By an originating process filed on 1 December 2017 the plaintiff Boral Construction Materials Group Limited (Boral) claims an order that the defendant company SFL/Piletech (EA) Pty Ltd (EA) be wound up in insolvency, for failure to comply with a creditors' statutory demand served on it by Boral on 6 November 2017 claiming debts of $150,675.86, and that Michael Jones be appointed liquidator of the Company.
The originating process was first returnable on 6 February 2018. On 22 December 2017, before the first return date, the company appointed David James Hambleton and James Marc Imray joint and several voluntary administrators, pursuant to (CTH) Corporations Act 2001, s 436A. The s 439A meeting was scheduled to be held on 8 February 2018.
Meanwhile, on 23 January 2018, eight of nine other companies in the SFL group, of which the defendant company is a member, also appointed the same voluntary administrators. For reasons which will become apparent, the exception of one company in the group from the administration process, namely SFL/Piletech (MA) (MA), has some significance. Those other eight companies which have gone into administration I will refer to as "the other administration companies". The s 439A meeting of the other administration companies is scheduled to be held on 28 February 2018.
On 6 February 2018, at the first return of the winding up application, the administrators of the defendant company EA gave an undertaking that they would exercise their power of adjournment at the second meeting of the company's creditors to be held on 8 February, to adjourn it to a date that was not before 28 February 2018, and upon that undertaking the Registrar, by consent and pursuant to Corporations Act s 440A, ordered that the proceedings be adjourned to 19 February, for directions and to be fixed for hearing. On 8 February, the administrators duly adjourned EA's s 439A meeting to 28 February, the date on which the second meetings of creditors of the other administration companies were to be held.
On 19 February, the administrators' application for an adjournment, pursuant to Corporations Act, s 440A was set down for hearing on 21 February, when it proceeded. Subject to that application, it is not in contention that the evidence otherwise establishes all matters necessary to entitle the plaintiff to a winding up order and the defendant does not oppose such an order nor the appointment of the plaintiff's nominee as liquidator, in the event that their s 440A application fails. Thus the sole substantive issue is whether the winding up application should be adjourned to a date after 28 February when the s 439A meetings of the company and the other administration companies are to take place.
Corporations Act, s 440A(2), provides that the Court is to adjourn the 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. The principles to be applied on such an application are now reasonably well established, and were not contentious. They may be summarised as follows:
1. for the Court to be required to grant an adjournment under s 440A, it must be satisfied that it is in the creditors' interests to continue the administration in all the circumstances, which involves there being a sufficient possibility - as distinct from mere optimistic speculation - that creditors' interests will be accommodated to a greater degree in an administration than in a winding up: see Weriton Finance Pty Ltd v PNR Pty Ltd [2012] NSWSC 1402; (2012) 92 ACSR 88 at [16] to [21];
2. the defendant company bears the burden of satisfying the Court that an adjournment should be granted: see Re Laguna Australia Airport Pty Ltd [2013] FCA 1271 at [11];
3. a substantial degree of persuasion that administration rather than liquidation is in the best interests of the company's creditors is necessary: see Re Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6]. This is reflected in the requirement that the Court be satisfied in all the circumstances that it is in the creditors' interests to continue the administration on the basis that there is a sufficient possibility as distinct from mere optimistic speculation, of that outcome. Thus, persuasive evidence is required: see Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457.
4. the Court will view with scepticism the appointment of administrators at the last minute in the face of winding up proceedings: Re Offshore & Ocean Engineering Pty Ltd (supra) at [16].
The affairs of all the companies in the group - including MA, the one company that is not in administration - are intertwined, each being both a debtor and a creditor of other group companies. This is illustrated by the case of EA itself, which is indebted to MA for $12,598,000, while MA is indebted to the holding company Steel Foundations Limited (SFL) for $10,145,000, and SFL in turn is indebted to EA for $14,347,000. The administrators have concluded, reasonably, that no company in the group has the capacity to repay its intercompany indebtedness unless it is first paid what it is owed by other group companies, and that in that sense the indebtedness is circular.
Only two companies in the SFL group have assets other than intercompany loans, and they are the defendant company EA, and the holding company SFL. However, SFL's assets are subject to charges in favour of secured creditors which will apparently exhaust its assets before leaving any residue for distribution to unsecured creditors.
