Crafted Furniture Pty Ltd v Rugged Luxe Pty Ltd

Background 2 The chronology of pertinent events is as follows. 3 Rugged was incorporated in January 2018, with its sole director and shareholder since that date being Justin Burden. 4 In January 2019, a commercial relationship commenced between Crafted and Rugged. That developed so that from about mid-2019 there was a licence arrangement between the companies whereby Rugged marketed and sold furniture on the retail market which it sourced from Crafted as a wholesaler. Rugged did this through Crafted-branded retail stores in, first, Bayswater Road, Rushcutters Bay, and, later, Pacific Highway, Crows Nest. In July 2020, the lease on the Rushcutters Bay store was terminated whereafter Rugged opened a new store in Oxford Street, Paddington. 5 The floor stock in the stores, which I understand to have been there for retail marketing purposes so that customers could see the stock and thereafter make their orders which would be supplied by Crafted, consisted of products exclusively supplied by Crafted. 6 By January 2021, the relationship began to sour. Crafted complained that Rugged was in breach of the licence agreement, appeared to be trading while insolvent and had refused to supply financial information as required by the licence agreement. A statement of account in April 2021, showed that $84,194.36 was due and payable by Rugged to Crafted. The earliest outstanding items had been invoiced in February 2020 and had been due from the middle of March 2020, i.e., more than a year previously. 7 In April 2021, Crafted issued a termination notice to Rugged for repeated breaches of the license agreements, and sent a letter of demand to Rugged for moneys owing. Thereafter, Mr Burden rebranded the showrooms as Cura Furniture and on 3 May 2021 incorporated Cura Furniture Pty Ltd with Rugged as the sole shareholder. 8 In May 2021, an "accountant for Justin Burden" asked the lessor of the Paddington store to transfer the lease from Rugged to Cura Furniture. I infer that it was Mr Burden's intention to continue to trade furniture from the same store but as the business of Cura Furniture rather than as the business of Rugged. There is evidence that Cura Furniture marketed furniture supplied by Crafted as its own. 9 On 15 July 2021, Crafted served a statutory demand on Rugged in which it demanded payment of its outstanding account, still in the sum of $84,194.36. 10 On 18 September 2021, there was a reallocation of the shares in Cura Furniture such that Rugged's shareholding was reduced to 1 of the 10 issued shares, and the remaining 9 shares were transferred to Mr Burden. That is to say, to the extent that there is any value in the shareholding in Cura Furniture, 90% of it was transferred to Mr Burden. 11 On 20 September 2021, Crafted filed an originating application for the winding up of Rugged in reliance on the statutory demand. The winding-up application is listed before a registrar of the Court for hearing on 27 October 2021, i.e., next week. 12 It appears that in the intervening period, Mr Burden continued to try to have the lease of the Paddington store assigned from Rugged to Cura Furniture. Ultimately, on 6 October 2021 solicitors acting for the lessor advised solicitors acting for Rugged by letter that, having received notice of the application for the winding-up of Rugged, the lessor does not agree to assign the lease to the related company. That was expressed to be on the basis that the assignment "may be determined to be a transaction to defeat the interests of a creditor and be voidable." 13 Meanwhile, on 5 October 2021, Mr Burden commenced discussions with Jason Tang of Cor Cordis, insolvency practitioners, with a view to possibly appointing administrators to Rugged. On the evidence of Mr Tang, the discussions continued on 6 and 8 October and included the following: (1) The possibility of a deed of company arrangement (DOCA), with no specific intended proposal being flagged but Mr Burden saying that "he would want to put a proposal 'to save the company', and that it would likely be funded by a related company named 'Cura'"; (2) Mr Burden said that he had been accused by Crafted of "Phoenixing", which he denied, and "instead had simply been forced to start again after the termination of his licence"; (3) Mr Burden said that no stock of Rugged had been transferred across to Cura Furniture which was a new brand; and (4) The possibility that if there was a voluntary administration and subsequently a DOCA was approved by creditors, the lease might be able to be retained. 14 On 8 October 2021, Mr Burden signed three documents, namely: (1) The minutes of a meeting of the sole director of Rugged recording resolutions that: (a) in the opinion of the director, the company is insolvent or is likely to become insolvent at some future time and that administrators of the company should be appointed; (b) Jason Tang and Andre Lakomy of Cor Cordis be appointed as administrators of the company; and (c) an instrument of appointment of administrators be executed by the company; (2) An instrument of appointment by Rugged of Messrs Tang and Lakomy as administrators; and (3) A letter to Messrs Tang and Lakomy advising them of their appointment as administrators of Rugged. 