Cathro, in the matter of Custom Bus Australia Pty Ltd (administrators appointed) [2018] FCA 113

FARRELL J: 1 By originating process lodged on 8 February 2018, Messrs Simon Cathro and Aaron Lucan, in their capacities as joint and several administrators of Custom Bus Australia Pty Ltd (administrators appointed) and Custom Bus Holdings Pty Ltd (administrators appointed) (together the Companies) made an application to extend the convening period in respect of the second meeting of creditors of the Companies pursuant to s 439A(6) of the Corporations Act 2001 (Cth). 2 The application was supported by an affidavit affirmed by Mr Cathro on 8 February 2018, an affidavit affirmed by Ms Orfhlaith McCoy, a partner of Clayton Utz, solicitors, on 12 February 2018 and submissions lodged on 9 February 2018. Following the hearing of the application, a further affidavit of Ms McCoy affirmed on 12 February 2018 was filed to address issues which arose during the hearing. Factual matters set out below are derived from those affidavits and the submissions. 3 Without extension, the convening period for the second meeting of creditors would end on 16 February 2018. The administrators seek an extension of 89 days to 16 May 2018 and ancillary orders permitting the administrators to dispatch notices, reports and communications to creditors by electronic means and permitting the second meeting to be held at any time during, or within five business days after, the convening period (as extended). 4 The basis of the application is that, while the administrators consider that a sale of Custom Bus' business as a going concern has the potential to result in the most favourable return to creditors, such a sale will not be able to be completed within the current convening period. It remains uncertain whether such a sale can be achieved and whether it will in fact result in a more favourable return to creditors than sale of the individual assets. The administrators are therefore not in a position to make a recommendation to creditors as to the future of the Companies in accordance with their obligations under the Corporations Act. 5 These are the reasons for making the orders sought.

Background 6 Custom Bus is a wholly owned subsidiary of Holdings. The directors of each of the Companies are the same people.

Appointment of administrators and committee of inspection 7 The administrators were appointed on 18 January 2018 pursuant to a resolution of the directors of each of the Companies pursuant to s 436A of the Corporations Act. The administrators are partners in accounting firm Worrells Solvency and Forensic Accountants (NSW) Pty Ltd. On 22 January 2018, the administrators convened the first meeting of creditors for each of the Companies. The meetings were held on 30 January 2018. The creditors of Holdings resolved not to appoint a committee of inspection. The creditors of Custom Bus resolved to appoint a committee of inspection comprising 3 members.

