Deputy Commissioner of Taxation v Scottsdale Homes No 3 Pty Ltd

CATCHWORDS : CORPORATIONS - voluntary administration - extension of convening period for creditors' meeting - whether court should be predisposed against extension - "balancing" principle - relevant discretionary considerations - modification of s 439A under s 447A(1) to permit meeting to be held during extended period

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 439A, 447A

ABC Learning Centres Ltd, in the matter of ABC Learning Centres Ltd; application by Walker (No 5) [2008] FCA 1947 ABC Learning Centres Ltd, in the matter of ABC Learning Centres Ltd; application by Walker (No 7) [2009] FCA 454 Carter, in the matter of SFM Australasia Pty Ltd (Administrators Appointed) ACN 105 317 333 (No 2) [2009] FCA 419 Deputy Commissioner of Taxation v Scottsdale Homes No 3 Pty Ltd (No 2) [2009] FCA 190 Deputy Commissioner of Taxation v Wellnora Pty Limited [2007] FCA 1324 Ex parte Vouris; in the matter of Marrickville Bowling and Recreation Club Ltd (under Administration) [2008] DCA 622 Fincorp Group Holdings Pty Ltd & Ors [2007] NSWSC 363 Fitzgerald, in the matter of Primebroker Securities Limited (Administrator Appointed) (Receivers and Managers Appointed) [2008] FCA 1247 Hall, in the matter of Australian Capital Reserve Limited (Administrators Appointed) [2007] FCA 1328 In the matter of LED Builders Pty Ltd (Administrators Appointed); LED Builders Pty Ltd (Administrators Appointed) and Ors [2008] NSWSC 633 In the matter of Lift Capital Partners Ltd (Administrators Appointed) [2008] NSWSC 446 Lehman Bros Australia Ltd [2008] NSWSC 1132 Lombe Re Australian Discount Retail Pty Ltd [2009] NSWSC 110 Lombe, Re Babcock & Brown Ltd (Administrators Appointed) [2009] FCA 349 CASES CITED : Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 Re Allbuild Construction Co Pty Ltd (admins apptd) [2000] WASC 227 Re Ansett Australia & Ors (All Admin Appointed) and Korda and Anor (As Administrators) [2002] FCA 90 Re Daisytek Australia Pty Ltd (admins apptd) (2003) 21 ACLC 1140 Re Diamond Press Australia Pty Ltd [2001] NSWSC 311 Re Georges, Midas Australia Pty Ltd (admin apptd) [2009] FCA 38 Re Hayes; Estate Property Group Ltd [2007] FCA 935 Re Levi (1996) 19 ACSR 521 Re Octaviar Limited (Administrators Appointed) (Receivers and Managers Appointed (ACN 107 863 436) [2008] QSC 272 Re S & D International Pty Ltd (in liq); Malhotra v Tiwari [2005] VSC 496 Re Witta Coola Pastoral Co Pty Ltd [1999] NSWSC 148 Silvia, in the matter of Austcorp Group Ltd (Administrators Appointed) [2009] FCA 636 Sims, in the matter of Destra Corporation Ltd [2008] FCA 2002 Stewart, in the matter of Kleins Franchising Pty Ltd (Administrators Appointed) (ACN 007 348 236) [2008] FCA 721 Uni-Aire Security Pty Ltd (Administrators Appointed) ACN 085 430 619, in the matter of Uni-Aire Security Pty Ltd (Administrators Appointed) ACN 085 430 619 [2006] FCA 1423 Worrell; Re Storm Financial Ltd (Receivers and Managers Appointed) [2009] FCA 70

PARTIES : Stephen James Parbery, Anthony Milton Sims and Grant Dene Sparks as administrators of the Riviera Group of Companies (Plaintiffs)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3210/09 IN THE MATTER OF RIVIERA GROUP PTY LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) ACN 102 298 279 AND THE OTHER COMPANIES LISTED IN THE SCHEDULE OF COMPANIES

JUDGMENT (Ex parte; revised on 18 June 2009) 1 HIS HONOUR: The plaintiffs are the administrators of a large number of companies in the Riviera Group. They seek an extension of the convening period under s 439A(6). 2 The principal business of the Group is the design, manufacture and distribution of luxury boats. Receivers have been appointed to the business and are in daily control of the business assets and trading activities of the companies. The vast majority of the companies' creditors fall into three distinct categories, namely, secured creditors with total claims of approximately $203 million, unsecured creditors with claims of approximately $30 million, and employees. 3 The plaintiffs were appointed voluntary administrators of the companies in the Group on 19 May 2009. At the first meetings of creditors on 29 May the chairman of the meetings indicated that the administrators proposed to seek an extension of the convening period so as to continue their investigations into the companies' business, property, affairs and financial circumstances. None of the creditors present at the meeting raised any objection and the chairman said that in the circumstances, the administrators intended to instruct their lawyers to pursue the application. Hence they come before the Court today. 