discount Retail Pty Ltd [2009] NSWSC 110; Stewart, Re Kleins Franchising Pty Ltd (admin apptd) [2008] FCA 721; Re Uni-Aire Security Pty Ltd (admin apptd) [2006] FCA 1423;
• more generally, that additional time is likely to enhance the return for unsecured creditors: Deputy Commissioner of Taxation v Scottsdale Homes No Pty Ltd (No 2) [2009] FCA 190; Re Fitzgerald; Primebroker Securities Ltd (admin apptd) (recs and mgrs apptd) [2008] FCA 1247; Re Vouris; Marrickville Bowling and Recreation Club Ltd [2008] FCA 622.

26 Applying all of these principles to the facts of this case, I am of the opinion that there are substantial grounds to support an extension of time for the period it sought by the administrators. These are:

(1) The application is supported by the receivers, who have commenced the sale process, and who depose that they require up to nine months within which to complete that process so as to provide the best possible outcome to stakeholders including employees and suppliers. The process may also promote a scheme of company arrangement.

(2) The administrators have expressed the opinion that it is in the best interest of the creditors, including employees and suppliers, that the convening period be extended for a period of up to nine months.

(3) The administrators are currently unable to prepare and circulate a meaningful report to creditors so as to comply with their obligations under s 439A(4) of the Act. Such a report is required to enable the creditors to be adequately informed about the options for the future of the Group. The preparation of such a report, in the absence of the completion of the sale process, would be premature.

(4) A reasonable extension will avoid unnecessary cost and expense of adjourned meetings.

(5) If the sale process is successful, it is very likely that many of the employees will continue in their employment.

(6) While the receivers continue to operate the businesses in order to maintain their value for the purpose of the sale process they are acquiring goods and services from suppliers who comprise a large part of the unsecured creditors.

(7) The extension of the convening period, permitting the sale process to run its course, will facilitate the exploration of a possible recapitalisation of the group by way of a deed of company arrangement.

27 In Re Australian Discount Retail,[4] Barratt J said:

The second meeting of creditors is best held at a time when it is possible to give creditors fairly definitive financial information that will assist them in this decision making. In the present case, information about the financial consequences of a sale of the business is crucial, assuming such a sale eventuates. In addition, creditors' decision-making will be much more difficult and more complicated if they are compelled to make a decision about the company's future based on speculation about the possibility of a going-concern sale. Further time for the formulation and digestion of recommendations based on established realities will avoid the possibility of what might be a premature decision in favour of winding up as the only practically available option. [5]

28 An important consideration when extending time is the effect of the statutory moratorium on some creditors, and of particular relevance in this case, landlords of premises occupied by the business.[6] As at the date of the appointment of the administrators all invoiced rents and outgoings had been paid. The receivers have continued to pay all rent and outgoings for all occupied premises. The administrators have provided all landlords with copies of the originating process and Mr Algeri's affidavit. A person adversely affected by the moratorium may approach the court for leave to deal with property. There was no attendance by any landlord, although I was informed that solicitors for one landlord, where the lease on premises has expired, have advised that they are seeking instructions from their client as to what if any steps it may wish to take under s 440C of the Act. The grant of the extension sought by the administrators will not inhibit a lessor making application to the court.

29 The type of order sought by the administrators is not novel. It is colloquially described as a 'Daisytek' order, having been made by Lindgren J in Re Daisytek.[7] My attention was directed to other examples in which lengthy extensions of the convening periods were granted to permit a sale or recapitalisation process to be undertaken. The examples given involve the Munday Group,[8] the Griffin Cole Group,[9] ABC Learning Group,[10] Australian Discount Retail Group,[11] Kleins Group,[12] Chemeq Group.[13]

30 An order was made in the following terms. The order was formulated so as to enable a meeting to be convened earlier than nine months and required the administrators to inform the landlords and all creditors of the orders made.

1. Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (Act) that the period within which the Plaintiffs must convene the second meeting of the creditors of Colorado Group Limited (administrators appointed) (receivers and managers appointed) (ACN 004 327 566) and each of the companies listed in the attached schedule (Companies) be extended up to and including 3 February 2012.
2. Pursuant to s 447A(1) of the Act that the second meetings of the creditors of each of the Companies required by s 439A of the Act may be held together or separately and at any time during, or within five business days after the end of, the convening period as extended by the Court notwithstanding the provisions of s 439A(2) of the Act.
3. The applicants have liberty to apply for any purpose connected with the administration of the Companies including but not limited to seeking a further extension of the convening period prior to 30 December 2011.
4. Any person having a sufficient interest may apply to the Court to vary any of Orders 1 or 2 above.
5. With respect to those landlords (or their representatives) referred to in Exhibit AJM-1 of the Affidavit of Alan James Mitchell dated 3 May 2011, the Plaintiffs (or their solicitors) inform these landlords of the orders made pursuant to this application by means of a circular forwarded by post or e-mail (as the case may be) within seven days after the making of orders.
6. With respect to all other creditors:
   1. the Plaintiffs inform those creditors of the orders made pursuant to this application by making the orders available on the 'Colorado Group Ltd' section of the website maintained by the Plaintiffs' firm Deloitte Touche Tohmatsu (http://www.deloitte.com/view/en\_AU/au/services/corporatereorganisation/businessesunderadmin/colorado%20%20%20/index.htm) within seven days after the making of orders; and
   2. the Receivers inform those creditors of the orders made pursuant to this application by making the orders available on the 'Colorado Group' section of the website maintained by the Receivers' firm Ferrier Hodgson (http://www.ferrierhodgson.com/en/Current%20Matters/Corporate%20Recovery%20Matters/Colorado%20Group.aspx) within seven days after the making of orders.
7. The costs of and incidental to this application be costs and expenses in the administration of and be paid out of the assets of the Companies.

Adele Palmer D.B.A. Pty Ltd (administrators appointed)

ARH Investments (Australia) Pty Ltd (administrators appointed) (receivers and managers appointed)

Colorado Adventurewear Pty Ltd (administrators appointed)

Colorado GP Pty Ltd (administrators appointed) (receivers and managers appointed)

Colorado Group Limited (administrators appointed) (receivers and managers appointed)

Colorado Group Sourcing Pty Ltd (administrators appointed) (receivers and managers appointed)

Diana Ferrari (Australia) Pty Ltd (administrators appointed) (receivers and managers appointed)

Jag (Aust) Pty Ltd (administrators appointed) (receivers and managers appointed)

Williams the Shoemen Pty Ltd (administrators appointed)

[1] Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 [10]; Re Pan Pharmaceuticals Ltd [2003] FCA 598; (2003) 46 ACSR 77 [41]-[42]; Re Austcorp Group Ltd [2009] FCA 636 [18]; Re Midas Australia Pty Ltd [2009] FCA 38 [11]; Re Dimidium Group Pty Ltd [2010] NSWSC 1086 [15].

[2] Re Riveria Group Pty Ltd [2009] NSWSC 585; [2009] 72 ACSR 352, [18]; Re ABC Learning Centres Ltd (No7) [2009] FCA 454; (2009) 71 ACSR 560; Re Rivercity Motorway Pty Ltd [2011] FCA 295.

[3] [2009] NSWSC 585; [2009] 72 ACSR 352 [13].

[4] Re Australian Discount Retail Pty Ltd [2009] NSWSC 110.

[7] Re Daiseytek Australia Pty Ltd [2003] FCA 575; (2003) 45 ACSR 446.

[8] Re Munday Group Pty Ltd [2010] FCA 447.

[9] Mentha; Re the Griffin Coal Mining Co Pty Ltd [2010] FCA 30; Mentha; Re the Griffin Coal Mining Co Pty Ltd (No2) [2010] FCA 499; and Mentha; Re the Griffin Coal Mining Co Pty Ltd (No3) [2010] FCA 1087.

[10] Walker; Re ABC Learning Centres (No7) [2009] FCA 454; [2009] 71 ACSR 560; and Walker; Re ABC Learning Centres (No8) [2009] FCA 994; [2009] 73 ACSR 478.

[11] Lombe; Re Australian Discount Retail Pty Ltd [2009] NSWSC 110; and Lombe; Re Kirby Street (Holdings) Pty Ltd [2009] NSWSC 949.

[12] Stewart; Re Kleins Franchising Pty Ltd [2008] FCA 721.

[13] McMaster; Re Chemeq Ltd [2007] WASC 154.