Crafted Furniture Pty Ltd v Rugged Luxe Pty Ltd

1. The administrators' application for the adjournment of the winding up of the defendant be dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

STEWART J: 1 The application by the plaintiff, Crafted Furniture Pty Ltd, for the winding up of the defendant, Rugged Luxe Pty Ltd (administrators appointed) was listed for hearing before a registrar of the Court this morning. The administrators sought an adjournment in order to put a deed of company arrangement (DOCA) proposal to creditors at their second meeting, which is due to take place on 5 November 2021. The matter was referred by the registrar to me as the Commercial and Corporations duty judge. 2 The matter that arises for decision is accordingly the administrators' application for an adjournment. Since Rugged Luxe is in administration, s 440A(2) of the Corporations Act 2001 (Cth) has application. It provides that the court is to adjourn a hearing of an application for an order to wind up 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 be wound up. 3 I had occasion to deal with the authorities that govern the exercise of the discretion to adjourn an application for winding up in such circumstances in Re Paltar Petroleum Ltd (No 1) [2019] FCA 635 at [39] and following. The critical inquiry is into the interests of the company's creditors in the two competing scenarios, being continuation under administration, on the one hand, or winding up on the other. It was said in Re Offshore and Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6] by Brereton J that what is required by s 440A(2): [i]s satisfaction that it is in the interests of the company's creditors for the company to continue under administration, rather than be wound up, as distinct from satisfaction that it may be so. (Emphasis added,) 4 What is required is a "substantial degree of persuasion" that administration rather than liquidation is in the interests of the company's creditors (also at [6]). 5 In Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2009] FCA 452 at [28], with reference to the hope that creditors might get more by way of payment of debts from administration than liquidation, Greenwood J stated as follows: The hope must however be a real and not remote possibility, unclouded by cascading contingencies all of which must fall in before an asset might become available to the creditors as a group. 6 Mr Edney, who appears for the administrators, also refers to the general power of the court inherent in its jurisdiction to control its own process to adjourn the hearing, even if I am not satisfied that it is in the interests of creditors that there be an adjournment, and that the company continue in administration rather than in liquidation. In that regard he refers to Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 548. There, Palmer J was not satisfied that it was in the interests of the company's creditors that the adjournment be granted, but, nevertheless, concluded that there should be a short adjournment in the exercise of the court's inherent jurisdiction. That was to enable the administrators to do further investigations and to put a DOCA proposal together. See also Paltar Petroleum at [49]-[55]. 7 In the present case, there is a DOCA proposal to put to the second meeting of creditors. The administrators have expressed the opinion that they consider it would be in the creditors' interests for the company to execute a DOCA. They do not consider that it would be in the creditors' interests for the administration to end or for the company to be wound up. 8 The evidence is that Rugged Luxe's sole director and secretary is Justin Burden, having been appointed to that role on 13 January 2018, the date of the incorporation of Rugged Luxe. Rugged Luxe operates from premises in Oxford Street, Paddington. It initially traded online, and, subsequently, entered into a licence agreement with Crafted which enabled it to sell furniture provided by Crafted in retail outlets. The licence agreement was terminated by Crafted in April 2021. 9 Crafted was the Rugged Luxe's sole supplier. As a result of the termination of the licence agreement the company ceased to trade prior to the appointment of the administrators, and the company now operates only by holding a lease of the premises. I infer that Rugged Luxe sublets the premises to a related company, Cura Furniture Pty Ltd, whose sole director and shareholder is also Mr Burden. Cura undertakes a furniture retail business from the premises. 10 Based on the administrators' preliminary investigations and the report on company activities and property (ROCAP) prepared by Mr Burden, Rugged has assets of approximately $67,000, and liabilities of approximately $1.33 million, leaving a shortfall of approximately $1.26 million. The principal creditors are the Deputy Commissioner of Taxation, Prospa Advance Pty Ltd (a secured creditor) and Crafted. The first meeting of creditors of the company took place on 20 October 2021. 