4 Mr Sims, one of the administrators, gave evidence of the extensive amount of work that has been necessary in this administration so far, and the amount of work still to be done before a satisfactory report to creditors can be prepared. Part of the complexity arises from the asset realisation process undertaken by the receivers and part of it arises in respect of ascertaining the entitlements of the relatively large number of employees, and former employees whose services have been terminated. 5 Mr Sims said that during discussions with the receivers, he became aware of the existence of creditors purporting to hold retention of title interests in property in the possession of the companies. He said that he understood from his discussions there were about 61 claims for a total of about $4.5 million. These are obviously matters requiring further investigation. 6 Given the number of companies, there are difficult tasks in reconciling intercompany loans as at the commencement of the administration, and there remains some uncertainty about the financial position of each of the companies to the level necessary to enable proper consideration to be given to a proposed deed of company arrangement. There are also issues concerning possible recovery actions warranting further investigation. 7 In my view these matters, considered together, constitute a sufficient case for the extension of the convening period that the administrators seek, which is an extension of about a month to 15 July. However, it occurred to me in preparation for the hearing of the application that the courts that most commonly hear applications under s 439A(6) in the large commercial centres in Australia, especially Sydney and Melbourne, are being confronted more and more frequently with applications for substantial extensions in complex cases, and on the whole they are acceding to those applications, and it seems therefore appropriate to take stock of the principles that are currently applicable. 8 It is striking that the voluntary administration provisions set a single statutory timetable for every administration of every company "from the smallest to the greatest" (as Young J said in Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611, at 612). The attempt to set a single timetable was bound to create distortions and pressures for relief. The statutory power of courts to extend the convening period is the mechanism for adjusting the statutory timetable to meet the exigencies of the instant case. 9 When the voluntary administration provisions were introduced into the corporations legislation, by the Corporate Law Reform Act 1992, it was contemplated that extensions of the convening period would not be given frequently; that is, there was thought to be a predisposition or a kind of factual presumption against an extension. The Explanatory Memorandum to the Corporate Law Reform Bill 1992 said (para 507): "The court will be given a power to extend these periods … though it is not expected that this power would be exercised frequently, since it is an important objective of the new provisions for creditors to be fully informed about the company's position as early as possible and to have an opportunity to vote on its future as soon as possible." 10 As is noted in Ford's Principles of Corporations Law (LexisNexis, looseleaf) at [26.201], an additional reason for reluctance to extend the convening period is that the statutory moratorium on the prosecution of proceedings against the company and on enforcement of rights by chargees and owners or lessors of property during administration should not be prolonged without good cause. 11 Some remarks in early cases on s 439A(6) applications appeared to reflect the sentiment expressed in the Explanatory Memorandum. For example, in Mann v Abruzzi Sports Club, Young J (at 612) expressed the opinion that "it would be quite contrary to the whole spirit of [Part 5.3A] to allow administration to be unduly extended or, indeed, to over-encourage administrators to apply to the court". In Re Witta Coola Pastoral Co Pty Ltd [1999] NSWSC 148 the same judge expressed the view that the voluntary administration regime required an accelerated program of work on the part of the administrator; see also Re Allbuild Construction Co Pty Ltd (admins apptd) [2000] WASC 227. 12 However, if one looks more closely at these cases it is less clear that there was any significant leaning against granting an extension, provided that adequate reasons were given in support of the application for extra time. In all three cases, extensions were granted as requested on grounds equivalent to those accepted in later cases. In Mann v Abruzzi Sports Club, for example, although Young J spoke in the manner indicated above about not allowing an administration to be unduly extended, he granted the extension sought on the grounds that the administration was complicated by the appointment of a receiver, the evidence indicated that the administrator was doing his best to deal speedily with negotiations that would enable the company to go back into survival mode, there was no evidence of prejudice to creditors or members in granting the extension, and if the meeting were convened without the extension the administrator would not have sufficient material to give a meaningful account of his administration. 