Debis Financial Services (Aust) Pty Ltd v Allied Bellambi Collieries Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3669/99 DEBIS FINANCIAL SERVICES (AUSTRALIA) PTY LIMITED v ALLIED BELLAMBI COLLIERIES PTY LIMITED (RECEIVERS APPOINTED) (VOLUNTARY ADMINISTRATOR APPOINTED) & ORS

JUDGMENT His Honour: 1 This matter raises for consideration the tension which may exist and in this case does exist between the administrator of a company in voluntary administration and the rights of a secured creditor of the company. The most material sections of the Corporations Law ("the Law") are the following: "440B Charge unenforceable

During the administration of a company, a person cannot enforce a charge on property of the company, except: (a) with the administrator's written consent; or (b) with the leave of the Court.

(1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. ……

441B Where enforcement of charge begins before administration

(1) This section applies if, before the beginning of the administration of a company, a chargee, receiver or other person: (a) entered into possession , or assumed control, of property of the company; or (b) entered into an agreement to sell such property; or (c) made arrangements for such property to be offered for sale by public auction; or (d) publicly invited tenders for the purchase of such property; or (e) exercised any other power in relation to such property; for the purpose of enforcing a charge on that property.

(2) Nothing in section 437C or 440B prevents the chargee, receiver or other person from enforcing the charge in relation to that property.

441D Court may limit powers of chargee, etc. in relation to charged property

(1) This section applies if: (a) for the purpose of enforcing a charge on property of a company, the chargee, or a receiver or other person, does an act of a kind referred to in a paragraph of subsection 441B(1); and (b) the company is under administration when the chargee, receiver or other person does the act, or the company later begins to be under administration; …… (2) On application by the administrator , the Court may order the chargee, receiver or other person not to perform specified functions, or exercise specified powers, except as permitted by the order.

(3) The Court may only make an order if satisfied that what the administrator proposes to do during the administration will adequately protect the chargee's interests.

(4) An order may only be made, and only has effect, during the administration.

(5) An order has effect despite sections 441B and 441C."

