Bridgecorp Finance Limited v Sterling Estates Development Corporation Pty Ltd [2006] NSWSC 33 | Case summary

4319/05 BRIDGECORP FINANCE LIMITED v STERLING ESTATES DEVELOPMENT CORPORATION PTY LTD (ACN 083 002 171) JUDGMENT - Ex Tempore 1 HIS HONOUR: This is an application for adjournment of a winding up summons. The winding up summons was filed on 3 August 2005, originally by the partners of Minter Ellison. Thereafter it has been in the list and been adjourned on five separate occasions. On 8 December 2005 an order for substitution of creditors was made, and the present plaintiff became the applicant for the orders. 2 The defendant ("the Company") is a company which is involved in the development of a very large number of home units on the site of the Children's Hospital in Camperdown. That development is being conducted as a staged development project, which is partly complete. The plaintiff has a security, of some kind, over at least some of the assets connected with that development. The plaintiff has appointed a receiver to certain items of real estate, under a fixed and floating charge which it holds. That appointment was made on Friday of last week, 27 January 2006. 3 Administrators were appointed to the defendant Company, and also to a related company, Sterling Guardian Pty Ltd, on 30 January 2006. 4 The administrator puts the case for adjournment on the basis that there is a proposal for a deed of company arrangement, which in his view is worthy of consideration by the creditors. 5 I should say that at this stage the proposal does not appear to have been thought through in every detail which would be needed to formulate a deed of company arrangement, but the broad outline of a proposal has been put forward. It involves certain creditors who are said to be related to those involved in the ownership of the Company not participating, and certain assets which would not be available in a winding up of the company being contributed to a deed fund. By a combination of those two means, it is suggested that unsecured creditors may receive more from the deed than they would receive if the company were to be placed into immediate liquidation. 6 Section 440A Corporations Act 2001 obliges the court to adjourn the hearing of an application for an order to wind up a company if the company is under administration and if the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. As well, the Court possesses the inherent jurisdiction, which it has independent of any statute and simply by reason of being a superior court, to adjourn proceedings whenever it seems more in the interests of justice to adjourn them than not. Mr Johnson, for the administrator, relies upon both s440A and the Court's inherent power to adjourn, as the basis for his application. He accepts, however, correctly, that the onus of making out a case for an adjournment lies upon him. 7 Mr Winterbottom, one of the administrators has sworn an affidavit, which gives the state of his knowledge and belief concerning the affairs of the company. It is apparent from reading that affidavit that, at this stage, his knowledge is incomplete. 8 Nonetheless, I do not say that by way of criticism, given that the affidavit was prepared the day after his appointment. 9 The proposal for the two companies in the group to enter a deed of company arrangement is one which has been in existence at least since 9 December 2005. On 8 December 2005 a proposal was put to a different firm of accountants to that to which the present administrators belong, that they become administrators, with a view to the Company entering the deed of company arrangement. On 9 December 2005 that other firm wrote stating the basis upon which it would consent to act. However, that other firm was not appointed, and the proposal for a deed did not advance, until 30 January 2006, when the present administrators were appointed. 10 Mr Spencer, for the plaintiff, submits that, when the proposal for a deed has been on foot for as long as this proposal has, the Court ought expect more detailed information to be available today than has been put forward. Mr Spencer points to the fact that the present solicitors for the administrator are the same firm that had previously acted for the Company, in connection with the proposal which was put to the other firm of accountants in December 2005. By instructing that firm of solicitors, Mr Spencer submits, the administrators have gained access to a body of information which ought to have been put before the Court on the present application. 11 While I accept that the amount of information that a court ought expect be provided to it, before it regards a sufficient case for an adjournment as having been made out, is dependent upon the opportunity which the applicant for adjournment has had to acquaint himself with the affairs of the Company. In the present case, the applicant for adjournment is the Company, by its administrator. He has had only a matter of days in which to acquaint himself with the affairs of the Company. Mr Winterbottom had some prior knowledge of the affairs of the Company, arising from an occasion in September/October 2005 when a company of which he is a director was approached for finance, and declined to provide it. I am not able to infer, from that fact, however, that he had access at that stage, to the sorts of information which an administrator would need to take into account in deciding whether a deed of company arrangement was a viable proposal to put to creditors. Likewise, the mere fact that some consideration was given from at least 9 December 2005 to a deed of company arrangement, tells very little about the depth of consideration that was given, and, given that the appointment of an administrator is a necessary step to the advancing of a deed of company arrangement, obviously an essential element in the promulgation of a deed of company arrangement was missing until 30 January 2006. 