The company EA's financial position is, in summary, as follows (this being drawn from the administrators' third report). As assets, it has sundry debtors of between $1,500,000 and $1,700,000 and stock worth between $100,000 and $350,000. Although according to its balance sheet it has related entity debtors of nearly $20,000,000 (of which $14,347,000 is owed by SFL), the administrators have formed the view that those loans are irrecoverable.
I have considered closely the possibility - because it is relevant to the overall assessment of the comparative courses proposed - that the loan to SFL might be recoverable through a liquidation of SFL and subsequent liquidation of MA, which is indebted to SFL. However, to the extent that SFL received a dividend from MA, that dividend would be caught by the security in favour of SFL's secured creditors, and would not be available for distribution to SFL's unsecured creditors including EA. Accordingly, the administrators' conclusion that the related entity debtors of almost $20,000,000 are likely to be irrecoverable and have no value appears reasonable. The result is that the company has recoverable assets of between $1,630,000 and $2,050,000.
Against that, it has liabilities to secured creditors of between $51,000 and $151,000, unsecured creditors of $3,640,000, and related entity creditors of $13,712,000. The related entity creditor is MA, the company that at present stands outside the administrations.
Accordingly, EA has total liabilities of between $17,400,000 and $17,500,000, and a net deficiency of between $15,350,000 and $15,870,000.
The directors of the company and MA have proposed a Deed of Company Arrangement (DOCA), the significant features of which would involve:
1. the pooling of all of the assets of the administration companies, including EA. However, as I have said, it is only EA that has any available assets of substance;
2. the extinguishment of all intercompany loans between all the administration companies; including EA. As the intercompany loans have no value as an asset of EA, this does not operate to its disadvantage;
3. the deferral of all claims by MA against the administration companies, including EA, and by the administration companies against MA. As MA is by far the largest creditor in EA - accounting for $13,700,000 of the total $17,400,000 of unsecured creditors - that would operate significantly to the advantage of EA, by removing from the claims against its assets almost 80% of those claims.
4. the return of control of the company (and of the other administration companies) to the directors, though not of the assets. For what purpose the companies are to be returned to the directors - and in particular whether it is with a view to continuing business and, if so, how that could conceivably be done without any of the assets and without the directors having other resources - is not apparent.
The administrators have adduced evidence of inquiries made by them of the major unrelated creditors, which have elicited that but for the plaintiff Boral - which represents less than 5% of the unrelated unsecured creditors - and possibly two others which may be undecided, those creditors have indicated that they would support an adjournment of the winding up proceedings, in order to permit the creditors to consider the DOCA proposal at the second meeting. Ordinarily, that would be a significant and weighty consideration in favour of acceding to an adjournment. Particularly in a case where commercial judgments may differ, there is force in the view that creditors are the best judges of their own best interests, and thus that it may be in their best interests to continue the administration to allow them to vote at the meeting to determine the future of the company.
The administrators have also expressed the opinion that it is in the best interests of creditors to adjourn the proceedings, in order to enable them to consider and vote on the DOCA proposal. But while I regard the opinion of an insolvency practitioner in this respect as relevant, ultimately it is for the judgment of the Court whether the continuation of the administration as opposed to an immediate winding up is in the interests of creditors, and while in that respect the predicted comparative outcomes of liquidation and the proposed DOCA - as to the quantification and timing of dividends - is also a very important consideration, it is not the only one.
In principle, the differences between the DOCA proposal and immediate liquidation in the present case are as follows:
1. Insofar as its loan to SFL is its major asset, which would be available to creditors in EA (for what it is worth) in a winding up, it would be extinguished by pooling under the DOCA, and thus would not be available. However, that is of little practical significance because, as I have explained, that loan appears to be irrecoverable, and has no value in any event.
2. The other assets of EA would be available to creditors of EA alone in the case of a liquidation, but would be shared between creditors of all the administration companies under the DOCA. As EA is the only company with available assets, the pooling of assets in this way would be adverse to the interests of EA and its creditors.
3. In the DOCA scenario, MA - which is by far the largest creditor of EA - would not participate in the deed fund and thus would not compete with the claims of the other creditors on the available funds, whereas in a liquidation MA would be entitled to about 80% of any dividend. Given the relative size of MA's claim against EA, this is a very significant benefit of the proposed DOCA, and as the administrators' calculations, to which I shall come, demonstrate, its impact, if one looks at the position of EA alone, outweighs the detriment of pooling of assets of EA with the other administration companies.
