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[2019] FCA 2206
Federal Court of Australia
2019-12-23
Farrell J
Original judgment source is linked above.
Number of paragraphs: 56
Counsel for the Plaintiffs: Mr IR Pike SC
Solicitor for the Plaintiffs: Baker & McKenzie
Counsel for Scentre Management Ltd ACN 001 670 579 on behalf of certain landlords (Interested party): Mr D Krochmalik (19 December 2019)
Solicitor for Scentre Management Ltd ACN 001 670 579 on behalf of certain landlords Colin Biggers & Paisley (Interested party):
ORDERS NSD 2099 of 2019 IN THE MATTER OF DS OPCO PTY LTD (ADMINISTRATORS APPOINTED) (RECIEVERS AND MANAGERS APPOINTED) ACN 095 018 803 BETWEEN: DUNCAN CLUBB AND ANDREW SALLWAY IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF DS OPCO PTY LTD (ADMINISTRATORS APPOINTED) (RECIEVERS AND MANAGERS APPOINTED) ACN 095 018 803 AND EACH OF THE OTHER COMPANIES LISTED IN THE SCHEDULE Plaintiffs
JUDGE: FARRELL J DATE OF ORDER: 23 December 2019
FARRELL J: 1 These are reasons for orders made on 23 December 2019 pursuant to s 439A(6) of the Corporations Act 2001 (Cth) in relation to the external administration of eight companies which are part of a group which operates the "Harris Scarfe" department stores and related business.
Background 2 On 11 December 2019, Duncan Clubb and Andrew Sallway (Administrators) were appointed as joint and several voluntary administrators of eight companies (Companies) pursuant to s 436A of the Corporations Act. On that basis, the Administrators estimated that, unless extended, the second meeting of creditors for each of the Companies must be held no later than 20 January 2020. 3 The eight Companies are as follows: 4 First, there is DS Opco Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (ACN 095 018 803) (formerly known as PSEA Dept. Stores Pty Ltd) (DS Opco). DS Opco operated 66 retail department stores trading under the name "Harris Scarfe" in each state and territory of Australia except for the Northern Territory (Business). Each of the department stores is leased. DS Opco is lessee of 65 stores and it has stock and fixed assets. DS Opco also employs approximately 2,000 employees. 5 Second is Harris Scarfe Financial Services Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (ACN 130 587 496) (HSFS). HSFS operates a business providing credit services to consumers via the issue of credit cards but otherwise has no known assets. This business is connected to, and therefore HSFS maintains a role in, a securitisation trust, but there is currently no external funding line to fund the securitisation program. HSFS holds a credit licence in connection with its role. All notes issued in the program are held by Companies. 6 Third and fourth are Harsyn Pty Ltd (Administrators Appointed) (ACN 123 966 772) (Harsyn) and Harrin Australia Pty Limited (Administrators Appointed) (ACN 123 876 184) (Harrin). Harsyn and Harrin are purely holding companies. Harsyn has no known assets other than shares in Harrin. Harrin has no known assets other than shares in DS Opco. 7 Fifth is Harris Scarfe Insurance Pty Ltd (Administrators Appointed) (ACN 003 511 171 (HSI). HSI has no known assets and is therefore dormant. 8 Sixth is Allens Stores Pty Limited (Administrators Appointed) (ACN 100 437 992) (Allens). Allens is the lessee of the head office of the Companies and has no other activity. 9 Seventh is Storecon Pty Limited (Administrators Appointed) (ACN 163 703 759) (Storecon). Other than being the lessee of one store, Storecom has no known activity or assets. Storecon has the same shareholder as Harsyn (Value Retail Group Pty Ltd, which is not in administration). 10 Eighth is Bronsonbay Proprietary Limited (Administrators Appointed) (ACN 106 780 465) (Bronsonbay). Bronsonbay is the trustee of the Harris Scarfe Securitisation Income Trust No 1 but undertakes no other business and has no known assets other than units in the Harris Scarfe Securitisation Trust No 1. 11 Australian Retail HoldCo Pty Ltd (HoldCo) is the ultimate shareholder of each of the eight Companies (together the Group or Harris Scarfe Group); it is not in administration nor are some of the intermediate companies of which it is the holding company. 12 Searches of the Personal Property Securities Register indicate that HoldCo also has security registrations against DS Opco, HSFS, Harsyn, Harrin and HSI, some by way of assignment. ANZ has a security interest registered against Allens. As at 11 December 2019, there were 185 registrations against the Companies' ACNs, with the significant majority being made against DS Opco. On their face, the registrations relate to motor vehicle leases, equipment leases in the supply of goods. They include purchase money security interests. Based on information available to the Administrators as at 18 December 2019, there are 446 unsecured creditors who are owed approximately $60.4 million (excluding employee entitlements) and 2,000 employees with unpaid entitlements of approximately $17 million, although that position will change once further proofs of debt are lodged. 13 On 11 December 2019, HoldCo appointed Vaughan Strawbridge, Kathryn Evans and Timothy Norman of Deloitte Touche Tohmatsu as receivers and managers (Receivers) of DS Opco and HSFS by HoldCo. On that day, the Receivers assumed control of the Business, which they continue to operate. 14 The Administrators circulated a first report to creditors dated 12 December 2019 ahead of the first creditors' meeting scheduled to be held at 11 am AEST on 20 December 2019. 15 By a letter dated 16 December 2019, the solicitors for the Administrators wrote to the Australian Securities & Investments Commission (ASIC) foreshadowing the Administrators' intention to make an application to this Court for orders under s 439A(6) of the Corporations Act that the convening period for each of the Companies be extended up to and including 21 July 2020. ASIC did not attend the hearing of the application on 19 December and 23 December 2019. 