Cvitanovic v Jolly Roger Exports Pty Ltd [2015] NSWSC 781 | Case summary

Cvitanovic v Jolly Roger Exports Pty Ltd [2015] NSWSC 781 | Case summary | Zoe

Judgment - ex tempore

By Interlocutory Process filed today, 15 June 2015, by leave, the Applicants, The Hi-Fi Sydney Pty Limited (administrator appointed) ("Company"), and Mr Nelson, its administrator ("Administrator" or "Mr Nelson"), seek an order under s 444B(2)(b) of the Corporations Act 2001 (Cth) extending the time in which the Company must execute a deed of company arrangement which was the subject of a resolution of creditors dated 25 May 2015 to five business days after the determination of the substantive proceedings in which this Interlocutory Process is brought, and associated orders.
Section 444B(2) of the Corporations Act provides that, relevantly, the Company must execute a deed of company arrangement within fifteen business days after the end of the meeting of creditors, which it appears is today or tomorrow, or such further period as the Court allows on an application made within those fifteen business days.
The application is brought in the context of, and primarily by reference to the existence of, substantive proceedings in which the Plaintiff, Carsingha Investments Pty Ltd ("CIPL") seeks an order under s 440B of the Corporations Act that it is entitled to take possession of premises that are presently occupied by the Company under a sublease. That application may in turn become moot if the application to extend the period for the execution of the deed of company arrangement fails, and the deed of company arrangement is executed, since the statutory moratorium applicable during an administration will cease, once a deed of company administration is executed. However, CIPL has offered an undertaking which constrains the steps which it will take in that situation, to which I will refer below.
The Company in turn seeks substantive relief in the proceedings, including an order under s 129 of the Conveyancing Act 1919 (NSW) or at general law by way of relief against forfeiture of its registered sublease in respect of the premises.
It will be desirable to say something first as to the chronology of events, then to refer to the affidavit evidence on which the parties rely, then to refer to the legal principles that are applicable to an order extending the time for execution of a deed of company arrangement under s 444B of the Corporations Act, and their application in the particular factual circumstances.
The affidavit evidence led by the parties, supported by two substantial exhibits, sets out the history of relevant events. It appears that the Company has been in arrears of rent, for a considerable time, so far as the previous lessor of the premises, the predecessor to CIPL, had issued a demand for payment of rental arrears as long ago as October 2014. The head lease of the premises was then transferred from the previous lessor to CIPL in December 2014.
Mr Nelson was appointed voluntary administrator of the Company, and certain other companies which are associated with it which trade in other States, in February 2015. He was appointed under s 436C of the Corporations Act, by a secured creditor of the Company, Karamika Pty Ltd ("Karamika"), which is an entity associated with the ultimate controllers of the Company.
It appears the steps were subsequently taken, as set out in the Administrator's affidavit dated 9 June 2015, to seek to realise value for the Company's assets and, in early March 2015, he received a nonbinding offer from another entity associated with the controllers of the Company, Max Watts Operating Pty Ltd ("MWO") to purchase the business assets of the Company and other entities. It appears that there have also been discussions, over a considerable period, between the controllers of the Company and CIPL as to the terms on which the Company might be permitted to continue to occupy the premises, although there may be dispute as to the nature of those discussions.
I proceed on the basis that the occupancy of the premises is of continued value to the Company, so far as there is evidence in the Administrator's affidavit that the Company undertook extensive fit-out and works to the premises, at substantial cost, which were completed in early 2012, with funds advanced to the Company by the Hi-Fi Group and in turn by Karamika to the Hi-Fi Group. Plainly, a termination of the sub-lease, or at least a loss of the ability to occupy the premises once CIPL takes possession of them, and in the absence of relief against forfeiture, would cause the loss of benefit of those works.
I have also been taken to extensive correspondence between CIPL, the Company, and the Administrator, and their respective solicitors over the period since the Administrator's appointment dealing with the question of occupancy of the premises. Mr Sulan, who appears for CIPL, relies on that correspondence to establish that there has been delay in bringing the present application. Ms Shepard, who appears for the Company and the Administrator, in turn submits that there has been no unreasonable delay, given the complexities facing an administrator in dealing with several companies within a group trading in three States. The Administrator's affidavit, understandably in an application of this kind, does not set out the full dealings involved in the administration in respect of the three companies, and it is therefore not possible to reach an assessment as to the complexity of the administration, or the extent to which delay in bringing the application has been unreasonable.