2 Section 435C of the Law provides for the circumstances in which a voluntary administration comes to an end. The two ways that are material to this case are that it expires if a deed of company arrangement ("DCA") is executed by both the company and the deed's administrator or if the company contravenes s 444B(2) by failing to execute a proposed DCA within the specified time. After dealing with the regime that applies while a company is in voluntary administration, the Law passes on to deal with the regime which comes into force if the DCA is executed and takes effect. Under that regime, also, there are or may be restrictions upon the rights of a secured creditor and, in particular, ss 444D and 444F deal with those circumstances. 3 The factual circumstances of this case are as follows. The first defendant, which is in voluntary administration, operated a colliery known as the West Bellambi Colliery upon a coal lease held by an associated company, the second defendant, which is also in voluntary administration. The fourth defendant is the administrator of both those companies. In that operation the first defendant used a Joy continuous coal miner ("the machine"). The machine was charged or mortgaged in favour of the plaintiff under an Equipment Finance and Security Agreement dated 15 June 1988 ("the mortgage"). There is no doubt that the first defendant is in default in its obligations under the mortgage so as to give the plaintiff a right to repossess the machine. The plaintiff has appointed a receiver of the machine under the mortgage. It is also common ground that the plaintiff's actions to enforce its security and to repossess the machine commenced before the voluntary administration so that s 441B applies. Among the rights which the plaintiff has under the mortgage is that the mortgagor will, under cl 8.1(k), do or cause to be done anything requested by the mortgagee for assisting in the execution, or exercise, of any power conferred by the mortgage, such as, for instance, the powers to repossess and sell. 4 The machine is presently some 14 kilometres down the coal mine, not vertically, of course, but some 14 kilometres of underground tunnels must be traversed to bring it to the surface. It is a large machine. There will be difficulties in getting it out. There has been a roof fall in a relevant passage in recent times, although this has been repaired. There may be regulations under the coal mining legislation which must be complied with for the machine to be removed, although there is controversy as to just what regulatory regime applies at the moment and what is involved in obtaining any necessary consents. It is quite clear that removing the machine will be a costly operation, but there is also considerable controversy as to the cost estimates, which are in evidence. They range between about $50,000 and more than $200,000. As may be expected, under the mortgage the mortgagee is entitled to charge to the mortgagor any costs it incurs in recovering the machine. 5 It is in this context that the plaintiff seeks injunctive relief from the Court to facilitate its recovery of the machine and the administrator seeks from the Court orders under s 441D(2) which would prevent its recovery during the continuation of the administration. It is again common ground that that duration is short. A DCA has been propounded by resolution of a creditors' meeting and under the provisions of the Law mentioned above the only open alternatives are that next week the administration will expire when that DCA is executed, or will terminate when the DCA is not executed within the requisite time. 6 As appears from the recitation of s 441D above the Court may make orders under subsection (2) only if satisfied that what the administrator proposes to do during the administration will adequately protect the chargee's interests. Clearly what the administrator is proposing to do at the moment is to carry into effect, if he can, the proposed DCA. That document is, in general terms, in fairly standard form for a DCA. A feature of it is that it proposes the execution simultaneously with the DCA of a Business Sale and Purchase Agreement ("the sale agreement") under which the colliery operation will be sold to Allied Coal Pty Limited ("the purchaser"). In other words, if the sale agreement is not executed the DCA will not be executed. The sale agreement contemplates either that the machine may be purchased along with the colliery, or may not be purchased along with the colliery; the former obviously can occur only if the amount owing to the plaintiff is paid out and the machine is discharged of the plaintiff's rights. 7 There is evidence available that it is the present intention that the sale agreement and, therefore, the DCA will be entered into only if the purchase of the machine is effected and, therefore, the plaintiff is paid out. Whilst I have no doubt of the veracity of the relevant deponent, intentions can, of course, change in quite short time, particularly in hard commercial negotiations. If the sale takes place including the machine the plaintiff's problems will be at an end, for it will have been paid out. If the sale does not go ahead, and it is said that the intention is that it should not without the sale of the machine, the machine will still be in the depths of the colliery, but it will still be owned by the first defendant and subject, as now, to all the plaintiff's rights, and this will have occurred inside the next week; on the evidence, there is hardly likely to be any prejudice to the plaintiff in so short a time. The situation which is said to be at present unlikely, but on the evidence certainly is possible, is that the DCA and the sale agreement may be entered into, but on the basis that the machine is not sold with the other assets of the colliery. In that situation, the the plaintiff says that it could then face an additional difficulty which does not exist at present. That is that, whilst its rights as against the first defendant and over the machine itself would be unaffected, there may be mining operations conducted in the colliery by a new owner, which may object to their being disturbed or disrupted by the removal of the machine blocking for some time access to the colliery. 8 I should say that there has been some contention in this matter as to whether or not there is a firm agreement between the purchaser and the plaintiff's receiver for the sale of the machine at a price that has been determined. It is clear from the evidence that the two sides to that proposed agreement have different beliefs as to whether such an agreement exists. There were some attempts to urge me that I ought determine that question in these proceedings, but they are not a suitable vehicle for the determination of that question, nor is it necessary for me to do so, to dispose of the present application, and I express no view as to that matter. The range of possibilities which exist at the moment I have adumbrated above. 9 It seems to me clear that the determination of an application under s 441D(2) involves two steps. First, there is a threshold issue. The Court must be satisfied of the matter referred to in subsection (3). Unless it attains such satisfaction it has no discretion which it can exercise. If it does attain that satisfaction, then it must exercise its discretion as to whether or not to make an order under s 441D(2). 10 In approaching the exercise of discretion under s 441D(2) the Court needs to take into account the policy of the Law in relation to administration and in relation to the exercise of the rights of creditors of the company during the administration. This policy is illustrated by the limited approach which the courts have taken to the grant of leave to commence proceedings under s 440D; Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203; 12 ACLC 1063. That approach was stated as follows by Austin J, of this Court, in Brian Rochford (admin apptd) Ltd v Textile Clothing & Footwear Union of NSW (1998) 30 ACSR 38 at 58: "The reported cases show that the courts exercise their discretion to grant leave under s 440D with caution, having regard to the structure and underlying policy of Pt 5.3A. For example, in Australian Liquor Hospitality and Miscellaneous Workers' Union v Terranora Lakes Country Club Pty Ltd (1996) 14 ACLC 1200 Davies J drew attention to the strict time limits under which an administration must proceed, the administrator's risk of personal liability and the consequent need for the administrator to take steps to reduce sources of liability during the administration. He said that for the Court to grant an injunction to restrain the administrator from terminating the employment of employees, as was sought, would not accord with the pattern laid down by the Corporations Law, and the injunction might interrupt the proper course of the administration and consequently the restoration of the company to profitability. Similarly, in Foxcroft v The Ink Group Pty Ltd (1994) 12 ACLC 1063 [sic] Young J noted the important difference between a company in administration and a company in liquidation, namely that a company in administration is seeking to continue to trade and to maximize its chance of remaining in business. The freeze on proceedings which is applied by s 440D should generally be complete, in his Honour's view, since to allow one creditor to proceed would distract the administrator and involve legal costs. Young J went so far as to say (at 1065) that leave under s 440D will rarely be granted. In the present case I must have regard to the policy of Pt 5.3A and in particular, the need to give the administrator a chance to develop proposals which would preserve the value of the company as a going concern, given the large discrepancy between that value and the company's value in a liquidation sale."