16 By a letter dated 17 December 2019, which was sent to creditors by email or post to their last known address, the Administrators advised creditors of their intention to make the application to this Court to extend the convening period by up to six months until 20 July 2020 and advised that the application had been set down for hearing on 19 December 2019 at 4 pm at the New South Wales Registry of the Court. 17 In anticipation of the Administrators making an application for an extension of the convening period, the Receivers wrote to the Administrators on 18 December 2019, stating that they estimate that an extension of the convening period to 21 July 2020 would be required to allow the Receivers time to carry out a sales process which they described as follows: Sale of Business Campaign The receivership of the Harris Scarfe businesses is large and complex. The continued trading of Harris Scarfe with an intent to sell the business as a going concern will yield the best return to stakeholders. Immediately on appointment the Receivers have commenced a sale process for the Harris Scarfe business undertaken by the Harris Scarfe Obligors [that is, DS Opco and HSFS]. The receivers anticipate that such a sale process will be time consuming given that the Receivers will be required to (amongst other things): (a) undertake a marketing program; (b) set up a data room and allow for due diligence for any potential buyers; and (c) negotiate the terms of any sale with the potential buyers. A process of the sale of the businesses of the Group is in process and, while it will be completed as soon as possible, it is likely that the sale and subsequent transition will not be completed in the short-term. An extension of the convening period for up to 6 months will enable a competitive sale process in relation to the business and assets of Harris Scarfe Obligors and will provide the time needed to properly conduct such a process given the nature and value of the assets involved. The continued operation of the business is critical to any such sale process and the statutory moratorium is, in turn, essential to the continued operation of the business as a going concern. If the Administrators were forced to call the second meeting of creditors earlier and the Harris Scarfe Obligors are placed into liquidation, our ability to conduct a meaningful sale campaign for the Harris Scarfe Obligors as a going concern would be fundamentally impaired. We would lose the benefit of the moratorium, landlords may becoming entitled to terminate any defaulting leases and secured creditors (such as those having retention of title of the goods) may seek to take possession of secured assets. The expression of interest campaign, while still in its initial stages, has generated 15 interested parties who have expressed interest in the Harris Scarfe business (as at 18 December 2019). In carrying out our work, the Receivers are meeting, and will continue to meet during the course of our appointment as receivers, all trading liabilities of the Harris Scarfe business in the ordinary course of its business consistent with our statutory obligations. We are also of the view that it is likely an interested party would seek to acquire the business through a deed of company arrangement given the number of leases and supply agreements which would otherwise be required to be assigned to a new legal entity through a more traditional completion mechanism. Our experience is the assignment or entering into new leases can significantly protract the completion of the sale. If a deed of company arrangement was to be proposed to creditors for approval, we would expect it to provide a better outcome and return to all creditors, than if the company was would [scil wound] up. Impact on other creditors Landlords As at the date of the Receivers' appointment, the landlords have been paid rent for December 2019. In accordance with the Corporations Act 2001, we will be liable for the continued use of these premises during the period of the receivership and we are continuing to pay rent and outgoings. Even if a buyer for the business is unable to be found, the extension of the convening period would provide landlords with a period of time during which to seek alternative tenants. Employees Since our appointment, we have continued the employment of all staff. We are hopeful that the majority of the Harris Scarfe employees would consider employment with any purchaser of the business. If a sale of the business is able to be achieved, it is likely that significant number of the employees of the business will continue in employment, rather than having their employment immediately terminated on the grounds of a redundancy. Even if a buyer for the business is unable to be found, the extension of the convening period would provide employees with a period of time during which to seek alternative employment. Suppliers We are continuing to place orders with suppliers in continuing to trade the business and have committed to make payments in the ordinary course of business for any orders placed and received during the receivership. Secured creditors The Financiers (our appointor) are supportive of the proposed extension. 18 On 18 December 2019, the Administrators filed an originating process seeking an extension of the convening period to 21 July 2020 and a supporting affidavit affirmed by Mr Clubb on that date. In their written submissions, the Administrators explained that, in short, their application was brought to enable the Receivers (and to a lesser extent, the Administrators) to explore sale and restructuring options in respect of the Business and/or assets of the Companies and to afford the Administrators time to investigate the affairs of the Companies properly, so that the Administrators may form the opinion required under r 75-225(3)(b) of the Insolvency Practice Rules (Corporations) 2016 (Cth). 