15 On 13 October 2021, the current interlocutory process was filed by Crafted in which in addition to the relief already mentioned, i.e., that provisional liquidators be appointed, relief was sought declaring the purported appointment of the administrators invalid, null and void and of no effect or alternatively declaring that the administration of the company should end because the provisions of Pt 5.3A of the Act are being abused. 16 On 14 October 2021, being the first return day of the interlocutory process, the solicitor appearing for Crafted indicated that at the hearing that was listed for today only the relief with regard to the appointment of provisional liquidators would be pressed with the other relief being able to be dealt with, if necessary, on a subsequent occasion. 17 The administrators have taken a neutral stand on the relief sought by Crafted. As mentioned, an affidavit by Mr Tang has been filed and is relied on by the administrators. It sets out the circumstances of the appointment of the administrators as well as some additional matters, relevantly: (1) The only physical assets of the company of which the administrators are aware is "display stock" of its furniture located at the Paddington store. (2) As the company sold furniture on a made-to-order basis, it would appear not to have any actual inventory beyond the display stock. (3) The display stock has been inventoried and valued. Whilst not revealing the value on account of commercial sensitivity, Mr Tang noted that Crafted had previously offered to purchase the floor stock from Rugged for $24,107.92 including GST. (4) Mr Burden is trading his new business, Cura Furniture, from the store even though the store's lease is still held by Rugged and it contains display stock owned by Rugged, and there may have been business opportunities otherwise diverted from Rugged to Cura Furniture, but given the early stage of the administration Mr Tang has not been in a position to investigate that. (5) In the meanwhile, Mr Tang has left Rugged's stock at the store on the basis that moving it and storing it elsewhere would involve significant cost and as it has been inventoried it could not be dealt with without detection. (6) The first meeting of creditors in the administration is arranged for tomorrow, 20 October 2021, at 11.30 am. 18 Additional significant debts of Rugged would appear to be approximately $100,000 owed to the Deputy Commissioner of Taxation and $100,000 on a small business loan owed to Prospa Advance Pty Ltd in respect of which there is a registered security interest.

Applicable principles 19 Section 472(2) of the Act is in the following terms: The Court may appoint a registered liquidator provisionally at any time after the filing of a winding up application and before the making of a winding up order or, if there is an appeal against a winding up order, before a decision in the appeal is made. 20 A provisional liquidator may only be appointed if a winding-up application has been filed, and will not usually be appointed unless there is a reasonable prospect that a winding-up order will be made: ASIC v ActiveSuper Pty Ltd (No 2) [2013] FCA 234; 93 ASCR 189 at [11] and [15] per Gordon J. 21 There is no dispute in this case that a winding-up application has been filed and that there is at least a reasonable prospect that a winding-up order will be made. 22 Where, as in this case, administrators have been appointed, s 440A(3) of the Act applies. It is in the following terms: The Court is not to appoint a provisional liquidator of a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed. 23 The court has a wide and complete discretion whether or not to appoint a provisional liquidator: Re Huntford Pty Ltd (1993) 12 ACSR 274 at 277; ActiveSuper at [11]. The grounds on which a provisional liquidator may be appointed are infinite, and all that really has to be shown is that there is a bona fide application constituting sufficient ground for the making of the order: Re New Cap Reinsurance Corporation Holdings Ltd [1999] NSWSC 536; 32 ACSR 234; at [23]; ActiveSuper at [12]. 24 The appointment of a provisional liquidator pending the determination of a winding-up application is a drastic intrusion into the affairs of the company and will not be done if other measures would be adequate to preserve the status quo: ActiveSuper at [13] and the authorities there cited. Therefore, an applicant must also show some good reason for intervention prior to the final hearing of the winding-up application. For example, an applicant may show that the appointment is needed in the public interest or to preserve the status quo or to protect the company's assets or affairs: ActiveSuper at [14] and the authorities there cited. 25 Importantly for the present case, I should not appoint provisional liquidators if I am satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have provisional liquidators appointed (s 440A(3)), and unless there is some good reason for doing so, such as to preserve the status quo to protect the company's assets.

