By Interlocutory Process filed on 24 November 2016 the Plaintiffs, Messrs Goyal and Winterbottom, seek a declaration under s 447C of the Corporations Act 2001 (Cth) that their appointment as administrators of Maria's Farm Veggies Pty Limited (admins apptd) ("Company") on 28 June 2016 was valid. That application follows claims made by Mr Cornelis Disselkoen, a former director of the Company, that their appointment as administrators was invalid by reason that their appointor, Macquarie Bank Limited ("MBL") was not a person who was entitled to enforce a security interest on that date in the whole, or substantially the whole, of the Company's property. The application has significant commercial urgency about it, because the administrators propose shortly to take steps directed to the completion of the construction of a substantial glasshouse on the Company's property, in a manner which it is hoped will realise value for the Company's creditors, which may be lost or substantially delayed if the construction of that glasshouse does not proceed. The validity of their appointment plainly impacts upon their ability to proceed with that proposal.
Two preliminary aspects of the application should be noted. The first is that the administrators invited me to proceed, for the purposes of this application, on the basis of certain assumptions that were adverse to their interests, made only for the purposes of this application, which made it more likely that the Farm Debt Mediation Act 1994 (NSW) ("FDMA") would apply in the relevant circumstances. Second, the administrators have foreshadowed an application under s 447A of the Corporations Act, which may have the substantive effect of validating their appointment, even if, as will emerge below, their application for a declaration as to its present validity is unsuccessful.
I will first deal with the scope of the application under s 447C of the Corporations Act, before turning to the chronology of events and the affidavit evidence, which is largely undisputed. I will then address the novel, but important, issue of construction raised by the application.
Section 447C of the Corporations Act relevantly provides that:
"447C (1) If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company's creditors may apply to the Court for an order under subsection (2).
447C (2) On an application, the Court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground."
Orders made by the court under this section are declarative rather than curative: Smolarek v McMaster (as administrator of Eznet Pty Ltd [2006] WASCA 216 at [25]; Re HPI Australia Pty Ltd [2008] NSWSC 1106 at [8]. It follows that, as may or may not ultimately be the case here, it is conceivable that a situation could arise that an order declaring the validity of an administrator's appointment under s 447C of the Corporations Act is not made, notwithstanding that any invalidity in that appointment would be cured by an order under s 447A of the Corporations Act.
The question of the validity of the administrators' appointment in this case turns upon whether, at the point of their appointment, MBL was a person who was "entitled to enforce" a security interest in the whole, or substantially the whole, of the Company's property which had "become", and was still, enforceable at that point. That follows from the terms of s 436C(1) of the Corporations Act which provides that:
"A person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company's property may by writing appoint an administrator of the company if the security interest has become, and is still, enforceable."
If MBL was entitled to enforce such an interest at the point the administrators were appointed, then it was entitled to appoint them under s 436C of the Corporations Act. Whether MBL was "entitled to enforce" such a security, and whether that security interest had then "become enforceable", for the purposes of s 436C of the Corporations Act, here depend upon the operation of ss 6 and 8 of the FDMA. Before I turn to those questions, I should set out a brief chronology of events.
The Company owns real property at Williamstown, New South Wales, on which a substantial glasshouse was to be constructed, part of which has been constructed. On 29 January 2015, the Company as borrower entered into a Syndicate Facility Agreement for $36 million with MBL as agent and security trustee and other entities, which provided for a loan of that amount to the Company. Clause 3.1 of the Syndicate Facility Agreement provided for the purposes for which the moneys advanced would be applied, including construction of the glasshouse and other costs and expenses in relation to the project and working capital for the Company. Clause 25 contained undertakings as to the production of particular vegetables by particular dates and clause 26 provided for events of default. Clause 26.19 permitted the lender to take particular steps in the event of a continuing event of default. There is evidence that the Company is presently indebted to the lenders for at least $36 million and, on the evidence of Mr Disselkoen, the amount of that indebtedness presently exceeds $41.7 million (Disselkoen 25.11.16 [8]). There has also been evidence in earlier applications in the Court that substantial debts are owed to trade creditors of the Company.