19 In his supporting affidavit, Mr Clubb said that he regards the Receivers' estimate of time required to undertake marketing activities, allow due diligence and contract negotiations and any post contractual steps, such as assignment of leases, as fair and reasonable. He says, at [31], [33]-[37]: In order to facilitate the sale of any of the assets of HSFS and DS Opco, in my experience and based on my preliminary discussions with the Receivers, it is my view that not only is a longer expressions of interest campaign necessary (particularly having regard to the intervening Christmas holiday period), but the sale of the assets while the Companies are in administration (and allowing for the continued trading of the stores) could also avoid any destruction to the value of those assets that would likely occur should the Companies be placed into liquidation prematurely and therefore result in potentially better return to creditors as a whole. In that regard, I am of the opinion that the interests of creditors of the Companies are best served by allowing sufficient time for the sale of the businesses of HSFS and DS Opco. … To date the Administrators have undertaken preliminary work to understand the current state of affairs within the Companies. However, from my experience, I believe that a large amount of work is still required to be done before a satisfactory report to creditors can be prepared, noting the large scale and complexity of the businesses undertaken by the Companies. In particular, at this point in time, Mr Sallway and I do not consider that we are in a position to be able to properly report to the Companies' creditors as required pursuant to rule 75-225(3) of the IPR. The Administrators are of the opinion that the objectives of section 435A of the [Corporations] Act and the interests of creditors of the Companies will be best served by an extension of convening periods for the second meetings of creditors of the Companies. An extension of the convening period to 21 July 2020, in addition to allowing the Receivers sufficient time to undertake the sale process, will permit sufficient time for the Administrators to: (a) ascertain the entitlements owed to employees of the Companies as well as any former employees whose employments have been terminated; (b) retrieve, review and analyse further books and records of the Companies for the purposes of investigating the Companies' affairs, reconstructing the financial position of each of the Companies, as well as reconciling any inter-company loans amongst the Companies; (c) facilitating the sale of any of the assets within the Companies under my control, or, alternatively, a recapitalisation (including by way of deed of company arrangement), in my experience and based on my preliminary discussions with the Receivers, it is my view that not only is a longer expressions of interest campaign necessary, but the sale of those assets while the Companies are in administration could avoid any destruction to the value of those assets that would likely occur should the Companies be placed into liquidation prematurely; (d) liaise with the Receivers regarding the sales campaign; and (e) issue a detailed and thorough report to creditors prior to the second meetings of creditors Furthermore, I consider that the vote of creditors at the second meetings of creditors should not take place until these options and tasks are further progressed, for the reasons that: (a) the Administrators are of the opinion that it is in creditors' best interests that the Companies continue to trade with a view to completing a transaction with the interested party that has emerged following the sale process to be conducted by the Receivers, which transaction is likely to result in increased returns to the creditors than the return likely to be achieved if the Companies were to go into liquidation at the second meetings of creditors if the convening periods were not extended. This is particularly true in respect of the employees who in a sale process would likely retain their employment; (b) an extension of the convening periods will enable the Companies to avail themselves of the statutory moratoria until the completion of any transaction with the interested party, which will allow the Companies to continue to trade in order to enhance the possibility of the businesses being sold as a going concern and therefore to maximise value on any sale; (c) an extension of convening periods will maximise the flexibility for any proposed transaction structure including for any potential purchaser to make proposals of any deeds of company arrangement. Preserving that flexibility is likely to result in enhanced returns to creditors of the Companies; (d) an extension of the convening periods will enable the Administrators to provide a considered opinion to creditors pursuant to rule 75-225(3) of the IPR as to what options are in creditors' interests in light of the further investigations and the progress of the sale of business; and (e) the proposed sale of business as a going concern will, in the Administrators' view, maximise the prospects of the employees of the Companies continuing to be employed. Whilst some of the Companies are dormant and undertake no business activity, it is desirable that the extension of the convening periods is sought in respect of all of the Companies, for the reasons that: (a) it will be more efficient and cost-effective to deal with all of the Companies together in terms of issuing reports to creditors, holding meetings and potentially negotiating any deeds of company arrangement; and (b) retaining the current corporate structure will give flexibility for any recapitalisation of the business or potential purchaser. If the proposed sale of the business by the Receivers or the Administrators' investigations complete in a shorter period of time than anticipated, or if there is a lack of bidder interest, the Administrators intend to promptly convene the second meetings of creditors of the Companies for the purposes of section 439A of the Act, as there is no value in unnecessarily prolonging the administrations for any longer than is necessary. 20 Mr Clubb deposed that he is not aware of any particular prejudice that may be caused to creditors or employees of the Companies by reason of the extension sought.