It does not seem to me to be necessary to reach such an assessment, in any event, because the evidence is relevant, not so much to support any criticism of the Administrator, which I emphasise I do not make, but instead to identify the fact that discussions between the parties have in fact continued over an extended period, and CIPL's rights in respect of the premises have in turn been affected over that extended period, while the administration and consequential moratorium continued.
During that period, CIPL issued a notice of default in respect of the sublease, relying on the appointment of an administrator. Ms Shepard points out, and I give weight to, the fact that the default relied upon was not non-payment of rent. It is possible that that reflects the fact that, on the Administrator's evidence, CIPL has subsequently drawn down a bank guarantee provided by the Company as security for its obligations under the lease, and, at least on the Administrator's evidence, the effect of drawdown of that guarantee and continuing payment of rent by the Administrator, during the administration, is that the total rent due to CIPL has been paid. The Administrator asked CIPL to assign the sublease to MWO, which was then the potential purchaser of the business, and CIPL declined to do so. Subsequently, CIPL gave effect to its notice of default under the sublease, by issuing a notice of termination of the lease on 7 April 2015. The Administrator also referred, in correspondence, to a possible application under s 444C(2) of the Corporations Act, which permits the Court to restrain conduct which is inconsistent with a deed of company arrangement, prior to its execution, although such application was ultimately not brought.
At least by 18 May 2015, the Administrator's solicitors had informed CIPL's solicitors of his intention, if the purported termination of the sublease was not retracted, to bring proceedings for relief against forfeiture and under s 444F of the Corporations Act restraining CIPL from entering into or taking possession of the premises.
It appears that, subsequently, an amended deed of company arrangement proposal was put forward by Karamika, which provided for the payment of a sum of $75,000 to the deed administrator within fourteen days of satisfaction of the conditions precedent, which included a condition precedent that the Company secured occupancy rights for the premises beyond the end of the administration period. That proposal permitted the satisfaction of the conditions precedent, to the payment of that sum, within 120 days of the execution date of the deed of company arrangement, after which it will terminate. The Administrator estimates that the amount paid, by way of contribution sum, will provide a modest benefit to creditors, although that will depend on the extent of costs incurred in the administration, which will take priority. Ms Shepard points to the fact that creditors, at least some of whom are employees or trade creditors, may also obtain a further benefit from the Company continuing to trade, following implementation of the deed of company arrangement.
The creditors of the Company resolved that it should enter into the deed of company arrangement on the terms proposed by Karamika on 25 May 2015, and, as I noted above, the period permitted for execution of that deed will shortly expire.
The Administrator gives evidence of the attitude of secured creditors to the application which is brought. It appears that the two remaining secured creditors are Hi-Fi Group and Karamika, which are each associated with the controllers of the Company and, not surprisingly, they support the application which is brought. The Administrator points out that there are also retention of title creditors, for the purposes of the Personal Property Securities Act 2009 (Cth), and their interests are protected so far as he continues to account to them as administrator, although the position of those creditors if the deed of company arrangement takes effect is less clear. The Administrator also draws attention to the position of unsecured creditors, including one employee and casual employees who have a higher ranking under the proposed distribution under the deed of company arrangement, and those matters indicate no particular prejudice to those persons.
The Administrator's affidavit indicates that there will be no prejudice to CIPL, at least in respect of rental under the premises, as to the short extension of time which is sought, for the execution of the deed of company arrangement, because he will continue to pay rental on that basis. The prejudice to which CIPL points is of a somewhat different character, so far as it will continue to be shut out of possession of the premises, pending the hearing of the application for relief against forfeiture, and may be shut out of the opportunity to re-let the premises on advantageous terms.
CIPL in turn relies on the affidavit of Mr Slot dated 28 May 2015, which points in particular to the fact that CIPL has received other offers to sublease the relevant premises, including at least one other offer which it regards was commercially attractive. Mr Slot's affidavit is otherwise largely relevant for completing the chronology of events, to which I have referred above.
Before turning to the relevant principles, I should indicate two other matters that are of some importance in the determination of this application. The first is that the relief sought by the Administrator was, as I have noted above, an extension of the time to execute the deed of company arrangement to three business days after the determination of these proceedings. That extension could have had the capacity to apply for a considerable period, depending when a hearing date was allocated, and the Administrator initially foreshadowed seeking a hearing date in July. As events have developed, the Court is able to allocate a hearing date on 23 - 24 June, and it appears the parties are capable of complying with directions for a hearing within that period, so that the period involved in such an extension is not as long as it might otherwise be. Second, and importantly, CIPL has offered an undertaking, in the course of this application, that, subject to an undertaking as to damages being given by the Company and its Administrator, it would not take possession of the premises prior to the determination of the proceedings. The Company and the Administrator presently do not give such an undertaking.