13 The reasons given for an extension in subsequent cases can be grouped into the following broad categories: · the size and scope of the business: Lombe, Re Babcock & Brown Ltd (Administrators Appointed) [2009] FCA 349; Worrell; Re Storm Financial Ltd (Receivers and Managers Appointed) [2009] FCA 70; ABC Learning Centres Ltd, in the matter of ABC Learning Centres Ltd; application by Walker (No 5) [2008] FCA 1947; · substantial offshore activities: Lehman Bros Australia Ltd [2008] NSWSC 1132; · large number of employees with complex entitlements: Re S & D International Pty Ltd (in liq); Malhotra v Tiwari [2005] VSC 496; Re Ansett Australia & Ors (All Admin Appointed) and Korda and Anor (As Administrators) [2002] FCA 90; · complex corporate group structure and intercompany loans: Lombe, Re Babcock & Brown Ltd (Administrators Appointed) [2009] FCA 349; Re Octaviar Limited (Administrators Appointed) (Receivers and Managers Appointed (ACN 107 863 436) [2008] QSC 272; In the matter of LED Builders Pty Ltd (Administrators Appointed); LED Builders Pty Ltd (Administrators Appointed) and Ors [2008] NSWSC 633; Hall, in the matter of Australian Capital Reserve Limited (Administrators Appointed) [2007] FCA 1328; · complex transactions entered into by the company (e.g. securities lending or derivatives transactions): In the matter of Lift Capital Partners Ltd (Administrators Appointed) [2008] NSWSC 446; · complex prospects of recovery proceedings: Worrel, Re Storm Financial Ltd (Receivers and Managers Appointed) [2009] FCA 70; Deputy Commissioner of Taxation v Wellnora Pty Limited [2007] FCA 1324 ; · lack of access to corporate financial records: Sims, in the matter of Destra Corporation Ltd [2008] FCA 2002; Fincorp Group Holdings Pty Ltd & Ors [2007] NSWSC 363; · the time needed to execute an orderly process of disposal of assets: Carter, in the matter of SFM Australasia Pty Ltd (Administrators Appointed) ACN 105 317 333 (No 2) [2009] FCA 419; ABC Learning Centres Ltd, in the matter of ABC Learning Centres Ltd; application by Walker (No 7) [2009] FCA 454; · the time needed for thorough assessment of a proposal for a deed of company arrangement: Silvia, in the matter of Austcorp Group Ltd (Administrators Appointed) [2009] FCA 636; · where the extension will allow sale of the business as a going concern: Lombe Re Australian Discount Retail Pty Ltd [2009] NSWSC 110; Stewart, in the matter of Kleins Franchising Pty Ltd (Administrators Appointed) (ACN 007 348 236) [2008] FCA 721; Uni-Aire Security Pty Ltd (Administrators Appointed) ACN 085 430 619, in the matter of Uni-Aire Security Pty Ltd (Administrators Appointed) ACN 085 430 619 [2006] FCA 1423; · more generally, that additional time is likely to enhance the return for unsecured creditors: Deputy Commissioner of Taxation v Scottsdale Homes No 3 Pty Ltd (No 2) [2009] FCA 190; Fitzgerald, in the matter of Primebroker Securities Limited (Administrator Appointed) (Receivers and Managers Appointed) [2008] FCA 1247; Ex parte Vouris; in the matter of Marrickville Bowling and Recreation Club Ltd (under Administration) [2008] DCA 622. 14 The cases show that where a substantial issue in any of these categories is established (and a fortiori, where the facts fit into more than one category), the court tends to grant an extension, and the extension tends to be for the time sought by the administrator provided that the evidentiary case has been properly prepared, there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and the court is satisfied that the administrator's estimate of time has a reasonable basis. 15 It is difficult to discern, especially in the most recent cases, any substantial remnant of the predisposition against extension. It is true that in Re Diamond Press Australia Pty Ltd [2001] NSWSC 311, Barrett J adverted to "an expectation reflected in the case law that an administration should proceed very quickly and should not be unduly prolonged, particularly in view of the moratorium situation it involves", and he said "it is intended to produce a reasonably speedy fate for the company, one way or another" (at [8]). But his Honour continued (at [10]): "The function of the Court on an application such as this is, as I see it, to strike an appropriate balance between, on the one hand, the expectation that administration will be a relatively speedy and summary matter and, on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders." 16 This "balancing test" has been applied frequently in later cases: for example Re Georges, Midas Australia Pty Ltd (admin apptd) [2009] FCA 38; Re Hayes; Estate Property Group Ltd [2007] FCA 935). If the approach is to "balance" the expectation of speedy administration against the risk of prejudice, there cannot be any predisposition in favour of speedy administration, for that would skew the balancing process. Rather, the cases suggest that where the administrator proves a substantial ground in any of the categories that I have set out, and there is no specific evidence of prejudice, an extension commensurate with the administrator's task will be granted, notwithstanding that the Explanatory Memorandum suggested that extensions would not be granted frequently. 