Allied Express Transport Pty Limited v Exalt Group Pty Ltd

REASONS FOR JUDGMENT 1 Allied Express Transport Group Pty Limited and Allied Overnight Express Pty Limited (Allied) seek an order for the winding up of Exalt Group Pty Ltd (Exalt) under s 459P of the Corporations Act 2001 (Cth) (the Act). Exalt is in administration. It concedes that it is insolvent and that unless the winding up application is adjourned, it has no ground of opposition to the winding up order. Exalt seeks an adjournment of the winding up application under s 440A(2) of the Act or, alternatively, under the general power to grant an adjournment contained in s 467(1). Under s 440A(2), the Court is bound to adjourn the hearing of an application to wind up a company that is under administration if the Court is satisfied that it is in the interests of the creditors to continue under administration, rather than be wound up. 2 The principles upon which the Court is required to grant an adjournment under this section are well-settled. They were usefully summarised by Black J in Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402; (2012) 92 ACSR 88 at [16]ff. Essentially, what is required to satisfy the pre-condition laid down by s 440A(2) is that the Court be satisfied that there is a sufficient possibility, as distinct from a mere optimistic speculation, that creditors' interests will be accommodated to a greater degree in an administration than in a winding up. 3 An applicant for an adjournment under this subsection bears the onus of demonstrating that there is some persuasive evidence to enable it to be seen that there are assets which, if realised under administration rather under liquidation, would produce a larger dividend or an accelerated dividend for the creditors. The exercise which is involved invites a comparison between the likely return which will be produced under administration and under liquidation. Of course, in stating these guiding principles, it is necessary to bear in mind that primacy must be given to the express words of the subsection. Exalt seeks an adjournment until after today when the second meeting of creditors is to consider a proposed deed of company arrangement (DOCA). 4 Exalt relies upon evidence which, if accepted, is said to demonstrate that priority creditors will be paid in full and ordinary unsecured creditors will receive a dividend of a minimum of two cents to a maximum of 12 cents at the conclusion of the three year period provided for in the DOCA. This is said to produce a better result than in a winding up under which the priority creditors, who are employees, will receive less than 100 cents in the dollar, with ordinary creditors receiving nothing. A very substantial quantity of evidence was put before me yesterday. A good deal of it was directed at the position to be taken at the meeting by creditors. 5 In essence, it appears that priority creditors support the DOCA, as do a substantial number of ordinary creditors. However, it also appears that a number of creditors with very large debts oppose the DOCA. On the evidence before me, it seems that it would be likely that if the meeting goes ahead, a majority in number would support the DOCA, but a majority in value may oppose it. The result may therefore be a deadlock, with the casting vote going to the chair of the meeting, Mr Vardy, who is the administrator of Exalt. Ordinarily, one might think that in light of the urgency of the situation, with the meeting due to be held today, the matter should be left to creditors. 6 It is well recognised that the creditors are usually better judges of what is in their interests than the Court, and that they should be given an opportunity to consider a DOCA if it appears that they will do better under the DOCA than under a liquidation. However, this is not an ordinary application. At the heart of the matter is the nature of the DOCA and the basis upon which Mr Vardy has expressed his opinion that a better return will be received under the DOCA than under liquidation. 7 Exalt carries on the business of warehousing, freight, distribution and logistics. Its principal asset is its customer base and certain software that enables it to service that customer base. Until recently, it operated at four leased warehouse premises, but it has vacated one of the warehouses, and proposes to vacate another warehouse, leaving it with only two sets of premises. This is said to result in substantial cost savings without impacting upon the company's revenue stream. Importantly, Exalt has no trucks or other vehicles to transport customers' goods to them, and is reliant entirely on providers of transport to carry out that service. Two major service providers were Australia Post and TNT, but they are substantial creditors and are not prepared to deal with Exalt. 8 The DOCA is based upon the continued operation of Exalt's business by another company called Logistics Partners Pty Ltd (Logistics). It should be borne in mind that until recently Logistics was a shelf company which was only acquired by its owners in March of this year. Significantly, its day-to-day operations will be run by Mr Christopher Dobson, as general manager. Mr Dobson is a director of Exalt. The directors of Logistics will be Mr Dobson's wife and a UK resident, Mr Sampson, who is unlikely to have any real day-to-day involvement in the conduct of Logistics' business. 9 Accordingly, the business of Logistics will therefore be conducted in essence by the parties who conduct the failed business of Exalt, and the business of Logistics will be conducted from the premises currently occupied by Exalt. The DOCA provides for the assets of Exalt to be transferred to Logistics, but with title to pass only upon completion of the DOCA payments by Logistics. The assets which will pass include plant and equipment, but they are minimal. The consideration payable by Logistics is $450,000, payable by instalments of $12,500 per month over a three year period, the payments to be made out of the profits which are projected to be generated from the business. 