I am conscious that, in the ordinary course, an administrator of a company that is, by definition, either insolvent or likely to become insolvent, may not be in a position to give an undertaking as to damages, without external support. However, that proposition is not conclusive, because here, the deed proponents seek to obtain the benefit of the deed, and there is no explanation in the evidence of their ability or willingness to provide external support to the Company or the Administrator, such that he could give such an undertaking.
I return now to the operation of s 444B(2) of the Corporations Act and the relevant authorities. That section provides, as I noted above, that the Company must execute a deed of company arrangement within the specified time after the end of the meeting of creditors, or such further period as the Court allows on an application made within that time. This application is made within that time. There are occasions on which the Court has extended the time period, in some cases, where it is apparent that that extension is to the benefit of all relevant parties: for example, Re Sydney Ringtread Tyres Pty Ltd (admin apptd) [2001] NSWSC 424; (2001) 38 ACSR 221.
There are other occasions on which the Court has declined to grant such an extension. Mr Sulan drew attention to the decision of the Court of Appeal of the Supreme Court of Victoria in Stout & Scales (in their capacity as joint administrators of Java 452 Pty Ltd) v Permanent Trustee Australia Ltd (as trustee of Advanced Property Fund) [1998] VSCA 168, where the Court considered an application for an extension of time to execute a deed of company arrangement in somewhat similar circumstances. Phillips JA, with whom Ormiston JA agreed, did not grant that extension. In the course of doing so, his Honour noted that the consequence of giving the extension sought would be to provide, in effect, an injunction against the entry into possession of premises by the owner of the premises, without an undertaking as to damages, although also recognising a submission of counsel that the administrator in that case might not be in a position to give such an undertaking. That issue was ultimately not determinative in that case, which was determined on other grounds, although his Honour noted (at [24]) that the fact that rent continued to be paid as long as occupation continued might still not provide a complete answer to the existence of prejudice that would otherwise arise from a continuance of the moratorium, by reason of the extension of time to execute the deed of company arrangement.
The parties also drew attention to, and both to some extent adopted, the detailed analysis of the relevant issues by Goldberg J in Mentha v Sydney Airports Corporation Ltd [2002] FCA 530; (2002) 120 FCR 310. His Honour there emphasised, as Mr Sulan pointed out, that the statutory moratorium is directed to the first stage of an administration, prior to the second meeting of creditors, at which the entry into a deed of company arrangement is one but not the only possible outcome. His Honour noted that the second stage of the administration occurred once the creditors passed a relevant resolution at the second meeting of creditors, as had occurred here, and the Act contemplated that the administration would then cease and be replaced by another regime, involving return to the status quo ante, winding up or execution of a deed of company arrangement.
His Honour noted that, once that occurred, s 444F of the Act came into operation, and that section empowered the Court to order that a lessor not take possession of property, but only if the requirements of s 444F(5) of the Act were satisfied, which included a requirement that the interests of the lessor be adequately protected. His Honour also noted that, importantly, once creditors had resolved that a company should execute a deed of company arrangement, the position was analogous to that once a deed of company arrangement was executed. In particular, his Honour observed (at [53]) that: "Once a deed of company arrangement is executed, the balance changes and it is for the deed administrator to establish that the taking of possession of property would have a material adverse effect on achieving the purposes of the deed, and that the interests of the owner or lessor would be adequately protected before the Court can make an order restraining an owner or lessor from taking possession of property. Once the creditors have resolved that the company should execute a deed of company arrangement, this change in the manner in which Pt 5.3A affects lessors and owners should not as a matter of principle be postponed for the purpose effectively of continuing the first stage of the administration and the constraints imposed by it so as to avoid the consequences of the second stage of the administration contemplated by the execution of the deed of company arrangement which the creditors wish to be implemented." His Honour supported that conclusion by emphasising, correctly in my view, the fact that Pt 5.3A contemplates a relatively expeditious timeframe within which a decision is to be made whether a creditor should execute a deed of company arrangement, during which the statutory moratorium applies, and the decision by creditors to execute such a deed should be implemented expeditiously.
In the course of submissions, Ms Shepard also drew my attention to the decision in Cvitanovic v Jolly Roger Exports Pty Ltd [2003] NSWSC 729, where Gzell J read Mentha v Sydney Airports Corporation Ltd above as directed to the question whether the purpose of an extension was to prolong an administration in order to avoid a result that the execution of the deed of company arrangement might bring about, but granted an extension, in the circumstances of the particular case, where a delay had occurred in the making of contributions to a fund which was a condition precedent to execution of the proposed deed of company arrangement. This case does not arise in that situation, because here the deed of company arrangement does not provide for payment, prior to its execution, but not until satisfaction of conditions precedent after its execution.
