Australian Securities and Investments Commission v Diploma Group Limited

1. The stay order referred to in paragraph 8 of the orders dated 12 May 2017 be lifted.
2. The 4th, 12th and 14th Defendants' application dated 22 May 2017 be dismissed.
3. Costs be reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

MCKERRACHER J: 1 These are slightly expanded reasons for the oral reasons I gave on 22 May 2017 in response to the parties' applications described in [5] and [6]. 2 On 12 May 2017 in Australian Securities and Investments Commission v Diploma Group Limited [2017] FCA 549 (Diploma No 1) I ordered that a provisional liquidator be appointed to each of the remaining defendants in these proceedings but stayed the operation of those orders until 25 May 2017. The reasons in Diploma No 1 should be read with these. 3 The temporary stay of the appointment of the provisional liquidators to all of the defendant companies was designed to ascertain whether necessary pre-conditions for a deed of company arrangement (DOCA) could be met. In particular it was necessary to ascertain whether a transaction, known as the Chemlabs transaction had eventuated. 4 Those conditions were not met and therefore the appointment of the provisional liquidators would be automatic as of Wednesday, 25 May 2017. 5 The Australian Securities and Investments Commission (ASIC) submit that there is no further reason to delay the appointment. It applies to vary the orders by removing the stay so that the provisional liquidators would be appointed immediately. 6 The Fourth, Twelfth and Fourteenth Defendants, however, apply for a further variation to those or any orders, preferably delaying again the appointment of the provisional liquidators to the First, Second and Third Defendants, pending an opportunity to consider yet a further proposed DOCA of an entirely different nature (which comes at the 11th hour on the failure of the previous DOCA). Several creative alternative mechanisms are also advanced for those defendants in order to achieve this objective, all of which take into account a timetable by which the next creditors meeting of the First, Second and Third Defendants would be on or before 11 July 2017. 7 The Fourth, Twelfth and Fourteenth Defendants note that pursuant to s 435C(3)(g) of the Corporations Act 2001 (Cth), upon the appointment of a provisional liquidator of a company, the administration ends. Their preferred position is to delay the appointment of the provisional liquidators over the First, Second and Third Defendants pending an opportunity to consider the latest DOCA proposal. They argue that it is not in the best interests of the creditors to have these companies in provisional liquidation at a time when a DOCA is being considered. They further submit that: (a) the fact that the First, Second and Third Defendants are insolvent should not be the driving factor in relation to the appointments of provisional liquidators. If that were the case, there would be no need to have Part 5.3A of the Act because ASIC would immediately seek the appointment of provisional liquidators for every company that went into administration; (b) there is no urgency to appoint provisional liquidators to the First, Second and Third Defendants because they are under receivership and administration and have been so for some time; and (c) there are no assets at risk because, again, the First, Second and Third Defendants are under receivership and administration and have been so for some time. 8 Alternatively, the Fourth, Twelfth and Fourteenth Defendants propose that the stay granted on 12 May 2017 should be extended to 12 July 2017. They submit that this would prevent the appointments of provisional liquidators taking effect before the meeting of creditors and would enable the creditors to have an opportunity to consider the latest DOCA proposal. By that time, the administrators would also have had the opportunity to undertake their requisite reports and consequently the creditors would be fully informed. 9 As a further possibility, the Fourth, Twelfth and Fourteenth Defendants propose an alternative mechanism by which, even if the provisional liquidators are appointed, they should be deemed to be applying today to immediately become once again the administrators of a second administration so that the latest DOCA proposal could be put before the creditors. There are proposed adjustments to the timing of reporting requirements to accommodate that. They rely on s 436B(2)(g) of the Act which allows the Court to grant leave for the provisional liquidators to be appointed as administrators. 10 Overall, the Fourth, Twelfth and Fourteenth Defendants submit that those orders will provide an opportunity to the creditors to assess whether there lies a better outcome for them in the latest DOCA proposal than there would be in a liquidation. 11 This relief is opposed by ASIC. 12 The receivers and managers and the administrators, I take it, will abide the outcome of the debate between ASIC and the Fourth, Twelfth and Fourteenth Defendants. 