10 Exalt has not traded profitably over the last three years. The position which is anticipated is therefore one of a substantial turnaround in the profitability, and the success of the DOCA is dependent upon it. Mr Vardy projects a turnaround, following the implementation of the DOCA, with savings to come in part from the relinquishment of the leases on two of the warehouses. The lessors of those premises will have claims for damages or for unpaid rent, but their claims will be included as debts payable out of the fund to be provided from payments under the DOCA. It should be borne in mind that this will swell the volume of creditors and therefore have an impact upon likely dividends payable out of the funds available from the DOCA. 11 Mr Vardy has undertaken, in the comparatively short time available to him, a review of the proposal and the profitability projections which underpin it. Mr Farnsworth, who has consented to be liquidator if Exalt is wound up, has also conducted an exercise of projecting the relevant comparison between administration and a winding up. The essential difference between the two professionals is as to the reliability of the projected profits from the business over the next three years and the true level of recoveries which may be expected in a winding up. 12 However, there is a further issue which causes me some real concern as to the process which has been undertaken. It was for this reason that I required Mr Golledge, who appears for Exalt, to call Mr Vardy, who was cross-examined by Mr Feller SC for Allied. The matters which were the subject of the evidence were as follows. First, Mr Vardy has not made any attempt to follow up on four expressions of interest that were received by him for the purchase of the business of Exalt. He therefore does not know whether any of those persons or companies would be prepared to purchase the business on terms more favourable than those put forward by Logistics. Nevertheless, at section 6 of his report, Mr Vardy states that Mr Dobson has proposed a DOCA based on the continued operation of the company's business. He says: In the absence of an offer or offers which collectively outweigh the proposed contributions under the proposed DOCA, it is apparent that the DOCA will provide a better return to creditors than the sale of the company's business and/or individual assets. 13 This statement, which is at the heart of Mr Vardy's opinions and projections, is inaccurate, because it implies that there were no other offers, notwithstanding the fact that Mr Vardy took no steps to ascertain whether the parties who put forward expressions of interest were indeed prepared to make binding offers. I do not criticise Mr Vardy for the statement in his report, because it appears that the report was written by another employee, although Mr Vardy signed off on the final terms of the report. He apparently did so without appreciating the inaccuracy involved in the statement set out above. He conceded the inaccuracy and the possible misleading nature of the statement in cross-examination yesterday afternoon. However, as I have said, the opinion is critical, because it goes to the heart of the comparison involved in the necessary exercise which underlies the exercise of the powers of the Court under s 440A(2) of the Act. Mr Vardy gave evidence as to the basis of his conclusions in an effort to explain them. He said the expressions of interest which he received did not include a dollar figure (other than one, which was based on a percentage of turnover over a period of time). Mr Vardy took the view that to improve upon the position that was inherent in the Logistics proposal, a purchaser would need to pay an amount between $200,000 and $430,000, so as to produce a return to creditors. 14 In Mr Vardy's opinion, the calculations which he made on the basis of his investigations of Exalt produced an outcome which was likely to be better than what he thought might be recovered from other interested parties, even though, as I have said, he did not follow up and hold any discussions with them. I accept that I must give some weight to Mr Vardy's opinion, but it is not an opinion to which I can give great weight in light of the matters that I have set out above. Also, the opinion reached by Mr Vardy must of necessity take into account the uncertainties that surround any future operations of the business of Logistics. That is the second area of concern which was addressed in Mr Vardy's evidence. Those uncertainties inform the position which will arise if Logistics is unable to meet the contributions under the DOCA. 15 Whilst strictly speaking, ownership of the assets will not pass to Logistics until the end of the three year period, in reality Logistics will acquire the customer base almost immediately. Mr Vardy states that he will obtain a general security interest over the assets of Logistics, which will include the customer base. But the commercial reality is that even if Mr Vardy is able to enforce the charge and appoint a receiver of Logistics in the event of default under the DOCA, Mr Vardy is unlikely to be able to realise the same value from the customer base that he would be able to realise if the business were to be sold now as a going concern as a result of a competitive tender. 16 In short, I have real concerns as to whether there is a sufficient possibility as distinct from a mere optimistic speculation that the creditor's interests will be accommodated sufficiently by an administration. This brings me to the third area of concern which is related to the matters that I have already addressed. It seems to me that it is impossible to determine on the evidence which I heard yesterday whether subcontractors who supply transport services to the company would continue to supply those services to Logistics. Those services are at the heart of the ability of Exalt or Logistics to continue to conduct its business. The ownership and control of Logistics suggest to me that there may well be reluctance on the part of substantial transport companies to deal with Logistics, which will be run by the same party who conducted the failed business of Exalt. 17 Lastly, I should point out that the benefits to creditors which are projected by Mr Vardy are not particularly substantial. At the lower end of the scale, ordinary unsecured creditors will receive only two cents in the dollar at the end of three years. However, it is true that it seems likely that employees will receive 100 cents in the dollar rather than a partial payment as is projected by Mr Farnsworth's view of the likely outcome of a winding up. 18 In Re Rildean Pty Ltd; ex parte TJF Scaffolding Maintenance and Hire Pty Ltd [2002] NSWSC 631 at [6], Young J said that: … the whole purpose of administration is to see whether companies can continue to live under some form or another, rather than die under liquidation, and that due opportunity must be given for any reasonable possibility to be explored… . 19 His Honour added a cautionary note as to the use of administration as a last ditch effort to stave off proper winding up proceedings. In my opinion, the present case is a last ditch effort. However, in spite of the real concerns which I have expressed above, I think the appropriate course is to adjourn the hearing of the application to wind up Exalt in order to allow the creditors to consider the matter at the meeting which is due to take place at 11 am today. I should point out that I expect the concerns which I have expressed in my judgment to be brought to the attention of the meeting. I note Mr Vardy's undertaking that, even if the deed is approved, neither he nor the company will sign the proposed DOCA. I will require him to give that undertaking as an undertaking to the Court. It seems to me in the circumstances that the appropriate course is to exercise my power to adjourn the hearing of the proceeding. I propose to adjourn it until 2.30 pm this afternoon subject to Mr Vardy giving an undertaking to the Court in the terms proposed and also any other undertaking that may reasonably be required by Allied. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.