Custom Bus' business 8 Custom Bus operates a business of manufacturing, maintaining and repairing bus-bodies for buses used by public and private transport operators. The business has been in operation through various successor entities since 1955. As at the date of the administrators' appointment, Custom Bus employed 160 employees and it had $437,268.97 in cash at bank and outgoings falling due in the next week (in the form of wages and rental payments) of $227,189. In the financial year ended 30 June 2017, Custom Bus had an annual turnover of $43,846,460. 9 The business is operated from premises in Wingfield, South Australia and Villawood, New South Wales. The Wingfield premises are used to repair and service local public transport buses and 14 employees worked there at the time the administrators were appointed. The Villawood premises contain Custom Bus' manufacturing facility and 146 employees worked there at the time the administrators were appointed. Each of the premises is custom-fitted with specialised equipment and manufacturing facilities necessary for the production, maintenance and repair of buses. 10 Custom Bus has nominated the Villawood premises to fulfil the licencing requirements of the Vehicle Safety Standards (VSS) Branch of the Department of Infrastructure, Transport, Regional Development and Cities which enables it to sell buses complying with the Motor Vehicle Standards Act 1989 (Cth). Accordingly, unless new premises can be obtained, fitted out and pass certification by the VSS, the Villawood premises remain essential for the manufacture or production of any new buses by Custom Bus. The landlord of the Villawood premises issued a notice of breach of covenant in respect of its lease to Custom Bus on 18 January 2018. 11 Custom Bus' business relies on, among other things, supplies of chassis from Volvo Group Australia Pty Ltd, Daimler Truck and Bus Australia Pacific Pty Ltd (Mercedes) and Scania Australia Pty Ltd. Those three companies are also the largest customers of Custom Bus. They purchase completed buses from Custom Bus once the bus-bodies are fitted onto their respective chassis and on-sell them to public and private operators including the New South Wales and South Australian State Governments. At the time the administrators were appointed, Custom Bus had 32 buses in production that were partially completed, three for Volvo and 29 for Scania and Mercedes. Volvo immediately terminated its contract but Scania and Mercedes have generally been supportive of Custom Bus completing production of buses for them. A key supplier of specialised equipment critical to the completion of the 29 incomplete buses threatened to cease supply unless a pre-appointment debt of $450,000 was paid. Negotiations for continued supply which took place between 18 and 24 January 2018 failed. This had an immediate impact on Custom Bus' capacity to continue to trade as a going concern as it had limited cash at bank and all of its debts are factored to Cashflow Finance and 180 Capital (see [15(2)] below). 12 In light of that development, and given Custom Bus' limited cash flow, the administrators decided that they were obliged to halt most of Custom Bus' operations on and from 24 January 2018. The employment of a majority of the production staff was terminated on that day. Forty-three employees were retained to work on eight previously completed buses which have been returned by the customer for modification and to complete three buses, two of which have since been completed and the other is 90% complete. Employees were also retained to assist with the sale process and to operate repairs, parts and maintenance operations in Adelaide and New South Wales. As at 12 February 2018, the number of employees has reduced to 30, with 20 employees located in New South Wales and 10 in Adelaide. The administrators are assessing whether it is financially and commercially feasible to complete an additional two buses which are 85% completed.

Sale process 13 Upon their appointment, the administrators commenced a "fast track" sale process for Custom Bus' business, with a view either to selling its business as a going concern or selling parts of the business or assets. Parties who had expressed an interest in the business or assets were contacted. A data room was established and urgent expressions of interest were sought to which responses have been received. The scheduled date for receipt of final unconditional offers for the business is 16 February 2018. Ms McCoy's affidavit indicates that due diligence by some interested parties might be ongoing at that time and it is unlikely that all offers will have been received by 16 February 2018. There are circumstances whereby completed sale of all assets might not occur by 16 May 2018. 14 If a sale of the whole of the business as a going concern is not achieved, the administrators intend to sell assets. However, because Custom Bus' plant and equipment comprises large specialist industrial machinery, they have formed the view that it must be sold in situ. The cost of dismantling and transporting the equipment to alternative large industrial premises, which would need to be rented, are not costs for which there are funds. Based on Mr Cathro's experience, the likely sale value which could be achieved will be greater if the plant and equipment are not dismantled. The prospects of the administrators being able to negotiate a sale of Custom Bus' business will be substantially prejudiced if Custom Bus is evicted from the Villawood premises with the likely consequence that supply contracts will be terminated.

Creditors and assets of Custom Bus 15 Custom Bus has the following classes of creditors: (1) the principal secured creditors are Allegro Fund II LP and Allegro Services II C Pty Ltd as partner and trustee of certain partnerships and trust arrangements (Allegro); (2) Cashflow Finance Australia Pty Ltd (as assignee of the rights of 180 Capital Funding Pty Ltd), the receivables financier to Custom Bus, is also a secured creditor; (3) suppliers and lessors of plant and equipment with purchase money security interests in property held by Custom Bus; (4) landlords of the Villawood and Wingfield premises; (5) employees; (6) multiple unsecured trade creditors; and (7) the Australian Tax Office. 16 The assets of Custom Bus comprised principally of plant and equipment, stock, work in progress, finished goods and trade debtors. 17 An updated summary of Custom Bus' assets and liabilities is as follows: Assets $ Cash at Bank 357,573 Trade Debtors pre-appointed 1,435,487 Trade Debtors post-appointment 689,045 Bank Guarantee 1,200,000 Stock TBD Motor Vehicles 58,000 Plant & Equipment 2,881,496 Work in Progress 3,867,000 Total 10,488,601