hearing on 19 December 2019 21 Senior counsel for the Administrators relied on his written submissions and Mr Clubb's affidavit in support of the application. Senior counsel submitted that the application was made at the time it was because of: (1) The time of year, recognising that 20 January 2020 is outside of the Court's term and it is a time at which there is limited availability of practitioners; and (2) The view of the Receivers expressed in their letter dated 18 December 2019 that they need six months to enable them to conduct an orderly sale process. It was therefore inevitable that an extension of the convening period would be required and it is unlikely that things will change materially by 20 January 2020. 22 Senior counsel for the Administrators also relied on the fact that there was a proposed order that any person who could demonstrate sufficient interest had leave to bring the matter back before the Court on 48 hours' notice. 23 Without objection by the Administrators, the Court granted leave to be heard on the application to Scentre Management Limited under r 2.13 of the Federal Court (Corporations) Rules 2016 (Cth). Scentre Management appeared on behalf of eight landlords in respect of DS Opco's leases of stores in Westfield Shopping Centres. 24 While the Administrators drew to the Court's attention the fact that they had been appointed pursuant to a resolution passed by the sole director of each of the Companies (Bradley James Leahy) on 11 December 2019, they did not draw to the Court's attention that Mr Leahy had only been appointed a director of the Companies on 2 December 2019 or that, in November 2019, the Companies' previous parent company sold the Companies (and other companies trading in Australia as Best and Less and in New Zealand as Poste Plus) to companies in the private equity group known as Allegro Funds. 25 Evidence given by Peter John Harkin (who acts for Scentre Management) by affidavit sworn on 19 December 2019 indicates that Allegro is known as a "turnaround" specialist which represents on its website that it has funds under management in excess of $1 billion. This is relevant on the basis that HoldCo is controlled by Allegro and it was HoldCo (the Companies' parent company) which appointed the Receivers pursuant to its security interests in DS Opco and HSFS which had been assigned to HoldCo by previous financiers. Accordingly, it is in effect shareholders (not external lenders) who have held their interest for little more than a month which are effecting the sale of the Companies through the Receivers. With respect to the Administrators, this factor is one which should have been drawn to the Court's attention consistent with their obligations on an ex parte application to assist the Court to understand the factual matrix in which the application is made. On instructions following enquiry from the Court, senior counsel for the Administrators indicated that the amount secured is approximately $50 million. 26 While Mr Clubb inferred from Mr Harkin's evidence that he was suggesting that the Administrators were not sufficiently independent of Allegro, the Court has no evidence on the basis of which to doubt the Administrators' independence. 27 Counsel for Scentre Management submitted that it did not entirely oppose the grant of an extension of the convening period but said that: (1) The application was "somewhat premature" because the first meeting of creditors had not yet been held, but it would be held on 20 December 2019, the day after the hearing. The Court is entitled to have the benefit of, and is often guided by, the views of administrators on applications for extension of the convening period, but the Administrators may not remain in office following the first meeting of creditors and new administrators may have different views. Further, the Administrators have not been able to canvass the views of creditors and the Court is being asked to make orders in circumstances where the views of creditors about a lengthy extension (in effect, seven months from the date of the hearing) are unknown; (2) The application is also premature because there is no urgency attached to the application since the convening period does not end until 20 January 2020. Even then, the Administrators could adjourn the meeting for up to 45 days. (3) An extension of the convening period for six months is lengthy: the longer the extension, the more important it is for the Court to be given a clear and complete explanation of the state of the administration, the grounds of the extension and the potential prejudice that would flow from granting it: see In the matter of Harrisons Pharmacy Pty Ltd (Administrators Appointed)(Receivers and Managers Appointed) [2013] FCA 458 at [45] (Farrell J); In the matter of Riviera Group Pty Ltd (admins apptd)(recrs & mgrs apptd) [2009] NSWSC 585; 72 ACSR 352 (Re Riviera) at [18] (Austin J). (4) An extension of six months is too long and there is limited evidence to support the length of the extension proposed. The Court is being asked to make the extension on the basis of speculation rather than evidence of how the sale process is likely to unfold. Even in complex administrations of companies in the retail industry, shorter extension have been sought for a campaign for the sale of the business as a going concern; for instance, in Preston, in the matter of Toys 'R' Us (Australia) Pty Ltd (Administrators Appointed) [2018] FCA 940 (Toys 'R' Us), where there were 44 stores, the extension was for only four months. (5) A preferable approach is extension in stages: see Hayes, in the matter of Estate Property Group Limited (Administrators Appointed) [2007] FCA 935 (Gyles J); Harrisons Pharmacy at [45]-[47]. It is no answer to say, as the Administrators have, that if the sale process is completed earlier than the anticipated timetable would suggest, the second creditors meeting will be held earlier: it is most likely that the end of the extension will be the goal as a practical matter. Nor is it an answer to say that interested persons may apply to the Court on 48 hours' notice, as that is reversing the onus which the Administrators' bear of justifying the extension sought. (6) Lessors are not entitled to enter into and take possession of the leases under s 440B of the Corporations Act during the moratorium imposed while the Companies are in administration. That is a particular consideration against the too ready grant of an extension: see Fincorp Group Holdings Pty Ltd [2007] NSWSC 363; 62 ACSR 192 at [4] (Barrett J); Crawford, in the matter of North Queensland Heavy Haulage Services Pty Ltd (Administrators Appointed) [2017] FCA 635 at [20] (Markovic J). In this case, the administration is, in effect, an intergroup reorganisation designed to reduce rent under pre-existing leases. (7) Receivers have been appointed and while rent had been paid to the end of December 2019 and they are obliged to honour the Companies' obligations, the lessors do not know what the position is likely to be as the Receivers have made no commitment. The lessors' interests would be better protected by a shorter extension of time; say, three months. 