Bernsteen Pty Ltd v Newmore Pty Ltd

CATCHWORDS : CORPORATIONS - voluntary administration - second meeting of creditors - extension of convening period - whether case for long extension made out - where special factors relevant to sale of business as going concern - one extension already made under s 439A(6) - whether s 439A(6) available to effect second extension - consideration of amendments made by Corporations Amendment (Insolvency) Act 2007 - continued availability of s 447A

LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss 435A, 439A(2), 439A(5), 439A(6), 439A(7), 439A(8), 447A, Corporations Amendment (Insolvency) Act 2007 (Cth)

Bernsteen Pty Ltd v Newmore Pty Ltd (1995) 13 ACLC 1608 Carter v Global Food Equipment Pty Ltd [2007] NSWSC 901; (2007) 25 ACLC 1173 Re Daisytek Australia Pty Ltd [2003] FCA 575; (2003) 45 ACSR 446 Re Envirostar Energy Ltd [2002] NSWSC 1246 Re Henry Walker Eltin Group Ltd [2005] FCA 984; (2005) 54 ACSR 383 CASES CITED : Re LED Builders Pty Ltd [2008] NSWSC 633 Re Madden (1996) 131 FLR 430 Re South Wagga Sports & Bowling Club Ltd [2009] FCA 25 Re Vanfox Pty Ltd [1995] 2 QdR 445 Re Western National Earthmoving Corporation Pty Ltd (1997) 141 FLR 121 Watson v Uniframes Ltd & Trumbull (1994) 55 FCR 556

TEXTS CITED : Legal Committee of the Companies and Securities Advisory Committee final report, June 1998: "Corporate Voluntary Administration" paras 2.79 to 2.81.

PARTIES : David John Frank Lombe and Simon John Cathro as administrators of Australian Discount Retail Pty Limited & ors - Plaintiffs

COUNSEL : Mr S G Finch SC/Ms K E Day - Plaintiffs Mr G J Ryan - ING Industrial Custodian Pty Ltd

SOLICITORS : Freehills - Plaintiffs Mallesons Stephen Jaques - ING Industrial Custodian Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1526/09 DAVID FRANK LOMBE & SIMON CATHRO (AS ADMINISTRATORS OF AUSTRALIAN DISCOUNT RETAIL PTY LIMITED & ORS

