Bidald Consulting v Miles Special Builders

CATCHWORDS : CORPORATIONS - Voluntary administration - Plaintiff seeks winding up of defendant - Administrators appointed - Solvency assessment shows defendant insolvent but likely to return to liquidity in the short term - Criticisms of figures - Whether court should be satisfied that in interests of company's creditors for defendant to continue under administration - No principles involved - Costs order in favour of plaintiff not provable in subsequent creditors' voluntary winding up - Whether orders should be made under the Corporations Act 2001 (Cth), s 447A specifying priority of payment of costs under deed of company arrangement and notice of intention to enter creditors' voluntary winding up

McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2 CASES CITED : Coventry Auto Parts Pty Ltd v Tony Michael Mechanical Pty Ltd (under administration) [2003] QSC 141

Bidald Consulting Pty Ltd t/as Forstaff - Plaintiff PARTIES : Miles Special Buikders Pty Ltd ("Voluntary Administrators Appointed") - Defendant

Mr Aldridge SC/ Mr A Blank - Plaintiff COUNSEL : Mr G McNally - Defendant/Administrators

Colin Biggers & Paisley Solicitors SOLICITORS : Dibbs Barker Gosling Lawyers

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2858/04 BIDALD CONSULTING PTY LTD v MILES SPECIAL BUILDERS PTY LTD EX TEMPORE JUDGMENT 1 Bidald Consulting Pty Ltd sought an order for the winding up of Miles Special Builders Pty Ltd. The matter was listed for hearing for three days. On the evening before the case was due to commence, Anthony Warner and Ivor Worrell, were appointed voluntary administrators of Miles Special Builders. 2 The matter was adjourned to the second day appointed for the hearing, when affidavits of Mr Warner were read. Included in the material was a report on the solvency of Miles Special Builders by Mr Warner. It concluded that the company was, as at 28 February 2005, insolvent in terms of the definition of that term in the Corporations Act 2001 (Cth), s 95A. Mr Warner expressed the opinion, however, that the company would return to solvency within a limited period of time. If the debt due to Bidald Consulting was ignored, it being disputed by Miles Special Builders, that return to liquidity was estimated to occur by 31 March 2005. If the debt of Bidald Consulting was included, a surplus situation was expected to arise by 30 April 2005. 3 Mr Warner performed a comparison between a liquidation and a deed of company arrangement which, on the figures he had taken into account, showed that under liquidation the creditors would receive about 12 cents in the dollar whereas under a deed of company arrangement the creditors would receive 100 cents in the dollar and there would remain a figure of approximately $350,000.00 for payment to the subordinated directors. 4 The directors, if a deed of company arrangement was voted upon affirmatively by a meeting of creditors, proposed to subordinate a debt in excess of $1 million to the payment of unsecured creditors. 5 The figures upon which Mr Warner expressed his opinion were taken from a company balance sheet as at 24 February 2005, other accounting entries and information provided to him by the directors. 6 Bidald Consulting challenged the opinion expressed by Mr Warner on the basis that the statements made to him by Mr Kovacic, a director of Miles Special Builders, were likely to be inaccurate. 7 That submission was based upon an earlier cash flow analysis prepared upon the basis of information in part supplied by Mr Kovacic that suggested that Miles Special Builders would return to a credit balance in its bank account by 23 July 2004 and hold a closing bank balance in excess of $1 million by December 2004. That prognostication did not eventuate. The amount in the bank at the time of the appointment of the administrators was $3,000.00. 8 No amount was included in the liabilities of Miles Special Builders with respect to a disputed claim by Tollfab Australia Pty Limited in respect of which pleadings had been delivered in the District Court. In its statement of liquidated claim, Tollfab claimed an amount of $343,573.11. In a notice of cross-claim by Miles Special Builders, an amount of $626,000.00 was claimed. Mr Warner was not informed of this dispute by the directors.