17 It seems to me the degree of complexity of the administration is the key to understanding the Court's current approach. It is obvious from the nature of the applications that have been made in recent years that, while there remain many voluntary administrations of small business companies that are relatively simple and can be carried out within the statutory timetable, there is an increasing number of more complex tasks for insolvency practitioners. Obviously, an increased number of the larger corporate groups are likely to be placed in administration in economically difficult times, and when they are, their sheer size, and their complex corporate structures and intercorporate finances, will create many problems for their administrators. Increasingly, companies in administration will have entered into complex funding arrangements, treasury instruments, and perhaps arrangements involving the use of trusts and managed investment schemes, rather than traditional funding. Business transactions are frequently overlaid with complexity because they are supported by collateral arrangements: for example, retention of title clauses or the use of derivatives for hedging and other purposes. Certain kinds of business are inherently complex, such as the securities lending arrangements in the Lift Capital case. 18 Where there is evidence of complexity of these kinds, it seems to me there is no place for a predisposition against extension. However, an important principle from the older cases remains good law: the applicant for an extension must adduce evidence establishing grounds, adequate to enable the court to carry out the balancing exercise about which the modern cases speak. The administrator is expected to explain with some particularity the problems that make the extension necessary (see Re Levi (1996) 19 ACSR 521; Re Allbuild Construction Co Pty Ltd, above). Additionally, where there is a particular person or group who might be prejudiced by the extension that has been sought or the accompanying moratorium, evidence should be adduced about their position. Indeed, one can envisage cases where particular creditors who will be prejudiced by the extension should be notified of or joined as respondents to the application. The longer the extension that is sought, the more important it is for the court to be given a clear and complete explanation of the state of the administration, the grounds for the extension and any potential prejudice that would flow from granting it. 19 In the present case the level of complexity is obvious from the affidavit of Mr Sims, and it seems to me that the application fits clearly within the case law. The balance is clearly in favour of granting the extension that the administrators seek. It is important in the present case that the extension sought is commensurate with the nature of the problem and the work to be undertaken, and is by any measure for a relatively short period of time, in circumstances where no significant prejudice has been identified. 20 Section 439A(1) requires the administrator of a company under administration to convene the second creditors' meeting within the convening period as fixed or as extended. Section 439A(2) says that the meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period. When a convening period is extended, it is possible that the administrators will be ready to hold the meeting of creditors earlier than 5 business days before the end of the extended period. It has therefore become common practice for the Court to make an order under s 447A(1) that will permit the administrators to convene the meeting and hold it at any time during the extended convening period, and therefore earlier than s 439A(2) would permit. For example, such an order was made in Re Daisytek Australia Pty Ltd (admins apptd) (2003) 21 ACLC 1140. I made a similar order in the present case, on the ground that it will maximise the administrators' flexibility to pursue the most expeditious course. 21 I make the orders in the short minutes of order, which I now initial and date for identification.

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