The regime as to secured creditors has obvious differences from that in relation to unsecured creditors, but is not without similarity. Their rights to enforce are frozen during the administration unless enforcement action commenced before the administration, and, even if it had, if curial enforcement is to be commenced or continued, secured creditors, too, must seek leave to proceed: J & B Records Ltd v Brashs Pty Ltd (1995) 36 NSWLR 172. 11 There is no or little authority on the exercise of the Court's discretion under s 441D(2). Some guidance may be taken from the explanatory memorandum to the Corporations Law Reform Bill 1992 of which pars 541 - 543 are in the following terms: "Proposed section 441D - Court may limit powers of chargee, etc, in relation to charged property

541 The earlier sections in this proposed Division will create significant exceptions to the moratorium which will otherwise apply once an administrator is appointed. The danger with these exceptions will be that a single creditor may be in a position to frustrate the objectives of the administration, even though that creditor's interests may not be large compared to the interests of others involved in the administration, or may be capable of being adequately protected through alternative means which would allow the administration to proceed effectively.

542 Proposed section 441D accordingly will allow the Court to order a chargee, receiver or other person who is exercising powers under proposed subsection 441B(1) to refrain from performing specified functions or exercising specified powers, provided the administrator is able to put before the Court a plan of action which the Court is satisfied will adequately protect the chargee's interests.