Ms Shepard also drew attention to the consideration of the matters relevant to an order under s 444F of the Corporations Act in Strazdins v Birch Carroll & Coyle Ltd [2009] FCA 731; (2009) 178 FCR 300. For reasons that I will indicate, it is not necessary to address those matters at this point.
In the course of submissions, I asked Ms Shepard to identify the difficulties which the Administrator apprehended, if the time for extension of the deed of company arrangement was not extended. The first, plainly enough, and the substantive basis of the application, was that, in that case, the moratorium would cease, CIPL would enter into possession of the premises, and the benefit of the expenditures which the Company had made by way of fit-out and otherwise would be lost. There are, it seems to me, two difficulties with that proposition. The first is that that proposition is to some extent displaced by the offer of the undertaking made by CIPL, such that it is open to the Company and the deed administrator, if he is subsequently appointed, to avoid possession being taken of the premises, by giving himself an undertaking as to damages, for the short period up to a final hearing, albeit that he may no doubt wish to seek some protection in that regard by a supporting undertaking from the deed proponents or those who stand to benefit by the deed.
The second difficulty, which seems to me to be in one respect more fundamental, is that the Administrator's submission in that regard appears to reduce, in substance, to the proposition that he regards the statutory moratorium which exists during an administration as more attractive than the regime which exists under s 444F of the Corporations Act during a deed of company administration. There may be good reason for him to take that view. However, the legislature has distinguished the statutory moratorium which exists prior to entry into a deed of company arrangement, from the matters which a deed administrator must seek to establish in order to prevent a lessor taking possession of the premises, under s 444F of the Corporations Act. The logic of the relevant provisions, which seems to me to be amply demonstrated by Goldberg J's analysis of them in Mentha v Sydney Airports Corporation Ltd above, supports the fact that they operate sensibly, such that, after creditors have decided to execute a deed of company arrangement, the company should properly pass to a situation where a deed administrator must comply with s 444F of the Corporations Act if he seeks to restrain the exercise of rights by the owner of the premises for any longer period.
Ms Shepard pointed to other consequential possibilities, if the period for entry into the deed of company arrangement was not extended, including that the deed administrator may be in some way, which I do not fully understand, be prejudiced in his application to the Court if the deed of company arrangement is executed without its conditions precedent being satisfied. It is not immediately apparent to me that such prejudice could arise. If such prejudice did arise, however, it seems to me that an attempt to avoid it, by deferring the execution of the deed of company arrangement, would be analogous to the course which was not permitted in Mentha v Sydney Airports Corporation Ltd above, where what the administrator sought to avoid was the substantive consequence of entry into a deed of company arrangement, which he perceived it as disadvantageous. Ms Shepard also pointed to the fact that the deed of company arrangement provided for return of the control of the Company to its directors on its execution. That may, no doubt, affect the manner in which proceedings are conducted, but again the difficulty seems to me that the application is, in substance, one to avoid the substantive consequences of entry into the deed of company arrangement, to the extent that those substantive consequences are seen as unattractive.
In these circumstances, I am not satisfied that I should grant the relief sought in the Interlocutory Process. Ms Shepard has foreshadowed that, in that situation, the Administrator may seek leave to bring an application under s 444F of the Corporations Act. It is plain that that application will involve complex issues, where the position may be finely balanced, to the extent that there will be a question of what is necessary to adequately protect CIPL's interests in the relevant circumstances. That question is by no means straightforward, and I have yet to hear counsel about it. On the one hand, it is plain enough that CIPL's interests may be adequately protected, if an undertaking as to damages of the kind it has sought, by way of cross-undertaking is given. On the other hand, there may be an open question as to what is required for adequate protection of interests, where the only risk that CIPL faces is one of a short deferral of the ultimate outcome, pending a hearing which can now be listed next week, and where a decision may be made shortly thereafter.
It seems to me that the preferable course is for me to say nothing further in that regard, and to deal with any question of what needs to be done under s 444F of the Corporations Act, if an application of that kind is pressed. In the meantime, with the benefit of this judgment, it may be that the parties will, over the luncheon adjournment, be able to bridge some of the differences which presently exist between them, bearing in mind that those differences seem, to some extent, to be in relatively narrow scope where a hearing is little more than a week away.

Cvitanovic v Jolly Roger Exports Pty Ltd

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