Liabilities Priority Secured Creditors 5,442,377 Employee Entitlements 3,662,128 Non-Priority Taxation Debts 1,324,349 Trade Creditors 7,442,923 Finance Shortfalls TBD Associated Loans TBD Total 17,558,716

Notification of application 18 The potential for an application to extend the convening period was foreshadowed at the first meetings of creditors. No creditor raised any concern or objection at that time. 19 Since then, members of Custom Bus' committee of inspection have been advised of the proposed application. By emails to the administrators, all members of the committee have stated that they have no objection to the proposed extension of the convening period. Allegro and the landlords of the Villawood and Wingfield premises have been advised of the application and they have raised no objection to it. The landlord of the Villawood premises indicated that it thought a period of 180 days was 'far too long'. The administrators have not sought the view of Cashflow Finance or 180 Capital because they have been repaid out of receivables save for a small amount of legal fees which will be paid out of moneys held by Cashflow Finance. 20 The solicitors to the administrators, Clayton Utz, advised the Australian Securities & Investments Commission of the application on 7 February 2018. On 8 February 2018, Ms Patricia Hu, a lawyer in the Insolvency Practitioners group, advised that ASIC did not require copies of the application and supporting affidavit.

Holdings 21 As far as the administrators are aware, Holdings' only asset is its shares in Custom Bus and it conducts no other business. Its liabilities consist of obligations under a loan note deed in favour of Allegro and a contingent liability relating to a guarantee to the landlord of the Villawood premises, the amount of which has not yet been ascertained. Holdings has no employees.

Steps taken by the administrators and their opinion as to best interest of creditors 22 In his affidavit at [16], Mr Cathro sets out the steps which the administrators have taken since their appointment. The administrators appear to have undertaken all the usual steps, including investigations into the assets and financial position of the Companies and investigating what securities are held over the Companies' assets. As noted above, it has been necessary to constrain the operation of Custom Bus' business and a sale process is in train. Mr Cathro noted, and I accept, that the administration has been attended by a number of complexities, including: (1) the debt factoring arrangements between Custom Bus, Cashflow Finance and 180 Capital; (2) the large volume of personal property security registrations lodged by suppliers and other securities which require review and verification; (3) the termination of key contracts by certain customers and suppliers and the secession of supply of critical components necessary for the completion of work in progress; and (4) balancing these factors in an attempt to continue production of buses, despite very limited cash flow. 23 There are a number of matters which will not be completed by 16 February 2018, when the existing convening period expires, including: (1) obtaining and assessing valuations of Custom Bus' assets; (2) determining multiple and competing purchase money security interest claims submitted by suppliers and lessors, including dealing with interests in co-mingling goods; (3) determining Custom Bus' liabilities and entitlements under the factoring finance arrangements with Cashflow Finance and 180 Capital; (4) pursuing the sale of Custom Bus' business, potentially as a going concern or otherwise by sale of assets; (5) investigating the Companies' affairs and availability of recovery actions in a liquidation scenario; and (6) negotiating with prospective purchasers. 24 The administrators say that it would be in the best interests of creditors for the extension to be granted: (1) It will allow the administrators to made progress with the sale of Custom Bus' business as a going concern, which has the potential to result in the most favourable return to creditors. A sale would be prejudiced if the convening period is not extended because of the prospect that the leases of the Villawood and Wingfield premises would be terminated. (2) Even if a sale of Custom Bus' business as a going concern cannot be achieved, returns to creditors will be maximised if its assets can be sold in situ, and the extension will let that occur. If the leases were terminated before the assets are sold, the time, cost and risk of relocating assets would be increased because of the need for VSS registration. (3) If a sale of the business can be achieved, it might offer an opportunity for former employees to be re-employed, for suppliers to continue to supply and for landlords to have a replacement tenant. Even if a sale of the business as a going concern cannot be achieved, and although Custom Bus is cash constrained, an extension of the convening period will allow completion of the remaining 90% complete bus (and, possibly, completion of another two 85% complete buses) to maximise the value received from work in progress. (4) With the extension, the administrators will be in a better position to make an informed recommendation about the future of the Companies in accordance with their obligations under rule 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) (requirements formerly contained in s 439A(4) of the Corporations Act). 25 The administrators note that: (1) The requested extension is unlikely to adversely affect the interests of creditors other than in respect of the continued statutory moratorium on leases under s 440B of the Corporations Act. No creditor has sought leave to continue proceedings against Custom Bus and no person has made an application to have Custom Bus wound up. Further, the lease on the Villawood premises does not expire until 30 November 2021. The lease on the Wingfield premises does not expire until 31 August 2019. Even though there are amounts outstanding under the leases relating to the period before the administrators were appointed, the landlords have been, and will continue to be, paid rent and other amounts due under the leases attributable to the period specified in s 443B(2) of the Corporations Act. (2) Although creditors of the Companies and the landlords have been informed of the application for an extension of the convening period, no opposition to a 90 day extension has been notified to the administrators. The committee of inspection for Custom Bus supports the proposed extension; and (3) It would not be cost-effective or beneficial to creditors (of either of the Companies) to convene the second meeting for Holdings but defer convening the second meeting of Custom Bus until a later time. 26 Having regard to Custom Bus' constrained cash flow, even though the proposed extension would be until 16 May 2018, it is the administrators' preference to convene the second meetings at the earliest possible time. The proposed orders would enable that to occur.