The Company granted a security interest to MBL, as security trustee, in any or all of its property to secure its obligation under the Syndicate Facility Agreement by a General Security Deed ("GSD") dated 4 February 2015, which was registered on the Personal Property Securities Register. Clause 7 of the GSD provided for the consequences of an Event of Default (as defined) and clause 8 provided that the secured party had, subject to applicable law, a range of powers on Event of Default. The Company also granted a real property mortgage in favour of MBL.
By letter dated 18 March 2016, the Company acknowledged numerous Events of Default, including non-payment under clause 26.1 of the Syndicate Facility Agreement, had occurred, and the lenders provided further funding of $850,000 without waiver of those acknowledged Events of Default. By letter dated 20 June 2016 MBL confirmed the continuing Events of Default, again including non-payment under clause 26.1 of the Syndicate Facility Agreement. On 28 June 2016, MBL appointed Messrs Goyal and Winterbottom as administrators of the Company, under s 436C of the Corporations Act and gave notice of that appointment to the Company.
Proceedings were subsequently brought against the Defendants, including Mr Disselkoen, in which he cross-claimed for a declaration against MBL as to the invalidity of the administrators' appointment. Mr Disselkoen discontinued that Cross-Claim last week, while maintaining a contention as to the invalidity of the administrators' appointment, which has prompted this application by the administrators. On 23 October 2016, nearly four months after the administrators were appointed, Mr Disselkoen, purportedly on the Company's behalf, requested a mediation by notice under s 9 of the FDMA. If the administrators were validly appointed, the FDMA at that point had no application by reason of s 5 of the FDMA. As I have noted above, whether the administrators were validly appointed will not ultimately be determined by this judgment, because it will depend, among other matters, upon the outcome of the foreshadowed application under s 447A of the Corporations Act. It is common ground that MBL has not in fact sought to appoint, or appointed, receivers, receivers and managers or a controller to the Company, has not itself taken possession of the Company's property as mortgagee and has not given a "statutory enforcement notice" under the FDMA or given notice of its intention to exercise a power of sale under the mortgage or GSD in relation to the Company's property, or commenced any proceeding claiming an order for payment by the Company of amounts due under the Syndicate Facility Agreement.
Turning now to the affidavit evidence, the administrators rely on the affidavits of their solicitor, Mr Walter, dated 9 November and 24 November 2016 which set out the background events, to which I have largely referred above. Mr Disselkoen relies on his affidavit dated 25 November 2016, which was said to be relevant to the exercise of the Court's discretion whether to make the declaration sought by the administrators. Mr Disselkoen there refers to conversations with a third party which indicated that that third party would be prepared to restart building the glasshouse on the property in January 2016, if the Company were no longer in administration and in exchange for payment of its current unsecured debt and expenses. Mr Disselkoen there asserts, without further elaboration, that if the Company was not in administration, he would obtain funds (I interpolate, in excess of $41.7 million) sufficient to carry on its business and pay out its lenders, although he adds that he would first seek to negotiate a discount of that amount.
In order to obtain the declaration which the administrators seek under s 447C of the Corporations Act, the administrators need to establish the validity of their appointment by MBL, and without reliance on any discretionary power of the Court under s 447A of the Corporations Act. They rely on three propositions, each of which is contested by Mr Disselkoen, in support of the validity of their appointment. First, they submit that MBL was "entitled to enforce" its security interest on 28 June 2016, when it appointed the administrators, although I note that s 436C of the Corporations Act requires not only that, but also that the security interest had become enforceable at that point. There is no contest about the fact that the security interest was over the whole or substantially the whole of the Company's property for the purposes of that section, so that that element of MBL's entitlement to appoint an administrator is satisfied. The administrators rely on definitions of the term "entitle" in, for example, Jowitt's Dictionary of English Law, as amounting to "have a right to". They submit that MBL as security trustee had become entitled to, or had a legal right to, enforce its security under the terms of the GSD, where Events of Default had occurred to make the security enforceable in accordance with its terms. There is no doubt that, putting aside the terms of the FDMA, MBL was entitled to enforce its security under the GSD. There is also no dispute that the intent of s 436C of the Corporations Act, reflecting its terms and the recommendation of the Australian Law Reform Commission that led to its introduction, is that a person who has a present right to appoint a receiver or controller should be entitled to appoint an administrator, where the appointment of an administrator may better serve the interests of unsecured creditors than the appointment of a receiver or controller.