9 In arriving at his comparison of the results of liquidation as against the results under a deed of company arrangement, Mr Warner assumed that stocks in the balance sheet of Miles Special Builders at approximately $369,000.00 would be utilised to generate further work in progress and ultimately further debtors in that amount. No provision was made for replacement stock although Mr Warner agreed that stocks had stood at approximately the same value in the balance sheet over time. 10 A further criticism of the figures was made upon the basis that they included no amount for costs of administration. Mr Warner did say that the costs of administration were likely to be the costs of a liquidation if the deed of company arrangement was not put in place; in other words, there was no advantage so far as costs were concerned under the one alternative as against the other. 11 The expected return to liquidity is dependent, in part, on debtors being realised in a short space of time. The history of Miles Special Builders suggested that the vast bulk of its debtors were in excess of 60 days. Indeed, the percentage was 92.3% representing debts of approximately $725,000.00, although there was included in that amount a challenged debt of approximately $467,000.00. 12 Mr Warner had been told that there were significant amounts on 14 day terms. He conceded that if Miles Special Builders was in liquidation it would be highly unlikely that such terms would be met. 13 If the amount claimed by Tollfab was taken into account and Mr Warner's comparison of liquidation against a deed of the company arrangement was adjusted, it would mean that in a liquidation the creditors would receive nothing as the forecast amount available to creditors of $231,000.00 would be insufficient to deal with the additional $344,000.00. On the other hand, under a deed of company arrangement, there would still be a return of 100 cents in the dollar if Mr Warner's estimates are accurate because there is expected to be available to non-priority creditors an amount of $1,183,000.00 with total creditors, excluding Tollfab, of $831,000.00, leaving a return to subordinated creditors of $352,000.00 and that figure would be sufficient to accommodate the Tollfab claim of $344,000.00. 14 The submission made by Bidald Consulting was that in the light of these uncertainties, the figures should not be accepted and I should not conclude that there is any reasonable prospect of Miles Special Builders returning to liquidity in a short space of time. 15 While there are clearly some criticisms of the figures upon which Mr Warner expressed his opinion, I am not satisfied that the doubt as to his prognostication of a return to liquidity is sufficient for me to conclude in terms of the Corporations Act 2001 (Cth), s 440A(2) that it is not in the interests of the company's creditors for Miles Special Builders to continue under administration rather than to be wound up. The purpose of Pt 5.3A is spelt out in s 435A, which is: "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 than would result from an immediate winding up of the company." 16 In my view, Mr Warner's analysis suggests there is a prospect that a better return for creditors and members of Miles Special Builders will result from a continuation of the voluntary administration. 17 The Corporations Act 2001 (Cth), s 440A(2) requires that I adjourn the hearing of the application for an order winding up Miles Special Builders as it is under administration if I am satisfied that it is in the interests of the company's creditors for the company to continue in administration rather than be wound up. For the reasons I have already expressed, I am of that view. I therefore propose to adjourn the application of Bidald Consulting. 18 In McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2, Barrett J concluded that an order for costs against a company in administration in favour of a creditor that had sought its winding up in insolvency was not provable in the company's subsequent creditors' voluntary winding up: it was neither an expense properly incurred by the administrators or liquidators in terms of the Corporations Act 2001 (Cth), s 566(1)(a) or s 556(1)(d), nor was it a debt the circumstances giving rise to which occurred before the commencement of the administration in terms of s 553(1). 19 It was suggested that I might overcome that decision by making an order under the Corporations Act 2001 (Cth), s 447A. It empowers the court to make an order about how Pt 5.3A might operate in relation to a particular company. In Coventry Auto Parts Pty Ltd v Tony Michael Mechanical Pty Ltd (under administration) [2003] QSC 141, Fryberg J took the view that he could make an order for the inclusion of a term in a deed in terms of s 447A. Section 444A specifies the content of an instrument setting out the terms of a deed of company arrangement. His Honour directed that that provision should operate in relation to the company in question so that the instrument specified that the costs of the applicant for the winding up of the company, ordered to be paid by the company, be paid by the administrators in priority to all other amounts payable by them. I propose to take a similar course. 20 I order that the originating process of Bidald Consulting Pty Ltd be stood over before the Corporations List Judge at 10.00 am on Monday 11 April 2005. I reserve Bidald Consulting Pty Ltd's costs. 21 Pursuant to the Corporations Act 2001 (Cth), s 447A, I direct that s 444A operate in relation to Miles Special Builders Pty Ltd so that the instrument referred to therein must specify that Bidald Consulting Pty Ltd's costs of these proceedings be paid by the administrators in priority to all other amounts payable by them. 22 Pursuant to the Corporations Act 2001 (Cth), s 447A, I further direct that s 439B and s 439C operate so that no resolution that Miles Special Builders Pty Ltd be wound up may be put to a meeting of creditors unless Bidald Consulting Pty Ltd has been given seven days' written notice of such intention. 23 I grant Bidald Consulting Pty Ltd liberty to apply on 24 hours' notice.

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