1 Mr Lombe and Mr Cathro are the administrators of Australian Discount Retail Pty Limited and 38 wholly-owned subsidiaries under Part 5.3A of the Corporations Act 2001 (Cth). They were appointed on 20 January 2009. 2 The group of 39 companies, which I shall call the "ADR Group", conducts several discount or variety retailing businesses under the names "Crazy Clark's", "Go-Lo", "Sam's Warehouse" and "Chickenfeed". 3 On 16 February 2009, the administrators approached the court seeking a substantial extension of the convening period for the second meeting of creditors in each of the Part 5.3A administrations. A solicitor representing a lessor of premises to one of the companies appeared on that occasion and opposed any extension. The court made an order effecting a short extension until 9 March 2009 and stood the matter over to 2 March 2009, at the same time making directions with a view to a contested hearing on that occasion. 4 When the matter came back before me on 2 March 2009, the lessor's solicitor informed the court that the lessor no longer opposed the grant of the extension the administrators sought. The lessor was given leave to withdraw and counsel for the administrators then made submissions in support of a further extension of the convening period until 18 August 2009 - to achieve what will be effectively a total extension of six months. 5 On the day on which the administrators were appointed to the 39 companies in the ADR Group, secured creditors appointed receivers of the assets and undertakings of the several companies. Those receivers thereupon took steps towards selling the assets and undertakings as a going concern, on the footing that the property might be sold more advantageously in that form than in a piecemeal fashion. 6 Read on the administrators' application on 2 March was an affidavit of Mr Melluish, one of the receivers. Mr Melluish deposes that the receivers consider an extension of the convening period to 18 August 2009 to be "necessary in order to maximise the chances of achieving a going concern sale of the business of the ADR Group and is in the best interests of creditors of the ADR Group as a whole." 7 Referring to the possibility of extension only until 30 March 2009, Mr Melluish said that this "may seriously prejudice and possibly thwart the receiver's strategy for achieving a going-concern sale". Mr Melluish went on to give several reasons for this assessment. In particular, he referred to steps taken by the receivers towards sale up to 27 February 2009. 8 The receivers undertook a program of advertising between 27 January and 4 February. A significant number of persons expressed interest and signed confidentiality agreements. An information memorandum was distributed. As at 24 February, a number of persons had submitted nonbinding indicative offers. Further discussions are now under way with several interested parties who have commenced due diligence. 9 The expectation of Mr Melluish and his co-receiver is that a successful bidder will be chosen and will enter into a sale and purchase agreement around the end of March 2009. 10 It is at that point that a potentially time-consuming process will begin in accordance with special provisions which it is envisaged will be included in any sale and purchase contract. The receivers expect that the successful tenderer will require the assurance of a substantial period within which to make appropriate arrangements with lessors of premises. 11 The retail and associated operations of the ADR Group, such as warehousing, are conducted mainly in leased premises. There are no less than 300 leases from 277 lessors in respect of 360 properties, being sites occupied by companies within the ADR Group. The receivers apprehend that it will be necessary for the successful tenderer to negotiate separately with each of the 277 landlords to obtain either consent to assignment of the relevant lease or leases or the grant of a replacement lease or leases. 12 Mr Melluish expresses the understandable opinion that no purchaser will commit to pay a large purchase price without reserving a contractual ability to withdraw if the leasehold premises (or the bulk of them) cannot be secured. 13 Mr Melluish goes on in his affidavit to refer to the benefits of a going-concern sale, not the least of them being that the employment of most of the 10,000 employees is likely to be preserved and suppliers and other contractors will have the opportunity of continuing to do business with the new owner. 14 The matters concerning leased premises are but one aspect of the complexity of the ADR Group. There are, as I have said, 10,000 employees. There are 6,750 unsecured creditors owed $91.7 million and 2,689 former and current employee creditors owed about $10 million. The combined administration of the companies in the group is a substantial undertaking. 15 It has taken the directors of the ADR Group longer than expected to prepare their statement about the group's business, property, affairs and financial circumstances. This is because of the complicated nature of the Group's affairs and operations, the need for more work on the computation of possible unrecorded and contingent liabilities and the fact that key personnel have been preoccupied in assisting the receivers with the sale process. The administrators have extended the time for submission of the directors' statement to 18 March 2009. 16 The approach to be taken to applications for an extension of the convening period for the second meeting of creditors in a Part 5.3A administration has been discussed in a number of cases. I do not need to refer to them. It is sufficient to say that the general expectation is that the time limits generally applicable are expected to prevail and that the court will not allow them to be departed from unless good cause is shown. That good cause must be such as to promote the objects of Part 5.3A, as stated in s 435A, that is, to maximise the chances of the company or as much as possible of its business continuing in existence or, if continuation is not possible, to achieve a better return for creditors and members than would result from an immediate winding-up. 17 These objects and their attainment must, however, be weighed against the expectation that voluntary administration will be a reasonably speedy affair. The need for expedition comes from the fact that various persons interested in the company are subjected by Part 5.3A to enforced inaction in the pursuit of self-help and other remedies while administration continues. It is to the circumstances of such persons that I now turn. 18 Each of the 39 companies in administration has a committee of creditors. In 38 out of 39 cases, the committee resolved unanimously to support the administrators' application for an extension of the convening period to 18 August 2009. In the one remaining case, there are 8 members of the committee and 6 of them voted in favour of supporting the administrators' application for an extension until 18 August 2009. One was in favour of an extension until May 2009 and one creditor, being a trade creditor, did not support any extension. The receivers are continuing the business and landlords are not prejudiced. 19 The administrators' intention to make an application for an extension of the convening period was notified to creditors in a letter which accompanied the notice convening the first meeting of creditors. 20 In the circumstances as they now exist, it would, in a real sense, be counterproductive for the administrators to be compelled to bring on the second meeting of creditors quickly. The purpose of that meeting is to decide the company's future - whether the administration should end, whether the company should pass into liquidation or whether any deed of company arrangement proposal should be accepted (there is, I might say, no deed of company arrangement proposal in this case, at least at this stage). 21 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. 22 At the same time, however, the court must be conscious of the need for creditors not to be left waiting unduly for some resolution of their position. But in the present case the creditors, through their committees, are content for additional time to be taken with a view to achieving a more certain and hopefully more favourable outcome. 23 The total extension sought in this case, that is the short extension I granted on 16 February plus the further extension now applied for, is six months. Mr Finch SC, who appeared for the administrators on the hearing of the application yesterday, has given me details of the periods involved in a number of extension cases. He acknowledges that six months is, as it were, at the upper end of the scale. While that is so, I do not consider it particularly productive to make comparisons. Each case must be approached according to its own circumstances. The balancing of a prompt outcome for creditors against a beneficial outcome for creditors will involve different considerations in every case. In the present case, the considerations to which I have referred indicate that creditors' interests will be best served by the extension of the convening period as the administrators seek, rather than by forcing on the meeting at an early date. The extension will therefore be granted. 24 It remains to consider the statutory basis for effecting the extension, bearing in mind that the court's power of extension under s 439(6) was exercised on 16 February when I made an order extending the convening period until 9 March. 25 It has been held in a number of cases that s 439A(6) allows only one extension of the convening period. In Re Henry Walker Eltin Group Ltd [2005] FCA 984; (2005) 54 ACSR 383, Hely J was of that view and quoted the decision of Davies J in Watson v Uniframes Ltd & Trumbull (1994) 55 FCR 556 and that of Branson J in Bernsteen Pty Ltd v Newmore Pty Ltd (1995) 13 ACLC 1608 in support of it. Hely J also referred to cases in which s 447A had been used to effect the second extension, being Re Western National Earthmoving Corporation Pty Ltd (1997) 141 FLR 121 and Re Envirostar Energy Ltd [2002] NSWSC 1246. 26 All the cases I have mentioned were decided under s 439A(6) as it stood before 31 December 2007 when the Corporations Amendment (Insolvency) Act 2007 (Cth) came into operation: "The Court may extend the convening period on an application made within the period referred to in paragraph (5)(a) or (b), as the case requires." 27 Section 439A(5), as it existed before 31 December 2007, fixed as the convening period either a period of 28 days referred to in its paragraph (a) or a period of 21 days referred to in its paragraph (b), depending on the circumstances of the particular case. The amending Act of 2007 altered s 439A(5), but without disturbing its basic structure under which either paragraph (a) or paragraph (b) sets the convening period. The amending Act also altered s 439A(6) and added subsections (7) and (8). Sections 439A(6), (7) and (8) in their present form are as follows: "(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.