4. The liquidator's recoveries would be available in a liquidation but not a DOCA. The administrators have formed the view, after some inquiries, that liquidator's recoveries will be doubtful and difficult and that the ability of the directors to satisfy any judgment against them, such as for insolvent trading or breach of duty is dubious, thus they give little weight to the potential for liquidator's recoveries.
In financial terms, the administrators in their third report have quantified the prospective outcomes of liquidation as a dividend to ordinary unsecured creditors of between $0.06 and $0.10 in the dollar, which compares with a prospective dividend of between $0.15 and $0.24 in the dollar in a DOCA scenario. The fundamental (though not sole) explanation for the difference is that MA will prove in the liquidation the $13,700,000 but will not prove in the DOCA.
On its face, that exercise demonstrates a clear benefit in the DOCA scenario over the liquidation scenario and, prima facie, indicates that it would be in the interests of creditors for the administration to continue at least so that they could consider the DOCA proposal. However, Boral contends to the contrary, for a multiplicity of reasons, some of which overlap.
The first is, essentially, that the benefit is not clear, because the state of the accounts of EA and of the other administration companies is unreliable and doubtful. In particular the indebtedness to MA, it is said, may not be so great as it is.
However, though it cannot be regarded as beyond possibility that some adjustments may be ultimately be required, the ongoing inquiries of the administrators to date have produced an increasing degree of confidence in the amount of the indebtedness of EA to MA. For the benefit of a DOCA in financial terms to be removed on this basis, there would have to be an enormous reduction, rather than some slight modification of the amount of the indebtedness. Although, in this respect, Boral suggested that because EA was a net creditor of the SFL Group - being owed more by related companies than it owed - benefit in pooling was not evident, that contention overlooks that the debts which it is owed are in fact irrecoverable and of no value.
Secondly, Boral submits that the investigations undertaken as to the prospects of liquidator's recoveries from the directors, and from third parties (such as advisers, and potentially the company's bank) are inadequate, including the inquiries into the resources available to the directors to satisfy any judgment.
However, allowance must be made for the nature of an administrator's functions and the time frame within which they must be performed. It is not realistic to expect an administrator to resolve these issues with certainty. The best that can ever be done is to form a view, based on what will almost always be limited material, to inform the decision of creditors. I see no reason to doubt that that is what these administrators have done. It is no doubt possible that it might eventuate that there is some scope for recoveries, but the important feature at this stage is that it is by no means obvious that that will be so. That there might be claims against the company's bank, professional advisers and so on is no more than speculative. Alternatively put, if creditors are going to make a decision based on the respective advantages of liquidation and administration, it is, as things presently stand, reasonable enough that they proceed on the basis that recoveries of an order that would make proceedings worthwhile, though by no means impossible, are far from assured, and even if made may be long in the future.
Thirdly, Boral submitted that distributions in a liquidation would be paid more quickly than distributions under the DOCA. Although I must say I can see no good reason why that would be so, that accords with what appears in the administrators' report. It is a factor in favour of liquidation, but the time difference is, on the face of it, not such as to offset the financial benefit of waiting a little longer for a higher return.
Fourthly, it is submitted that MA, a related creditor and the proponent of the DOCA, would control the votes by value in the creditors' meeting, and thus that if all the other related creditors voted against the DOCA, the outcome would be decided by the administrators' casting vote. That submission appears to be correct but, in my view, it is not a reason to favour liquidation if, objectively assessed, administration appears to offer better prospects for creditors. In any event, if the resolution were carried on the casting vote of the liquidator, or because of the support of MA as a related creditor, it would be amenable to review by the Court.
Fifthly, it was submitted that liquidation was desirable in order to investigate what was said to be the admittedly unreliable books and records of the group, in the light of unmet promises of payment in the past, and what was said to be the very high costs of the administrators. Again, it seems to me these are relatively marginal matters. If, objectively speaking, the DOCA offered real prospects of a better return to creditors than liquidation, those considerations would not suffice for a conclusion that continuation of the administration was not in their interests.
However, the most telling argument advanced by Boral was that there was not truly a benefit for EA in the DOCA through deferral of its debt to MA, because if EA were wound up, then it could bring about a winding up of SFL and in turn of MA - and, if necessary, the other administration companies - with the result that pooling would be available in any event under Corporations Act, s 571, by determination of the liquidators, resulting in all the benefits offered by the DOCA but, in addition, preserving the potential, at least, for liquidator's recoveries. This was coupled with the submission that as a matter of logic, as the DOCA proposal involves no injection of funds from outside the SFL group, the proposed DOCA could not produce a superior result for creditors than a winding up of all the group companies with subsequent pooling. In each case, the available assets and the claims on them would be the same, whereas in the case of liquidation at least the potential for liquidator's recoveries would exist which is not the case in the event of a DOCA being approved.