28 At about the time the hearing commenced, the solicitors for the Administrators received two letters dated 19 December 2019 from solicitors for other lessors to DS Opco. The letters were tendered. One letter indicated that the lessor would be lodging a proof of debt for $22 million and the lessor did not support the application before the views of creditors had been canvassed at the first creditors' meeting or with a committee of creditors which might be appointed at that meeting. The other letter indicated that the lessors represented did not support such a lengthy extension on the bases that: (1) The proposed extension is a long time to leave creditors in an uncertain position; (2) Before going into administration, the Companies were in a position to make "researched asks of its landlords for reduced rent"; (3) The flyer offering the Harris Scarfe business for sale contemplates a reduced number of stores being operated by the Business; (4) Harris Scarfe was only recently acquired by a sophisticated purchaser who would, as part of the acquisition, have done significant due diligence and would already have in its possession a restructuring plan that it used to raise finance which is apparent from the matters referred to at (2) and (3); and (5) The timing of the application for an extension of the convening period does not allow for creditors or any committee of creditors to have been consulted. (6) A period of three months would be more appropriate. 29 The Administrators were not able to demonstrate any urgency or other reason why the Court should make orders extending the convening period before the first creditors' meeting was held on the next day, being Friday, 20 December 2019. In that circumstance, the Administrators did not oppose the Court standing the matter over to Monday, 23 December 2019 at 2.15 pm so that the Court could be informed of the views expressed by creditors at the meeting. Having regard to the matters put by Scentre Management and the other lessors in the letters tendered at the hearing on 19 December 2019, the Court indicated that it would be material for it to know the creditors' attitude to an extension of three months (as suggested by the lessors) or the six months proposed by the Administrators.
Hearing on 23 December 2019 30 At the hearing, the Administrators sought a five-month extension of the convening period to 21 June 2020. 31 Mr Clubb gave evidence by way of his affidavit affirmed on 23 December 2019 (his second affidavit) that: (1) He acted as chairperson of simultaneous meetings of the creditors of the Companies pursuant to s 436E of the Corporations Act held at 11 am on 20 December 2019 (first creditors' meeting). (2) The Administrators' appointment was not challenged at the meeting. (3) A committee of inspection of DS Opco was formed. (4) He informed attendees of the Administrators' application to extend the convening period by six months and the alternative of a three-month extension and a further application if the Receivers required more time to complete the sale. During discussion, a representative of Scentre Management expressed views against the six-month extension. Representatives of a number of landlords each made statements to the effect that they were content with a three-month extension, but they did not support a six or five-month extension. (5) On a show of hands: (a) 21 creditors voted in favour of a five-month extension. (b) 13 creditors voted in favour of a three-month extension. (c) 1 creditor voted against any extension. (d) The appointor of the Receivers together with a number of creditors abstained. (6) Some of the creditors may not have voted by putting up their hands and it is unclear whether these creditors abstained from voting as it was an informal poll. (7) A number of landlord creditors requested a formal poll that would reflect the value of claims, but Mr Clubb declined the request on the basis that the resolution was not on the agenda and was non-binding, the monetary value of the landlord creditors was balanced by the large number of employees and trade suppliers supportive of the proposed extension, and by voting on a show of hands, those creditors holding proxies were only able to vote once, noting that one creditor held in excess of 200 general proxies. (8) Following the vote, Mr Clubb indicated that he would seek a five-month extension at the adjourned hearing on 23 December 2019. (9) Mr Clubb concluded the discussion by confirming to creditors that it was the Administrators' intention to provide monthly update reports to creditors on progress of the voluntary administration of the Companies in order to mitigate the lack of periodic updated information that might otherwise arise as a result of the proposed extension. 32 Annexed to Mr Clubb's affidavit was a copy of the Administrator's presentation to the first creditors' meeting. Also annexed was a copy of a letter from the Receivers dated 20 December 2019. In it, the Receivers provided an indicative timetable for the sale process and a timetable which allows for external factors as follows. The Receivers expressed the view that the proposed extension should be five months so as to accommodate timetable slippage due to external factors: Indicative timetable Date Event 10 January 2020 Indicative expressions of interest due to receivers and managers. 13 January 2020 Receivers and managers are to: 1. shortlist potential purchasers from indicative expressions of interest. 2. facilitate data room access for shortlisted parties; and 3. facilitate VDD access for shortlisted parties. 14 February 2020 Binding bids for purchase of the Harris Scarfe Group are due to receivers and managers. 21 February 2020 Expected exchange date with purchaser following negotiations with parties who submitted binding bids. 20 May 2020* Expected completion date with conditions precedents satisfied including the following: Lease assignments (c. 3 months)
Allowance for external factors Date Allowance Event 10 January 2020 Indicative expressions of interest due to receivers and managers. 13 January 2020 Receivers and managers are to: 1. shortlist potential purchasers from indicative expressions of interest. 2. facilitate data room access for shortlisted parties; and 3. facilitate VDD access for shortlisted parties. 14 February 2020 Binding bids for purchase of the Harris Scarfe Group are due to receivers and managers. 28 February 2020 7 days Expected exchange date with purchaser following negotiations with parties who submitted binding bids. 10 April 2020 6 weeks Conditions precedent is satisfied for: 1. Foreign Investment Review Board approval (if required); and 2. Australian Competition and Consumer Commission approval (if required) 20 July 2020* Conditions precedents are satisfied for: Lease assignments (c. 3 months)