Principles 27 The principles which apply to an application for extension of the convening period provided for in s 439A(5) of the Corporations Act are well settled. Where an application is made under s 439A(6), Courts attempt to strike a balance between the expectation that administrations will be conducted relatively quickly and the need to ensure that sensible and constructive actions directed towards maximising the return for creditors and shareholders are not prejudiced: see Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 per Barrett J at [10]. Factors relevant to the grant of an extension of time were usefully summarised by Austin J in Re Riviera Group Pty Ltd (administrators appointed) (receivers and managers appointed) (2009) 72 ACSR 352; [2009] NSWSC 585 at [13]. At [14], Austin J observed that: The cases show that where a substantial issue in any of these categories is established (and a fortiori, where the facts fit into more than one category), the court tends to grant an extension, and the extension tends to be for the time sought by the administrator provided that the evidentiary case has been properly prepared, there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and the court is satisfied that the administrator's estimate of time has a reasonable basis. 28 Those cases have been followed in many Courts without demur. The submissions supporting the application note correctly that extensions of three to six months have been made previously. 29 Factors which should also be considered include whether creditors have been notified of the proposed extension of the convening period, whether the creditors object, whether the administrators have had sufficient time to carry out their functions properly and whether the administrations are able to provide information and sensible advice to creditors to enable them make a choice as to the course they wish to take between the alternatives of approving a deed of company arrangement, ending the administration or winding up the company: see Mentha, in the matter of the Griffin Coal Mining Co Pty Ltd (administrators appointed) [2010] FCA 30 per McKerracher J at [16] and [20] and In the matter of Pan Pharmaceuticals Ltd [2003] FCA 598 per Lindgren J at [41].

Conclusion 30 At the hearing of the application, counsel for the administrators confirmed that they had received no notice of objection from any creditor. Having regard to the principles set out above, the terms of s 439A(6), the fact that this is the first time the administrators have sought an extension to the convening period and the application is made within that period, the reasons for the administrators' opinion that it is in the best interest of creditors that an extension be granted and the evidence before the Court set out above, I am satisfied that the orders sought by the administrators should be made. In saying this I have taken into account that it might become necessary for the administrators to approach the Court for a further extension because it is not possible to meet the proposed timetable. I nonetheless consider the current proposal is reasonable. If contracts for the sale of Custom Bus' business, or part of it, can be signed and significant progress made by 16 May 2018, the fact that another application might need to be made to the Court does not mean that orders extending the convening period for 89 days should not be made now. As noted by me in In the matter of Harrisons Pharmacy Pty Ltd (administrators appointed) (receivers and managers appointed) [2013] FCA 458 at [47], the creditors will have an opportunity to consider their attitude to a further extension at that time and the Court will be in a position to assess whether a further extension is then warranted. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.