543 An example of a situation where this provision might be useful would arise where a chargee, just prior to the appointment of an administrator, has appointed a receiver in respect of a machine, which is essential to the operation of the factory owned by the company. The administrator may be able to protect the interests of the creditor in a number of different ways which would avoid the frustration of the objectives of the administration which could follow from the company not being able to use that machine. For example, the administrator may propose that that creditor be paid out over a certain period of time. Alternatively, the administrator may be able to offer the creditor security over some other asset, such as a piece of real estate owned by the company which is not essential to the company's core operation. Provided the administrator is able to convince the Court that whatever plan the administrator proposes will adequately protect the creditor's interests, the Court will be able to make an order that allows the administration to proceed effectively." 12 There are similar regimes provided for in the US and the UK, in the former case in Chapter 11 of the Bankruptcy Code 1978 and in the latter in the Insolvency Act 1986: see generally P Crutchfield, Corporate Voluntary Administration Law (2nd ed, 1997) 41-56. The US Code is more similar in the regard at present under consideration than the UK Act, but authority under both statutes has been cited in the Federal Court by Lehane J in Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 in connexion with the construction of s 444F (see below). 13 Some assistance may be derived from decisions relating to s 444F, which is the corresponding provision of the regime which prevails during the subsistence of the DCA. As to that section, in Hamilton supra Lehane J said at 31 - 32: "The matters which the Court should have in mind when deciding whether a secured creditor's interests will be adequately protected if an order under s 444F(2) is made have not been the subject of consideration in any case which counsel or I have been able to discover. I was referred to two authorities in other jurisdictions, one the decision of the US Supreme Court in United Savings Association of Texas v Timbers of Inward Forest Associates Ltd (1988) 98 L ed 2d 740, particularly at 746, the other the decision of the English Court of Appeal in Re Atlantic Computer Systems plc [1992] Ch 505. Because of the very considerable differences between the provisions of the Corporations Law and the legislation of other jurisdictions, it is necessary to treat authorities from other jurisdictions with some care. Nevertheless, in so far as the authorities indicate a reluctance to deprive a secured creditor of its proprietary rights or to sanction an arrangement which will cause those rights to depreciate substantially in value, that approach is, no doubt, equally applicable under the Corporations Law: it is unlikely to be the case that a secured creditor who, in a significant way, is deprived of its interest, or the value of its interest, without substantially equivalent compensation, is adequately protected. However, that does little more than emphasise that the Court does not have jurisdiction under a provision such as that under consideration unless it attains satisfaction of the adequacy of protection of the chargee." 14 Turning now to the question of the process whereby the Court attains or does not attain satisfaction under s 441D(3), it seems to me that there are two pertinent things to be noted. The first is that what is to be focused on as providing the satisfaction is what the administrator proposes to do during the administration. The second is that the protection of which the Court must be satisfied is "adequate" protection. "Adequate" is a word which imports notions of relativity. It is relevantly defined in the Macquarie Dictionary as: "Equal to the requirement or occasion; fully sufficient, suitable, or fit (oft. fol. by to or for )."

In other words, the protection as to which the Court is required to be satisfied is not protection which is absolute or perfect in all circumstances, but protection which is adequate or suitable considering the circumstances which actually prevail. 15 With those things in mind, I turn to consider the sufficiency of what the administrator proposes to do in this case. He proposes to proceed to enter, if he can, into the DCA and the sale agreement. As I have already noted, Mr Coles, of Queen's Counsel for the plaintiff, did, during the course of the hearing, press on me that it was vital for his client to get the machine out of the colliery during the administration since, at its end, the colliery might pass into other hands, being the hands of a purchaser with which the plaintiff did not have privity of contract and that that purchaser might be unwilling to cooperate with the plaintiff in the removal of the machine, particularly since this had a potential to disrupt production in the mine, and that, equally, because of the lack of privity of contract, the plaintiff may not be able to compel the purchaser's cooperation. 16 It should be pointed out that the difference between that situation and the present situation may not be as great as appears at first sight, because, although the first defendant is the mortgagor of the machine and has been the operator of the colliery, it is not, as already stated, the holder of the coal lease under which the colliery is conducted; that is the second defendant, with which the plaintiff does not now have privity of contract so far as this mortgage is concerned. However, bearing in mind the possibility of the disruption of production, it does seem to me that upon a sale the plaintiff's position, so far as recovering the machine is concerned, may be weaker vis-a-vis a purchaser than it at present is vis-a-vis the first defendant. 17 During the course of the hearing I raised with Mr Angyal, of counsel for the administrator, the fact that I saw this as perhaps being an inadequacy of the regime at that time proposed, from the point of view of the protection of the plaintiff's interests. The administrator's response was to offer an undertaking in the following terms: "The administrator of the First Defendant undertakes not to sign any Sale of Business Agreement unless it includes a clause substantially in the form of the following:

6.3 If any assets used by the Vendor in the Business and situate as at the Transfer Date upon the Premises are subject to a charge the Purchaser assents to the Vendor or the chargee of such asset removing such asset from the Premises upon giving reasonable prior notice to the Purchaser and at such time that causes as little disruption as reasonably possible to the operation of the Business by the Purchaser and subject to any applicable statutory requirements, provided that the chargee: (a) pays all costs directly related to the removal (which for the avoidance of doubt specifically excludes any loss of production costs); and (b) pays to the Purchaser any costs reasonably incurred by the Purchaser in complying with any statutory requirements relating to the removal."