*CP for assignment of leases to be achieved (subject to completion). This is a process that given the number of leases we expect could take: minimum 3 moths; but could be 6 months plus. 33 Also annexed to Mr Clubb's second affidavit was a copy of a document prepared by the Receivers headed "Information Flyer 2019" (Sale Flyer). The Sale Flyer indicated that the Companies would "operate across a network of 39 stores", because, at its heart, Harris Scarfe "is a southern states homeware brand - and current stewardship of the business is engaging in a strategic geographic repositioning, exiting its tail of unprofitable stores, predominately in QLD, NSW and WA, returning focus to its profitable heartland". 34 It is not apparent from Mr Clubb's evidence when the Sale Flyer was distributed. It is not clear whether the Administrators had a copy of the Sale Flyer as at 4 pm on 19 December 2019, when the application was brought on for hearing. The Court must infer that they did not, since all of the evidence provided and submissions made on behalf of the Administrators was consistent with there being 66 stores for sale by the Receivers and there is a difference in scope of the task of selling 39 stores compared to 66 stores. Further, the proposal to sell 39 stores and close other stores would imply that there may well be staff redundancies as a result (given the geographic spread of the stores in NSW, Queensland and Western Australia). All of these factors are relevant to the Court's decision whether and for how long to extend the convening period. 35 Mr Clubb's evidence concerning the prospect of store closures is as follows: Beyond what is stated in the Sale Flyer, the Administrators have not been informed by the Receivers of any future plan for store closures (whether in total numbers, or in relation to specific, individual stores). The Administrators themselves do not have any present view on closure of any stores operated by the Companies. The Administrators note that the Receivers will pay any rent incurred during the course of the receivership in accordance with their statutory obligations under the Act (see the letter of support from the Receivers dated 18 December 2019 as appeared at Tab 16 of the Exhibit "DC-1"). The Administrators do not intend to assert any moratorium or rights in relation to any stores that are closed by the Receivers, for the reason that there is no economic value or benefit for the Companies in asserting that moratorium - any such store premises will promptly be made available for re-possession by the relevant landlord(s). 36 Scentre Management did not appear at the hearing on 23 December 2019 and no other creditor appeared to oppose the Court making orders extending the convening period.
Legal Principles 37 The Administrators' written submissions noted the summary of relevant legal principles adopted by Markovic J in North Queensland Heavy Haulage Services at [18]-[20] as follows: 18 In exercising the jurisdiction to extend time under s 439A(6) the Court must have regard to the objects of Pt 5.3A of the Act as set out in s 435A. Those objects are to maximise the chances of the company or as much as possible of its business continuing in existence or, if that is not possible, to result in a better return for the companies' creditors and members than would result from an immediate winding-up of the company. 19 The approach taken by the Court in applications of this type is well settled. The power to extend the time for convening the second meeting is one that should not be exercised as of course. Rather, the Court must strike an appropriate balance between the expectation that administration will be a relatively speedy matter and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders (see In the matter of Harrisons Pharmacy Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458 (Harrisons Pharmacy) (per Farrell J) at [11] and the authorities referred to therein). 20 Other relevant factors, particularly in the circumstances of this case, are: (1) whether the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration: see Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192; [2007] NSWSC 363 (Fincorp) at [18]; (2) the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others, a factor which may militate against the too ready grant of an extension: see Fincorp at [4]; and (3) whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and to arrive at the opinion required by s 439A(4), in order to inform creditors adequately so that they, in turn, will be in a position to decide whether to terminate the administration, execute a DOCA or place the company in liquidation: see Re Pan Pharmaceuticals Ltd (admins apptd) (ACN 091 032 914) (McGrath and Honey as joint liquidators) (2003) 46 ACSR 77; [2003] FCA 598 at [41]). 38 The Administrators also noted the comments of Lindgren J in Silvia, in the matter of Austcorp Group Limited (Administrators Appointed) [2009] FCA 636 at [18] as follows: The overlapping considerations affecting the exercise of the discretion whether to extend the convening period may be summarised as follows: (a) the Court should recognise the objective of speed of administration that was associated with the introduction of Part 5.3A by the Corporate Law Reform Act 1992 (Cth) as from 23 June 1993. The Court should also recognise the objectives stated in para 507 of the explanatory memorandum associated with the Bill for that Act, that it was expected that the power to extend the period would be exercised infrequently since it is an important objective of Part 5.3A that creditors be fully informed about the company's position as early as possible and have an opportunity to vote on its future as soon as possible: Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 (Young J) at 612; Re Geraldton Building Co Pty Ltd (Administrators Appointed); ex parte Trevor [2000] WASC 320 (Owen J) at [5]; (b) the function of the Court is to strike an appropriate balance between the legislature's expectation that the administration will be a relatively swift and summary procedure, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders: Re Diamond Press Australia Pty Limited [2001] NSWSC 313 (Barrett J) at [10]; Re Pan Pharmaceuticals Ltd (2003) 46 ACSR 77 (Lindgren J) (Pan Pharmaceuticals) at [42]; Re New Horizons Corporation; ex parte De Vries [2004] NSWSC 253 (Austin J) at [5]; (c) the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration: Re Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192 (Barrett J) (Fincorp) at [18]; (d) a particular consideration against the too ready grant of an extension is the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others: Fincorp 62 ACSR 192 at [4]; Chamberlain, in the matter of South Wagga Sports and Bowling Club Ltd (Administrator Appointed) [2009] FCA 25 (Jacobson J) at [9]; (e) the application is to be assessed by reference to whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and, in particular, to arrive at the opinion referred to in s 439A(4), in order to inform creditors adequately so that they will be in a position to decide whether to terminate the administration, execute a deed of company arrangement or place the company in liquidation: Pan Pharmaceuticals (2003) 46 ACSR 77 at [41]; ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No.7) [2009] FCA 454 (Emmett ) (ABC Learning Centres)at [28]; (f) it is often desirable that any extension be accompanied by an order under s 447A, permitting the meeting to be held at any time during the convening period as extended: see the order made in Re Daisytek Australia Pty Ltd (2003) 45 ACSR 446 (Daisytek) at [10]-[18].