The real dispute lies, here, as to whether the effect of ss 6 and 8 of the FDMA is such that, as at the date of the administrators' appointment, MBL was not then a person who was entitled to enforce its security interest or that security interest had not become enforceable at that point. Section 3 of the FDMA provides for the object of the FDMA, which requires mediation before a creditor can take possession of property or other enforcement action under a farm mortgage. Section 5 of the FDMA provides that the FDMA applies in respect of creditors in relation to a "farm debt" as defined, and the administrators have accepted, but only for the purposes of this application, that the elements necessary for the application of the FDMA are satisfied.
Section 8(1) of the FDMA in turn provides that a creditor (as defined) to whom money under a farm mortgage (as defined) is owed by a farmer (as defined) may not take enforcement action (as defined) against the farmer in respect of the farm mortgage until at least 21 days have elapsed after the creditor has given a notice to the farmer under this section. In Constantinidis v Equititrust Ltd [2010] NSWSC 299; (2010) 14 BPR 27,217, Barrett J (as his Honour then was) helpfully summarised the operation of s 8(1) of the FDMA (at [11]) as follows:
"The s 8(1) prohibition operates to preclude action by a person who, at the time the action is taken, is a 'creditor' to whom money is, at that time, owed under a mortgage which is at that time a 'farm mortgage' by a person who is, at that time, a 'farmer'. Thus, the prohibition does not operate unless all of the 'creditor' status of the person taking action, the 'farm mortgage' status of the mortgage under which the money is owed to that person and the 'farmer' status of the person owing the money exists at the time the action is taken."
The term "enforcement action" is in turn defined in s 4(1) of the FDMA as including taking possession of property "or any other action to enforce the mortgage". I will return below to whether the appointment of the administrators itself falls within that section. Section 6 of the FDMA provides that enforcement action taken by a creditor to whom the FDMA applies is void. It is common ground that MBL did not give notice under s 8(1) of the FDMA, whether 21 days before appointing the administrators, or at all.
Messrs Bennett and Cassimatis, who appear for Mr Disselkoen, also draw attention to s 33 of the Interpretation Act 1987 (NSW) which requires the Court to prefer a construction that will promote the purpose or object underlying a statute to a construction that would not promote that object, and submit, correctly, that the statutory purpose of an Act is to be drawn from consideration of that Act as a whole. They point to several authorities that have considered the purpose of the FDMA, including Varga v Commonwealth Bank of Australia Ltd [1996] NSWSC 86 and Waller v Hargraves Secured Investments Ltd [2012] HCA 4; (2012) 245 CLR 311 at [28]. I in turn reviewed those authorities in Re Sundara Pty Ltd [2015] NSWSC 1694 and do not repeat that review here. I note, however, that a significant part of the issues in this case depend, not on the proper construction of the FDMA, but instead on the proper construction of s 436C of the Corporations Act, which itself should be given a purposive construction so as to promote the objects of Part 5.3A of the Corporations Act specifically and the Corporations Act generally.
Mr Disselkoen's first submission, in response to the administrators' submissions in this respect, amounts to the simple proposition that, on 28 June 2016, MBL was not "entitled to enforce" any security interest it held that constituted a farm mortgage, because it had not observed the requirements of the FDMA, and enforcement was therefore prohibited by s 8 of the FDMA. Mr Pike, who appears with Mr Bova for the administrators, responds with an equally simple but contrary submission, that s 8(1) of the FDMA did not deprive MBL's security interest of enforceability, but simply required that MBL give the requisite notice to the extent that the FDMA applied and to the extent it sought to exercise the rights that would fall within the definition of "enforcement action". Mr Pike submits that the FDMA assumes that a security such as the GSD is enforceable, and then prohibits a step by way of "enforcement action" taken without satisfaction of the condition in s 8 of the FDMA, and renders void a step taken without satisfaction of that condition.