12 Mr Spencer submits that the information contained in the administrator's affidavit ought be insufficient to persuade me that it is appropriate to adjourn the application. He points to the fact that the administrator has put forward figures relating to the secured indebtedness of the Company to various financiers, which are only approximate, appear to be based upon a summary document contained in the Company's records, and have not been verified. At this stage of the administration of the Company, I do not find that in the slightest surprising. 13 The administrator has expressed the view that, if the figures he has for the secured indebtedness of the Company are correct, and if the stock on hand of home units is sold at the current list prices of those home units, then there may be sufficient funds realised to pay secured creditors in full. It is apparent that there are assumptions inherent in that opinion. 14 The question of whether the stock on hand of home units has in the past been sold at the list prices, and is likely in the future to be sold at the list prices, is obviously a matter which will require investigation. Even so, even the view which the administrator has expressed based upon the assumption I have mentioned is one which provides some guidance as to what may be in the interests of the creditors of the Company. Sometimes, in an administration, it becomes apparent quite early that the assets on hand definitely will not pay the secured creditors, and it is a useful piece of information that the present does not appear, on the information presently available, to be such a case. 15 As well, the precise amount which is owed to secured creditors appears to be uncertain. That is based upon more than the fact that, at this stage, the figures for secured liabilities which the administrator has quoted in his affidavit have not been verified. There is a debt to a particular secured creditor, General Pacific Custodian Pty Ltd, for which the administrator does not give any figure at all. He says that the amount of that debt is uncertain and appears to be in dispute. 16 As well, in his affidavit the administrator has not taken explicit account, in the body of the affidavit, of a debt of something over $5.3 million which is owed to the plaintiff by the Company, as well as by Sterling Guardian Pty Ltd, various other companies in the group of companies to which the Company belongs, and Mr Patrick Yu and Mr Albert Yu, who are directors of the Company. That debt is one which appears to be secured by a fixed and floating charge, under which the plaintiff has appointed the receiver I earlier mentioned. 17 At the time of the administrator's appointment, there were negotiations under way for the sale of certain lots of land owned by the Company to a purchaser which had put a proposal for purchase forward. The administrator says that if he was satisfied that the price offered for that land was reasonable, at or above market valuation, and if certain of the secured creditors agreed, it is his present intention to accept the offer and sell that land. The sale of the land is a necessary step to be able to advance the deed of company arrangement. While the evidence before me today on this topic is fairly thin, there is at least some evidence which suggests that the price being offered may be above what is at least one valuer's view of the market value of the land. 18 A related company of the Company has had a judgment entered against it in the Federal Court for in excess of $7 million as a result of litigation brought against it by the Australian Taxation Office connected with the way in which it had accounted for GST on the margin scheme. An appeal is pending against that judgment. That appeal is being funded by persons other than companies in the same group which the Company belongs, on the basis that it is a test case which the development industry as a whole has an interest in. The proposal for a scheme which has been put forward is for a group scheme, and hence whether the debt presently owed to the taxation office is able to be removed through success in that appeal will affect the distribution which is available under a deed. The evidence before me does not enable me to form any view about the prospects of success of the appeal. 