Consideration 39 The Court accepts that the legal principles set out in the Administrators' submissions apply to this application. 40 The Court accepts the submission made by Scentre Management that this application for an extension of the convening period was made prematurely. It is difficult to envisage what circumstances might justify the Court making orders extending a convening period for the second creditors' meeting before the first creditors' meeting has been held and in circumstances where creditors have been given only a very short period of notice of the Administrators' intention to seek the extension. Certainly, the fact that an application for extension of the convening period might have to be made before a duty judge in January is not a justification. Nor is the convenience of counsel. 41 Mr Clubb's first affidavit contained information about the work undertaken in the first week of the administration. It was unsurprising that he said that he was not then in a position to make a recommendation to creditors about how they might vote at the second meeting of creditors. It is likely to be rare that an administrator would be in such a position after such a brief period. 42 The result of the application being made so soon in the life of the administration was that both the Court and creditors were at a disadvantage in relation to the quality of the information provided. 43 Had the application been made proximately to 20 January 2020, it is likely that the Administrators would have been in a better position to advise the Court (and creditors) more accurately of the number of stores to be closed, the number to be sold and likely staff redundancies, all matters relevant to the exercise of the Court's discretion. Instead, the application proceeded on 19 December 2019 on a clearly false premise that 66 stores were to be sold. Submissions were made which flowed from the premise, including the possibility of maximising the number of employees who might remain in employment. 44 The Court has some concerns that the Receivers did not ensure that the Administrators were in a position to put more accurate information before the Court at the time the application was heard. They instigated the early approach to the Court. It is not clear when the Sale Flyer was distributed to potential buyers, but given that the Sale Flyer was included in Mr Clubb's second affidavit, it is difficult to see that the Receivers would not have been in a position to provide relevant information to the Administrators in their letter of 18 December 2019, especially in light of the fact that the Receivers were able to say that they had received 15 expressions of interest. Any commercial disadvantage which might have flowed from the release of the information in the Sale Flyer ahead of the Christmas/New Year sales period would have resulted only from the instigation of the early application to extend the convening period: it would have had no relevance if the application was made in mid-January 2020 and the choice to make the application early does not justify the information being withheld, if it was. 45 It is true that it is common for applications for extension of the convening period to be brought on at relatively short notice. However, in most cases, either the first creditors' meeting or a committee of inspection has been advised that such an application is likely to be made and the opportunity has been taken to canvass the attitude of creditors to such an application. In this case, the secured creditor's interests are those of its shareholder. Consultation with the representatives of the secured creditor (the Receivers) was not sufficient and the Administrators should have been in a position to consult more meaningfully with other creditors. 46 While there is no evidence that the Administrators had the Sale Flyer when the application came on for hearing at 4 pm on 19 December 2019, the short notice of the application given to creditors and the failure to provide the information in the Sale Flyer to them lent credence to the validity of the concerns expressed by some landlords about the possible impact of the moratorium imposed under s 440B of the Corporations Act and their lack of information at that time. Had consultation with creditors at the first creditors' meeting taken place before the application was made (with clear notice of the Receivers' intentions with respect to those stores which will be closed as envisaged by the Sale Flyer), it might be that none of the landlords would have sought to appear or be heard on the application on 19 December 2019, since none sought to appear on 23 December 2019. While the Administrators sought to justify a longer extension of the convening period on the basis that it would avoid unnecessary cost of seeking later extensions, the early application has resulted in landlords incurring costs which might not have been necessary and the application involved a hearing on two days, when in the ordinary course these applications are dealt with at a brief hearing on one day. 47 Premature applications are likely to lead to unduly long extensions because there is insufficient information on the basis of which to determine how long the administrators and (relevantly here) receivers will need to do their job. That is demonstrated in this case, where the Receivers were content with a five-month extension, having first suggested a six-month extension and the shorter indicative timetable indicates that the sale of the Business might be achieved with a four-month extension. 48 Unduly long extensions are not consistent with the intent of Part 5.3A of the Corporations Act. 49 The Court therefore considered whether it should make orders extending the convening period, notwithstanding the premature application and, if so, for how long. 50 This is a case which involves similar issues to those discussed in Harrison's Pharmacy at [46]-[47], where I said: 46 While it is true that the discretion to be exercised by the Court should not have a predisposition in favour of speedy administration that would skew the balancing process, the issue of the extent to which the Court should maintain a supervisory role remains relevant to the period for which any extension requires consideration. This is so notwithstanding that there are a slowly growing number of precedents for extensions in the order of 6 months. An alternative approach was used in Hayes, in the matter of Estate Property Group Limited (Administrators Appointed) [2007] FCA 935 in which the Court granted an extension of one month with leave for reconsideration of a further period. 