(7) If an application is made under subsection (6) after the period referred to in paragraph (5)(a) or (b), as the case may be, the Court may only extend the convening period if the Court is satisfied that it would be in the best interests of the creditors if the convening period were extended in accordance with the application.

(8) If an application is made under subsection (6) after the period referred to in paragraph (5)(a) or (b), as the case may be, then, in making an order about the costs of the application, the Court must have regard to: (a) the fact that the application was made after that period; and (b) any other conduct engaged in by the administrator; and (c) any other relevant matters." 28 The altered form of s 439A(6) was not referred to by Jacobson J in Re South Wagga Sports & Bowling Club Ltd [2009] FCA 25 where the earlier pattern was followed. The approach of Hely J in Re Henry Walker Eltin Group Ltd (above) was expressly approved and a second extension was made by means of an order under s 447A. 29 There is a question whether the s 439A provisions in their amended form cause s 439A(6) to be available on several successive occasions. It is clear that an application for extension under s 439A(6) may now be made, even though the period of 20 or 25 business days referred to in s 439A(5) has ended. But the relevant law reform materials suggest that this provision was introduced only to allow a form of ex post facto extension. The Explanatory Memorandum accompanying the Corporations Amendment (Insolvency) Bill 2007 indicates, at paragraph 7.125, that the amendments to this part of s 439A were intended to implement recommendations of the Legal Committee of the Companies and Securities Advisory Committee in its final report of June 1998 entitled "Corporate Voluntary Administration". The Legal Committee said at paragraphs 2.79 to 2.81 of that report: "2.79 The court has an express power to extend the convening period on application made within that period. There is some difference in the case law about whether the convening period can be extended on application made outside the convening period under the court's general powers, though a number of these applications have been granted. 2.80 The Legal Committee in its Discussion Paper proposed that: The court's power to extend the convening period should also apply where the administrator applies after that time, but only where there would otherwise be substantial injustice to creditors (for instance, because of technical defects discovered after a meeting has been held). The court should have regard to the administrator's conduct (for instance, in failing to properly carry out his or her duties) when considering the costs of that application.