This question is ultimately one of impression, albeit it must be resolved by reference to the terms of s 436C of the Corporations Act and ss 6 and 8 of the FDMA, as well as with regard to the statutory purpose of the relevant legislation, as it emerges from their terms. It appears, notwithstanding the authorities to which I have been taken, that this question has not previously been directly considered by the cases, although there are several cases that consider related questions, to which I will refer. As I have noted above, s 436C of the Corporations Act is directed to the position where a person (relevantly MBL) is entitled to enforce a security interest in the whole or substantially the whole of the company's property and the security interest "has become, and is still, enforceable". In an ordinary case, where the FDMA did not apply, a security interest would likely become enforceable on the occurrence of an event of default and, possibly, the giving of any requisite contractual notice to bring about its enforceability.
If the FDMA applies, it seems to me that, as Mr Bennett points out, it cannot properly be said that MBL is "entitled to enforce" its security interest, or that that security interest has "become ... enforceable", at a point at which enforcement would in fact be prohibited by s 8 of the FDMA, unless and until the requisite notice was given and any further steps required by the FDMA were then taken, where any act of enforcement prior to that point would be invalidated, had it occurred, by s 6 of the FDMA. It seems to me that it is not to the point that, as the administrators submit, MBL did not in fact proceed to enforcement, because its ability to appoint an administrator depends upon its ability to "enforce" its security, and the fact that that security has "become ... enforceable", and, in my view, it was not able to do so unless and until it took the steps required by s 8 of the FDMA.
I accept that the position in that respect is not as clear as the position was, for example, in Photios v Cussen (in their capacity as joint administrators of Beechworth Land Estates Pty Ltd (admins apptd) [2015] NSWSC 336, where Robb J held that an administrator could not be appointed on the basis that s 211 of the Duties Act 1997 (NSW) expressly made a security unenforceable where duty was not paid. It also does not seem to me that the decision in Horton v Alberran [2005] VSC 166, to which Mr Pike refers, assists the administrators. As Mr Bennett points out, that decision ultimately turns on questions of construction of the loan agreement and security there in issue and not on the issues raised in this case. The conclusion that I have reached is consistent with the policy reflected in the FDMA, as reflected in the case law to which I have referred. It also preserves the logical relationship between a secured creditor's ability to appoint a receiver in respect of a farm debt and its ability to appoint an administrator to the company that owes that debt, where s 436C of the Corporations Act is intended to have the result that a secured creditor who is able to appoint a receiver should be entitled to take the lesser step of appointing an administrator. It seems to me that there is no reason to extend the secured creditor's entitlement to appoint an administrator, unless the words of the statute require the Court to do so, prior to the point at which the secured creditor could properly take steps to appoint a receiver under the FDMA, breaking the nexus between the appointment of a receiver and the appointment of an administrator which s 436C of the Corporations Act contemplates.
Accordingly, I cannot make the declaration sought by the administrators under s 447C of the Corporations Act, where I cannot conclude, at least without invoking the Court's power to regularise any defect in their appointment, that they were validly appointed. This may or may not ultimately prove to be a victory of any value to Mr Disselkoen, for reasons to which I will return, but I should first address two other issues raised in the proceedings.