47 The Court should consider the appropriateness of the length of the extension sought, having regard to the availability under s 447A of the Act of further extensions in appropriate cases, so that the Court is in a position to monitor the manner in which the administration and any associated receivership is being conducted. Relevant considerations might include: (a) The extension should be for no longer than is required for a diligent exercise of the powers of the administrators and where relevant, as here, the receivers and managers. While successive applications to the Court involve cost, there are also fees incurred by administrators, receivers and managers which mount up over time and these are unnecessary expenses if the administrators or receivers and managers are not diligent. While it is true that, as here, it is possible for creditors to approach the Court during the period of the extension, the occasion of an application for an extension provides a forum for the creditors to have their voices heard, for example, in the subsequent applications in the case of ABC Learning: see Re ABC Learning Centres (No 8) (2009) 73 ACSR 478. (b) It is undesirable for claims which are subject to a moratorium to be extant any longer than necessary. (c) Where the primary asset of the business is goodwill, an overly protracted administration is unsettling to staff who may leave for more certain employment, diminishing the value of the business of the company in administration. (d) Unnecessary delay in prosecuting an administration exposes the assets of the company to market risk. (e) The longer the administration and the receivership, the greater potential there is for the interests of the secured creditor and the unsecured creditors to diverge, to the detriment of the unsecured creditors. (f) It was the intention of the legislature that administrations be conducted expeditiously: Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) at [507], as mentioned by Austin J in Re Riviera Group Pty Ltd at [9]. 51 The information in the Sale Flyer indicates that the Receivers' task will be less complex than the sale of 66 stores in five states would indicate. Having said that, the Court accepts that the sale of 39 stores is also likely to be attended by complexity. Further, the fact of a receivership of the substantial assets of the Harris Scarfe Group complicates the administrations because it is not the Administrators making some of the critical decisions in relation to those assets. The receivership can delay the time at which Administrators will be in a position to provide the advice to creditors required for them to make a decision at a second creditors' meeting whether to return the Companies to their director, put the Companies into liquidation or accept a deed of company arrangement, if one has been proposed. 52 Despite the circumstances of this application, the Court accepts that an extension of the convening period is appropriate; the question is the length of the extension. The shorter indicative timetable provided by the Receivers is likely realistic, absent a complicating factor, such as the need to obtain regulatory clearance. That period (approximately four months) would be in the same range as that ordered in the case of Toys 'R' Us, which involved the sale of 44 stores. 53 It was argued that the longer timetable might be appropriate in light of the fact that some of those who have lodged expressions of interest might need to secure regulatory clearances. It was also argued that a further application for an extension of the convening period would involve cost. It was noted that the Administrators' had undertaken to hold the second creditors' meeting earlier than the end of the convening period if that becomes feasible and that the proposed orders include liberty for a person who can show sufficient interest to apply at any time. In the Court's opinion, those factors do not justify an unduly long extension of the convening period having regard to the purposes of Part 5.3A. 54 Should a need for regulatory clearance arise, the Court will be in a better position at that time to determine for what period the extension should be granted. Having regard to the premature nature of the application, any costs attendant on a possible further application do not overcome the imperative to have regard to the purposes of Part 5.3A. 55 On instructions, senior counsel for the Administrators conceded that about a week after sale of the stores is completed is sufficient time for them to prepare and provide the required report to creditors ahead of the second creditors' meeting.
Conclusion 56 On that basis, the Court determined that the convening period should be extended to 29 May 2020. If it transpires that more time is required, it remains open to the Administrators to seek a further extension of the convening period under s 447A of the Corporations Act. At that time, the Administrators will be in a better position to provide realistic guidance as to the required extension. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.
Associate: Dated: 13 January 2020 SCHEDULE OF COMPANIES NSD 2099 of 2019 Harris Scarfe Financial Services Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (ACN 130 587 496) Harsyn Pty Ltd (Administrators Appointed) (ACN 123 966 772) Harrin Australia Pty Limited (Administrators Appointed) (ACN 123 876 184): Harris Scarfe Insurance Pty Ltd (Administrators Appointed) (ACN 003 511 171) Allens Stores Pty Limited (Administrators Appointed) (ACN 100 437 992) Storecon Pty Limited (Administrators Appointed) (ACN 163 703 759) Bronsonbay Proprietary Limited (Administrators Appointed) (ACN 106 780 465)