2.81 Submissions agreed." 30 Footnoted to paragraph 2.79 of the report were several cases, including Re Madden (1996) 131 FLR 430 and Re Vanfox Pty Ltd [1995] 2 QdR 445. These were both cases in which there was a need, after the event, to permit or validate the holding of a meeting convened outside the convening period - hence the example in paragraph 2.80 of the Legal Committee's final report of a case where "technical defects" are discovered after the meeting has been held. 31 Against this background of a preoccupation with cases calling for ex post facto extension, I am doubtful that there was an intention to create a general jurisdiction to make multiple extensions under s 439A(6), as distinct from providing a safety net for use in the kinds of cases that were in the contemplation of the particular law reform body. That is a question that is best left for an occasion on which it is fully canvassed in submissions. 32 I say this because the recognition in many cases that s 447A is available to deal with cases of subsequent extension such as the present is, in my view, not called into question by the amended form of the legislation. The appropriate course, therefore, is to proceed under s 447A in the present case and to make an order that Part 5.3A is to have effect as if the extended period for which the administrators contend were the convening period in relation to these particular administrations. In saying that, I should record that, for the reasons already stated, I am satisfied that it is in the best interests of the creditors of the several companies in the ADR Group that the convening period be so extended (compare the new s 439A(7)). 33 Other orders the administrators seek embody safeguards that have become commonplace in cases of this kind. There is, in particular, an application for an order under s 447A that will have the effect of permitting the administrators to hold the second meeting of creditors at any time during the extended period (or within 5 business days after its end), rather than strictly in accordance with s 439A(2). 34 In Re LED Builders Pty Ltd [2008] NSWSC 633, Austin J described such an order under s 447A as, "sensible and now almost routine". His Honour noted that the practice of making an order of this kind was initiated in Re Daisytek Australia Pty Ltd [2003] FCA 575; (2003) 45 ACSR 446 and that a similar order was made in Carter v Global Food Equipment Pty Ltd [2007] NSWSC 901; (2007) 25 ACLC 1173. These were s 439A(6) cases but the same thinking should apply to a second extension pursuant to s 447A in the kind of case now before me. 35 The order just mentioned will ensure that if a sale is completed earlier than expected (or if it becomes clear that there will be no going concern sale), the administrators can bring the meeting on promptly without having to wait for the end of the extended period. 36 It is also contemplated that any person with a sufficient interest may apply to have the substantive orders discharged or modified. This too is a desirable safeguard in cases of this kind. 37 I make the following orders: 1. Order pursuant to s 447A of the Corporations Act 2001 that Part 5.3A of that Act is to have effect in relation to Australian Discount Retail Pty Limited and each other company named in the schedule to the originating process filed on 16 February 2009 as if the convening period referred to in s 439A were the period ending on 18 August 2009. 2. Order pursuant to s 447A of the Corporations Act 2001 that Part 5.3A of that Act is to have effect in relation to Australian Discount Retail Pty Limited and each other company named in the schedule to the originating process filed on 16 February 2009 as if it were provided that the meeting of creditors required by s 439A to be held may be held at any time during or within five business days after the period referred to in Order 1. 3. Liberty is granted to the plaintiffs to apply for any further extension of the convening period referred to in Order 1 at any time before 18 August 2009. 4. Liberty to apply is granted to any person who can demonstrate sufficient interest to modify or discharge Orders 1 to 3, on not less than 48 hours' notice to the plaintiffs. 5. Notice of Orders 1 to 4 is to be made available on the website, www.deloitte.com.au , on or by Tuesday, 3 March 2009. 6. Costs of this application are costs in the administration of the plaintiff companies. **********

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