13 As discussed above, ASIC has applied to vary the orders by removing the stay so that the provisional liquidators would be appointed immediately. ASIC submits that its concerns about the governance of the Diploma Group remain unchanged and that the loss to the group of any benefit from the Chemlabs transaction further reinforces the conclusion that the group as a whole is significantly insolvent. They say it is in the creditors' interest to know, sooner rather than later, the complete and true financial position of the whole group. 14 In response to the Fourth, Twelfth and Fourteenth Defendants' application, ASIC submit that to make the appointment of provisional liquidators in effect a partial one, treating the companies under administration and their creditors differently from the group and its creditors as a whole, is undesirable and creates unnecessary complications and expense. Furthermore they point out that if the provisional liquidators are so inclined, and believe that the DOCA proposal (or a further potentially viable DOCA proposal) is something that should be considered by creditors, they could subsequently make an application to the Court for their reappointed as administrators once again under a second administration which would enable consideration of the DOCA to be voted upon by creditors. They argue that it is not appropriate to have the Court pre-empt such an application and effectively grant it in anticipation. 15 In relation to the latest DOCA proposal, ASIC notes that this is approximately the tenth DOCA proposal put to the administrators of the First, Second and Third Defendants since April 2017. ASIC submits that there has been more than a sufficient opportunity to put before the creditors an acceptable DOCA. ASIC has also pointed to detailed reasons as to why it takes the view that the latest DOCA proposal is entirely unsatisfactory. In summary this includes a number of concerns relating to the latest DOCA. These concerns include: officers of the proponent company may have engaged in conduct which contravenes the Act; the proposal does not state how the interests of creditors of the Fourth to Twenty-First Defendants will be affected by its operation; administrators have not been appointed to these defendants to protect the interests of the creditors; and the success of the proposal is dependent on a variety of conditions including: (a) the proponent reaching an agreement with a secured creditor Swiss Re International; (b) the successful litigation by the Third Defendant against CIMC Modular Building Systems (Australia); (c) a successful insurance claim by the Third Defendant; (d) with respect to the Second Defendant and the Third Defendant: (i) the DOCA proposal for the First Defendant being approved; (ii) ASIC's application to wind up and appoint a liquidator to the First Defendant, Second Defendant, Third Defendant and the Fourteenth Defendant (as trustee for the Fourteenth Defendant's trust) being discontinued/dismissed; (e) a further agreement being reached with Swiss Re; (f) the securities of the First Defendant (being the only remaining entity following the restructure) being reinstated to trading on the Australian Securities Exchange; and (g) the proponent of the Varied Deed Proposal causing the First Defendant to have a market capitalisation of $5 million on or before 31 March 2018. 16 It is certainly not possible at this stage, given the recency of the latest DOCA proposal, to form a definitive view as to whether ASIC's criticisms are entirely sound. But I do note that certain criticisms at the very the least have not been addressed in the course of argument today and on their face, such criticisms appear to have a reasonable foundation. (Items (b) and (c) above are examples.) Bearing in mind that the administrators' preferred position and recommendation to the creditors has always been that the companies should be wound up, and bearing in mind the numerous opportunities that there have been in the five months the administrators were appointed for a DOCA to be put before creditors, in my view the preferred course is to allow ASIC's application to remove the stay for the appointment of the provisional liquidators, but to leave it in the hands of the provisional liquidators as to whether they see fit to apply to the Court to appoint themselves as administrators to a second administration so that the DOCA can be placed before creditors. It seems to me at present that there is more substance in the criticisms of the latest DOCA proposal than in the virtue of staying the appointment of the provisional liquidators. 17 In my view in all of the circumstances to further defer the appointment of the provisional liquidators would inappropriately extend the considerable uncertainty, delay and prejudice to creditors. 18 I therefore propose to grant relief in accordance with ASIC's application and the application of the Fourth, Twelfth and Fourteenth Defendants will be dismissed. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.