There is an alternative DOCA proposal, for the other administration companies, in the event that EA be wound up. Essentially, it involves using the dividend which MA would receive in the liquidation of EA to constitute a deed fund, which would then generate a meagre dividend, perhaps of a couple of cents in the dollar, for creditors of the other administration companies. The administrator gave evidence that in his judgment creditors of the other administration companies would vote for the alternative DOCA if EA were wound up, because it was in their financial interests to obtain a couple of cents in the dollar rather than nothing.
In my view, one needs to consider how consideration of the alternative DOCA proposal would properly be undertaken by persons acting in their own interests and discharging their duties.
First, if EA were wound up and a liquidator appointed, what would that liquidator do? It seems to me that that liquidator would form the view that EA's interests were best served by bringing about a situation in which there was pooling, at least as between EA, SFL and MA. The result of that would be to extinguish the intercompany loans, and thus remove MA as a creditor of EA and achieve at least the benefits of the DOCA - if not superior benefits through there being a reduced pool of claimants on the fund. The liquidator of EA would therefore, presumably, vote at the creditors' meeting of SFL against the alternative DOCA proposal, and in favour of the proposition that SFL be wound up.
In circumstances where EA was in liquidation and would not be involved in the alternative DOCA proposal, it is very difficult to see how a judgment could properly be formed on behalf of SFL that it was in its interests to execute a DOCA. That is because SFL would not be relieved of its liability to EA, and yet by the proposed alternative DOCA it would effectively release its claim against MA. There would be no apparent benefit for SFL in that course. On the other hand, it would be in the interests of SFL's creditors, and in particular EA - which is by far and away the dominant creditor of SFL - for SFL to bring about the winding up of MA, and thus bring about a situation in which there could be pooling, under s 571, at least as between EA, SFL and MA. If that were to happen, then short of marginal impacts such as costs and timing, the practical difference between the course of winding up EA and the DOCA proposal is that in the former the potential for liquidator's recoveries is preserved, while in the latter it is lost.
So viewed, the only way in which administration could ultimately result in a superior outcome for creditors of EA is if the liquidator of EA and/or the administrator of SFL were to act perversely, in causing SFL to accede to the alternate DOCA proposal. Were the administrator to take such a course, by exercising a casting vote in circumstances where the liquidator of EA voted in favour of the liquidation of SFL, then such a decision would be susceptible to review by the Court.
Again, there is force in the associated submission that, in the absence of an external injection of funds, creditors could not be better off under the DOCA proposal than in a liquidation, and because in a liquidation the potential for recoveries would be preserved their position would be superior.
Thus in my view, the best interests of the creditors of EA will be served by the company being wound up, so that it in turn can cause SFL and in turn MA and, if necessary, other group companies to be wound up and their assets pooled and intercompany liabilities extinguished under s 571.
It may be said, why should this decision not be left to the creditors, and as I have observed, it is true that on the information presented to them so far it appears that the overwhelming majority of unrelated creditors have indicated a disposition in favour of adjourning the application to permit them to consider the DOCA. However, they have not been presented with what Mr Krochmalik described as the true counter-factual, namely the fundamental truth that if EA, SFL and MA were wound up, they could not be worse off than under the proposed DOCA, and they would have in addition the potential for liquidator's recoveries.
Ultimately, the Court has to be satisfied that it is in the best interests of creditors that the administration continue. Analysed in the way I have, I just do not see how it is possible that, ultimately, creditors could be better off under the DOCA proposal than in a liquidation - unless, as I have said, the liquidator of EA and/or the administrator of SFL were to act perversely. The Court ought not act on the hypothesis that they would do so.
For those reasons, the application under s 440A fails, and the Court will make orders that the company be wound up.
The Court orders that:
1. The application of the defendant SFL/Piletech (EA) Pty Ltd for an adjournment under Corporations Act, s 440A, is dismissed.
2. The defendant company SFL/Piletech (EA) Pty Ltd be wound up in insolvency, and Michael Jones of Jones Partners be appointed liquidator of the defendant.
3. The plaintiff's costs of the adjournment application be costs in the winding up.
[3]
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Decision last updated: 09 May 2018