11 Cura is trading a new business from the premises. Following the commencement of the administration, Mr Burden informed the administrators that he intended to propose a DOCA that would allow the company to avoid liquidation and provide a better return to creditors than in liquidation. Mr Burden and Cura are the parties who have proposed the DOCA. 12 It would appear that the principal underlying motivation for the DOCA from the perspective of Cura is to be able to maintain occupation of the premises to continue trading from them. The lessor has refused to assign the lease of the premises from Rugged Luxe to Cura. 13 The DOCA proposal involves the following principal elements: (1) The administrators of Rugged Luxe, Mr Burden and Cura would all be parties to the DOCA. (2) A deed fund would be established for the benefit of priority and ordinary unsecured creditors of Rugged Luxe. That fund would be made up of: (i) all cash at the bank held by Rugged Luxe as at the date of the administrators' appointment; (ii) all trade debtors payable to Rugged Luxe as at that date; (iii) all claims available to Rugged Luxe with respect to deposits paid for and/or profits on open orders against Crafted, and any claims arising from the termination of the licence agreement if any; (iv) all other cash or cash equivalents payable to Rugged Luxe as at the date of the administrators' appointment; (v) all realisations made from Rugged Luxe of its stock; and (vi) a cash contribution from Cura (and/or Mr Burden or his nominee) totalling $210,000 to be paid by way of 30 monthly instalments of at least $7,000 payable on the first day of each month commencing on the month immediately succeeding the execution of the DOCA. (3) Mr Burden, Tanya Marler (Mr Burden's spouse) and Cura not claiming on the DOCA in respect of priority and/or secured claims they may have against Rugged Luxe. (4) An undertaking by Mr Burden to cause Rugged Luxe to pay in full all taxes and statutory obligations falling due for payment by it after the execution of the DOCA. (5) The DOCA contributions being secured by the registration of security over Cura and Rugged Luxe's assets and undertakings, as well as a personal guarantee from Mr Burden. 14 On a comparison between what may be realised for creditors in the DOCA if adopted and successful, as against a liquidation, it is said by the administrators that the DOCA appears to offer 100 cents in the dollar to priority employee creditors and a return to unsecured creditors of between approximately 12 and 19 cents in the dollar. On winding up, secured creditors would get 0 to 44 cents in the dollar and priority employee creditors and unsecured creditors would get nothing. 15 It is to be noted that the assets of the company as reflected in these calculations do not include insolvent trading claims against Mr Burden which the administrators estimate may amount to between $200,000 and $300,000 but which they estimate are worthless because of his asset position. 16 In that regard, Mr Burden's assets and liabilities according to a personal statement signed by him last week reflects an excess of liabilities over assets that I note to include, in the liabilities column, the claim of Prospa on, presumably, a guarantee and indemnity that it says that it has against him for Rugged Luxe's debts to it. In that regard, Prospa has indicated that it does not support the DOCA and intends pursuing Mr Burden personally pursuant to a guarantee and indemnity. 17 I am not satisfied that there are sufficient prospects of the DOCA being adopted by creditors or if adopted it succeeding such as to satisfy the requirements of s 440A(2) of the Corporations Act. That is for the following reasons: (1) Two of the most significant creditors, being Crafted and Prospa, do not support the DOCA, or at least they have indicated as much at this stage. (2) As mentioned, Prospa has indicated that it will pursue Mr Burden on a guarantee and indemnity it has from him for its claim. With reference to his asset and liability position as signed by him, that will likely, or at least possibly, lead to the bankruptcy of Mr Burden, which will jeopardise the continuing success of Cura's business, upon which the success of the DOCA depends. (3) The furniture retail business previously conducted by Rugged Luxe failed. It traded from the same premises in Oxford Street, Paddington where Cura trades. Cura's business is in effect the same business that had been conducted by Rugged Luxe. The forecasts for the new business are, it seems to me, unjustifiably optimistic, particularly in the light of the history of Rugged Luxe's business, and the success of the DOCA depends on the success of Cura and the reliability of the forecasts. Indeed, given Rugged Luxe's asset position, the DOCA fund is constituted very substantially by the proposed monthly payments from Cura. (4) The costs of the administrators will substantially increase over the period between now and the second meeting of creditors, and if the DOCA was adopted thereafter and if the DOCA subsequently failed, those costs would be to the detriment of creditors. (5) The proposed undertakings by Mr Burden would appear, on the administrators' own information, to be worthless. (6) I regard the prospects of returns on the DOCA as forecast to be remote and speculative, and to depend on cascading contingencies. (7) The further investigation of the possibility of returns on insolvent trading or voidable preference claims would end. 18 Insofar as the exercise of my inherent jurisdiction to adjourn the winding up is concerned, for essentially the same reasons I am not satisfied that there is sufficient basis or justification. Other than for the purpose of putting the proposed DOCA to creditors, which would incur further fees and take further time, there is no justification for an adjournment. In view of my assessment of the prospects of the DOCA, even that justification is substantially eroded. 19 With regard to the administrators' fees, I note that in their report they claim remuneration of almost $60,000 excluding GST for their work in the period 8 to 24 October 2021. The wisdom of the administration of a company, and hence the incurring of substantial administrators' fees, with assets of only $67,000 and liabilities of $1.33 million is open to question. The administrators say that between now and the second meeting of creditors they would accrue an entitlement to a further $20,000 in fees. 20 I accordingly dismiss the application to adjourn the hearing of the winding up application. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.