Consideration 26 Crafted submits that provisional liquidators should be appointed for the following reasons: (1) The appointment of administrators was for an improper purpose, namely to preserve the lease on the Paddington store to enable Cura Furniture to continue trading there as part of Mr Burden's "phoenixing" strategy. (2) Once the first meeting of creditors has been held, the administrators' fees and expenses will quickly escalate which will ultimately be to the detriment of creditors. It will be more cost effective, and hence to the benefit of creditors, for provisional liquidators to be appointed. (3) Provisional liquidators could terminate the lease bringing the rental obligations to an end, which obligations are currently being met by the administrators who will be reimbursed to the detriment of creditors. (4) There is no indication of the prospects of any DOCA producing any benefit to creditors. 27 The essentially neutral submissions of the administrators include the following: (1) They are independent, owe their duties to the body of creditors and not to the director who appointed them, and are not under the influence of the director. (2) They have not yet had the opportunity to investigate the affairs of the company including the allegations made by Crafted, or to consider with Mr Burden whether a DOCA proposal is feasible such as to produce a better outcome for creditors than in a winding-up. It is at least possible, they say, that a DOCA could save the lease with the result that the business can continue, whether in Rugged or in Cura Furniture, with a better return to creditors. (3) There is no, or at most very little, risk of dissipation of Rugged's minimal assets between now and the hearing of the winding-up application because they, the administrators, are in control of the company and the floor stock has been inventoried. 28 On the evidence, Rugged is patently insolvent and I am doubtful that there is much prospect of a successful DOCA. However, I am mindful that the administrators were appointed only 11 days ago and there has not yet been a first meeting of creditors. In the circumstances, the absence of any concrete information as to what any DOCA proposal might entail and whether it would create any benefit for creditors when compared to their position on winding-up does not weigh particularly heavily with me. I must accept that there is a possibility, even if remote, of a DOCA proposal being made which will be of benefit to and ultimately endorsed by creditors. 29 If the administration is allowed to continue, by me not appointing provisional liquidators, the administrators will have until the hearing of the winding-up application to explore the possibility of a DOCA. They will have the burden on that occasion of persuading the court to adjourn the hearing on the basis that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up (s 440A(2) of the Act). They understand that they will have to put considerably more before the court on that occasion than what they have been able to do today. 30 Given the limited assets of the company, and the appointment of administrators, I am not persuaded that there is any material risk of the dissipation of assets between now and the hearing of the winding-up application. In short, it seems to me that Crafted's principal concern to maintain the status quo is adequately addressed by the continued administration. 31 What I am left with is a somewhat speculative exercise with regard to the relative expenses of the administrators, if the company continues in administration, and the liquidators, if provisional liquidators are appointed. On one view, the expenses of the administrators will be greater because they will continue to be liable for the rent and they will investigate the affairs of the company and the possibility of an advantageous DOCA, whereas the provisional liquidators will merely preserve the status quo. However, I must also take into account the possibility of an advantageous DOCA. 32 The result is that, with reference to s 440A(3), I am not satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed, but I am also not satisfied that there is any good reason for intervention prior to the final hearing of the winding-up application. There is no discernible public interest in such an intervention which is not necessary to preserve the status quo or to protect the company's assets. In short, the justification for the drastic action of the appointment of provisional liquidators little more than a week before the hearing of the winding-up application is weak. 33 In the circumstances, I am not persuaded to grant the relief that Crafted seeks. The relief in paragraphs of 1 to 4 of the interlocutory process should accordingly be dismissed. 34 I will hear the parties on costs.

Thereafter on costs 35 The administrators submit that Crafted should be ordered to pay their costs so that those costs are not costs in the administration and hence to the ultimate detriment of the body of creditors. They submit that such an order would be in accordance with the usual rule that the costs follow the event. 36 I am not persuaded that that is the proper order such as to do justice in this case. There are a few considerations. First, this was a finely balanced decision. Secondly, the application was brought not in the idiosyncratic interests of Crafted, but rather in the interests of the body of creditors as a whole. Thirdly, there has not been, and cannot be, any suggestion that the application was other than bona fide. 37 In those circumstances, in my view the appropriate costs order is that the parties bear their own costs. Insofar as the administrators are concerned, such costs would naturally form part of the costs of the administration rather than having to be borne by them personally. They will accordingly be reimbursed their costs. If necessary, that may mean that their costs are recovered from the indemnity they received in respect of costs up to a maximum of $30,000 from Mr Burden. 38 I will order accordingly. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.