Mr Bennett also developed a second argument, partly in support of and partly in the alternative to the first argument that I have addressed above, that the appointment of an administrator is itself an "enforcement action" which cannot occur without compliance with s 8 of the FDMA. This argument is distinct from Mr Bennett's first argument, so far as it attacks, not whether MBL satisfied the statutory condition to appoint an administrator under s 436C of the Corporations Act, but the act of appointment pursuant to that section. Mr Pike fairly recognised that the definition of "enforcement action" in the FDMA extends beyond enforcement of the security by taking possession to include reliance on any of the rights under the mortgage: Waller v Hargraves Secured Investments Ltd above. Mr Bennett in turn placed substantial weight on that proposition. However, a substantial body of case law, including in this Court, has held that the appointment of an administrator and other actions such as the winding up are not "enforcement action" of a security for a range of purposes: Australian Cherry Exports Ltd v Commonwealth Bank of Australia (1996) 39 NSWLR 337; Australian Innovation Ltd v Dean-Willcocks [2001] NSWSC 1204; (2001) 166 FLR 360 at [33]; Boz One Pty Ltd v McLellan [2015] VSCA 68; (2015) 105 ACSR 325 at [253]; Photios v Cussen (in their capacity as joint administrators of Beechworth Land Estates Pty Ltd) (admins apptd) above at [44]-[45]; Re Bluenergy Group Ltd (Subject to a Deed of Company Arrangement) (Admin Apptd) [2015] NSWSC 977; (2015) 300 FLR 155 ("Bluenergy") at [71]. With all respect to Mr Bennett's submissions, I can see nothing in Waller v Hargraves Secured Investments Ltd above that is inconsistent with those decisions. It seems to me, as I noted in Bluenergy above, that the appointment of an administrator is an alternative to, rather than enforcement of, a security and the act of appointment of the administrator would not be invalidated by the FDMA if, contrary to the view which I have expressed above, a secured creditor had the requisite entitlement to enforce the security, and that security was presently enforceable, without compliance with the FDMA.
The administrators also relied on s 5(2)(c) of the FDMA which provides that the FDMA does not apply in respect of a corporation that is an externally administered corporation within the meaning of the Corporations Act. That provision does not seem to me to assist the administrators, unless they are entitled to other relief including relief under s 447A of the Corporations Act, since the company is only an externally administered corporation if the administrators had been validly appointed to it. I adopt, in that respect, the reasoning of Barrett J (as his Honour then was) in respect of the appointment of receivers in Constantinidis v Equititrust Ltd above at [51]-[55].
Mr Bennett submitted that, if I were to reach the view that I have reached above, the Court should make a declaration under s 447C of the Corporations Act, or any inherent jurisdiction, that the administrators were not validly appointed. It seems to me that I should not take that course. First, it seems to me that that course would deprive the administrators of procedural fairness, where a corresponding application was discontinued by Mr Disselkoen last week and the administrators appeared to have had no notice that it would be renewed from the bar table in the course of this application. Second, this application has not exhausted the range of relevant considerations which might be applicable to the validation of the administrators' appointment. It is for that reason that I noted above that, without of course expressing any concluded view, its result may or may not ultimately be of practical benefit for Mr Disselkoen. The administrators have, as I noted above, foreshadowed an application under s 447A of the Corporations Act and it is well established that a defect in the appointment of an administrator may be regularised on that basis: Calabretta v Redpen Developments Pty Ltd (in liq) (recs and mgrs apptd) [2010] FCA 81; (2010) 183 FCR 47 at [37]; Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310at [5]. It is plainly within the realms of possibility that the purposes of Part 5.3A of the Corporations Act and the interests of creditors may be served by validating the administrators' appointment in the circumstances, although that is a question which will need to be determined on its merits at a future time. No declaration that the administrators' appointment is invalid should made until the foreshadowed application for it to be validated on that basis has been determined.
In the circumstances, the administrators' Interlocutory Process filed 24 November 2016 should be dismissed. My tentative view is that, and Counsel have accepted that, costs should be reserved pending the administrators' further application and its outcome. I will, following discussion with Counsel, make directions to allow the administrators' application under s 447A of the Corporations Act to be allocated an early hearing date in the light of the commercial urgency of the matter.
I make the following orders and directions:
The application of Messrs Goyal and Winterbottom as administrators of Maria's Farm Veggies Pty Limited filed on 24 November 2016 be dismissed, and costs of that application be reserved.
The administrators have leave to file, to be made returnable before Black J for hearing at 10am on 14 December 2016, any interlocutory process in respect of their appointment seeking relief under s 447A of the Corporations Act.
The administrators serve, and send to the Associate to Black J their affidavits in support of any such application on or before 4pm on 5 December 2016.
Mr Disselkoen serve, and send to the Associate to Black J, any affidavits in respect of that application by 4pm, 8 December 2016.
The administrators serve any affidavit evidence in reply, and both parties serve their respective submissions in respect of the application, by 4pm, 12 December 2016.
The application be listed for hearing before Black J at 10am, 14 December 2016.
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Decision last updated: 30 December 2016