Mr Coles protested that this undertaking did not absolutely give to the plaintiff all the rights and protection that it had under the mortgage. In particular, he protested that it was deficient because of the potential requirement in (b) to pay the purchaser's costs incurred by the purchaser in complying with statutory requirements relating to the removal. 18 However, as I have already said, the terms of s 441D(3) are not absolute. The real situation at the moment is that as the first defendant is insolvent. Even though it is its primary liability to pay the costs of removal, that is not likely to be honoured in the first instance by the company or by its administrator with his duties to the general body of creditors. As a matter of reality, if the plaintiff wishes to recover the machine, all it can do is to incur itself the costs of removal and debit them to the account of the first defendant, that debit becoming one of the unsecured debts of the first defendant. It should also be noted specifically that the undertaking offered provides for the payment of the bulk of the costs; in the circumstances, the bulk of the costs involved are those covered in (a). It would seem that, on the evidence, I could not come to the conclusion that there would be any large amount payable to the purchaser under (b) and it does not seem to me to be unreasonable that the plaintiff should be required to pay that payment if the purchaser has to pay to comply with statutory requirements in relation to the removal. This additional undertaking being proffered, it seems to me, in any event, in the light of the circumstances which I have outlined, that it is a fairly remote possibility that the plaintiff will face any additional difficulty or significantly greater cost in recovering the machine next week after the administration ends, as compared with the situation this week, if in fact the administration ends in circumstances necessitating further action on the plaintiff's part. Even in that event, the possibility of disadvantage is largely removed by the new clause 6.3, which will bind the purchaser, through the mechanism provided by the undertaking, to permit the removal of the machine even if that causes some disruption to the operation of the colliery and without compensation for the disruption. In those circumstances I have formed the view that what is proposed by the administrator for him to do during the administration will adequately protect the chargee's interests within the meaning of s 441D(3) in the circumstances which prevail. 19 I come then to the exercise of my discretion under s 441D(2). In exercising that discretion I bear in mind the shortness of the remaining duration of the administration and the protection afforded to the plaintiff, whether the DCA comes into effect or not and whether the sale agreement comes into effect or not, as discussed above. I also bear in mind that the general policy of the Law is to permit companies to be returned to viability or, as in this instance, to arrange for enterprises which companies have conducted to be disposed of as going concerns so as to effect the greatest return to the creditors and contributories, particularly as compared with the result of a fire sale. In this regard, there is evidence as to the value of the machine which it has not been necessary for me to advert to previously. Such machines are apparently in demand and this one will not be reduced to scrap value by being taken out of its present use in this colliery. However, it is common ground that the value of the machine on the open market outside the colliery is considerably less than it is in situ in this colliery on a going concern basis. In addition, there are the costs of its removal from the colliery, the estimates of which vary from some tens of thousands of dollars well into six figures. It is true that special provision is made by the Law for the position of secured creditors who have commenced enforcement action before the administration. One of the special things they are given is the requirement of protection in s 441D(3). But once that is satisfied, it seems to me that the general policy of this Part of the Law, although it does not entirely govern the situation, is a factor to be taken into account in exercising the discretion under s 441D(2) when it arises. Taking all the above factors into account, I have decided, in this case, to exercise the discretion by making an appropriate order under s 441D(2) upon the giving of an undertaking to the Court by the administrator in the form set out above. 20 Short minutes to effect this decision should be brought in.

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