19 Mr Spencer points out that, today there is no evidence before the Court that the various entities who are said to be related creditors would in fact agree to their debts not participating in the proposed deed. As well, he submits that there is no evidence before me today that the persons standing behind the company have any real prospect of raising the sum of money which it is proposed will be contributed to the deed fund. 20 I accept that, on today's evidence, that is so. Even so, in my view, it is in the interests of creditors for an independent person with the experience which these administrators have to be able to evaluate, on a more informed basis than they had been able to do in the very short time since their appointment, whether a deed of company arrangement of the kind now proposed is indeed a feasible alternative, and whether, if it is feasible, it would result in a better return to the unsecured creditors than would a winding up. 21 Mr Spencer points out, correctly, that if the company were to be wound up there would be an earlier relation back day than if the administration were to continue now but result in a creditors winding up. Equally correct, he points out that there is a possibility of funds being available in a liquidation which would not be available under a deed. Such funds might be available if an action against directors for insolvent trading were viable, or if it turned out that the company had been engaging in uncommercial transactions. At the moment, all that can be said is that on the present evidence it is not a fanciful suggestion that such actions might be available in relation to this Company, but it is not possible to say whether further investigation will show that there is any action actually worth pursuing of those kinds. It is part of an administrator's task to put a recommendation to the creditors, insofar as he can, about whether the giving up of the prospect of recoveries for insolvent trading or uncommercial transactions is worthwhile, weighing up the prospects of there actually being recoveries from such an action, and the other benefits which might flow to the creditors under a deed. In my view it is in the interests of the creditors to have a reasoned consideration from the administrator on these topics. 22 The administrators, before their appointment, put forward a fees estimate, which totalled $240,000. They stated that they required an up-front payment of $150,000 in cleared funds from a bona fide third party, prior to providing their consent to act. While the administrators had not put on specific evidence as to what has happened concerning the provision of those requested funds, from the very fact that they had been appointed there is some evidence, today, that those cleared funds have been provided. Mr Spencer says that if the administration continues, there will be a priority expense for the administrator's fees. At least at the present time, it looks as though the size of that expense which would need to be met from the Company's own resources would be of the order of $90,000. Given the overall size of the unsecured creditors, of the two companies which are the subject of administration, it does not, in my view, on the material today, seem as though continuing the administration would be imposing a significant extra detriment on the creditors, even if it were to happen that the administrators ultimately decided that a deed of company arrangement was either not viable, or not the preferable course. 23 No doubt, if a further adjournment of the winding up application were to be sought, it would be necessary for considerably more evidence to be put before the Court than was put before the Court today. For the purpose of today's application, I am satisfied there is sufficient evidence to justify adjourning the application. 24 The administrator seeks to have the application adjourned to a date which is after the time when the second meeting of creditors is due to be held. Alternatively, he seeks to have it adjourned to a time soon after the first meeting of creditors is held. 25 In my view it is preferable to adjourn the application to a time which is soon after the time of the second meeting of creditors. I am conscious of the fact that, if the second meeting of creditors were to resolve to adopt a deed, section 444D would have the effect that the deed bound all creditors of the company, except the secured creditors in realising their security. 26 However, even when a deed has been adopted, if a plaintiff who is seeking the winding up of the company is dissatisfied with the provisions of the deed, and wishes to approach the Court to have it declared void, under section 445G, the winding up application can be kept alive, so that it is able to be taken advantage of if any such application to declare the deed void were to succeed. Such a course was followed in the proceedings which ended with Bidald Consulting v Miles Special Builders [2005] NSWSC 1235. 27 Thus, the adjournment of the winding up summons to shortly after the time of the second meeting of creditors is not something which will irretrievably deprive the plaintiff of the benefit of the relation back date which would apply if a winding up order were to be made on the present summons. 28 I stand the summons over to Monday 6 March 2006, in the Corporations List. That is the first Monday after the date which is the last date for the calling of the meeting of creditors. 29 I extend the time within which the winding up application made on the present summons must be determined to Monday 20 March 2006. I grant liberty to either party to apply to the Corporations List Judge or the Duty Judge as they might be advised, on 2 days notice. **********

Bridgecorp Finance Limited v Sterling Estates Development Corporation Pty Ltd

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