Farnsworth in his capacity as voluntary administrator, in the matter of Monorant Pty Limited (administrator appointed) [2013] FCA 949

Judgment (16 paragraphs)

[1]

Second Plaintiff - Monorant Pty Limited (Administrator Appointed)

Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act), the period within which the first plaintiff must convene the second meeting of creditors of the second plaintiff pursuant to s 439A of the Act be extended up to and including 17 November 2013.
Pursuant to s 447A(1) of the Act, Part 5.3A of the Act have effect in relation to the second plaintiff such that the meeting of creditors required by s 439A of the Act may be held at any time during the period up to, or within 5 business days after, 17 November 2013 notwithstanding the provisions of s 439A(2) of the Act. Third Plaintiff - Tony Ferguson Licencing Pty Limited (Administrator Appointed)
Pursuant to s 439A(6) of the Act, the period within which the first plaintiff must convene the second meeting of creditors of the third plaintiff pursuant to s 439A of the Act be extended up to and including 17 November 2013.
Pursuant to s 447A(1) of the Act, Part 5.3A of the Act have effect in relation to the third plaintiff such that the meeting of creditors required by s 439A of the Act may be held at any time during the period up to, or within 5 business days after, 17 November 2013 notwithstanding the provisions of s 439A(2) of the Act. Fourth Plaintiff - TF2 Pty Limited (Administrator Appointed)
Pursuant to s 439A(6) of the Act, the period within which the first plaintiff must convene the second meeting of creditors of the fourth plaintiff pursuant to s 439A of the Act be extended up to and including 17 November 2013.
Pursuant to s 447A(1) of the Act, Part 5.3A of the Act have effect in relation to the fourth plaintiff such that the meeting of creditors required by s 439A of the Act may be held at any time during the period up to, or within 5 business days after, 17 November 2013 notwithstanding the provisions of s 439A(2) of the Act. Fifth Plaintiff - Tony Ferguson IP Pty Limited (Administrator Appointed)

Background 3 The corporate plaintiffs, through a somewhat complex trust structure, comprise what may be conveniently described as the Tony Ferguson group of companies (the group). The group operates a business that sells a range of weight loss products including shakes, breakfast muesli and bars, and soups, and operates the Tony Ferguson Weight Loss Program (collectively, the business). The products sold by the business are manufactured by Jalco Food and Beverage Pty Limited (Jalco Food), a company associated with Mr Barry Smorgon and Mr John Tisdale, two of the directors of the corporate plaintiffs. The products are manufactured pursuant to contractual arrangements between Jalco Food and the fifth and sixth plaintiffs. 4 Under the present group structure, the seventh plaintiff functions as a holding company for the group. It owns all the shares in the second plaintiff which, in turn, owns all the units in four separate unit trusts of which the third, fifth, sixth, and eighth plaintiffs are, respectively, trustees. The second plaintiff collects money from the bank accounts of each of the unit trusts and pays the liabilities of those trusts as required. 5 The third plaintiff is the main operating entity within the group. It holds the rights to conduct the Tony Ferguson Weight Loss Program (the program) and licences Amnesiac Australia Holdings Pty Ltd (Amnesiac) and Jalco International Pty Ltd (Jalco International) to conduct the program internationally, other than in New Zealand. To that end, Amnesiac has granted a number of licences to third parties. The third plaintiff occupies premises at 4 Production Place, Penrith, New South Wales for the purpose of conducting its operations. It occupies those premises under informal arrangements whereby it is responsible for the payment of rent. 6 The eighth plaintiff was responsible for the operation of "stand-alone stores" which offered the program directly to consumers. It is also responsible for conducting online sales. At the time of Mr Farnsworth's appointment, there were no stand-alone stores. However, the eighth plaintiff continues to conduct online sales for the business. The eighth plaintiff occupies premises at Riverdale Shopping Centre, Dubbo, New South Wales for the purpose of conducting its operations. It occupies those premises under informal arrangements whereby it is responsible for the payment of rent. 7 The fifth plaintiff owns the intellectual property that forms part of the program. It also jointly owns with Jalco Food the formulae for certain products supplied under the manufacturing arrangements with that company. The fifth plaintiff licences the intellectual property to the third plaintiff for use in Australia and New Zealand. It also licences the intellectual property to Amnesiac and Jalco International for use by them in conducting the program internationally. 8 The fourth plaintiff is wholly owned by the seventh plaintiff. It owns and distributes a range of weight loss products which are separate from those involved in the program. Nevertheless, its operations are part of the business conducted by the group. 9 The day-to-day operations of the business are conducted using the distribution and warehousing services of Symbion Pty Limited (Symbion). It is not necessary for me to detail the arrangements by which, or manner in which, Symbion provides those services, other than to note the following matters. Requests for products are placed by retailers (mainly chemists, particularly Terry White Chemists) with Symbion who then places orders on the third plaintiff. The third plaintiff, in turn, places orders with Jalco Food. The third plaintiff raises invoices to Symbion for payment. However, these invoices are factored by the third plaintiff to Bibby Financial Services Australia Pty Limited (Bibby) who makes payment to the third plaintiff of approximately 80% of the face value of each invoice. 10 The role played by Symbion in the operation of the business is governed by a written contractual arrangement to which the third, fifth, and eighth plaintiffs are parties. Pursuant to that arrangement, Symbion is responsible for operating warehouse facilities for the products to be distributed. Prior to Mr Farnsworth's appointment, Symbion was required to vacate the premises from which its warehouse was operated. Mr Farnsworth's investigations have led him to understand that the original contractual arrangement to which Symbion was a party has been varied to remove the requirement that it operate a warehouse. There has been a dispute concerning the new arrangement. However, since his appointment, Mr Farnsworth has reached an agreement with Symbion whereby its involvement in the present operation of the business will continue until 2 October 2013, unless his administrations end earlier. Mr Farnsworth's evidence was that, if extensions of the convening periods were granted, he believed he would be able to agree with Symbion to continue its present distribution arrangements in respect of the business. 11 Bibby holds registered security interests over all the present and after-acquired property of the third, fifth, sixth, seventh, and eighth plaintiffs. The total amount of the debts purportedly secured is approximately $533,804.09. Bibby has been given notice of the present application. It has provided written acknowledgement that it does not oppose the extensions sought by Mr Farnsworth or the consequential relief he seeks relating to the time at which the second meetings of creditors are to be held. 12 Mr Farnsworth's evidence was that he has continued to receive payments from Bibby as invoices issued to Symbion are factored. Financial forecasts provided to him indicate that, at the least, the business will break even during the extended convening periods that have been sought. 13 On 23 August 2013, Mr Farnsworth caused advertisements to be published in the Australian Financial Review seeking expressions of interest in the purchase of the business. He has received four expressions of interest, all of which are non-binding and subject to a period of due diligence. 14 There are two matters to be noted in respect of any sale of the business. The first is that some of the products supplied by the business are regulated under the Therapeutic Goods Act 1989 (Cth) by the Therapeutic Goods Administration (the TGA). Mr Farnsworth has advised that, because of the nature of these products, any sale of the business may require approval by the TGA. The second is that part of the group's business arrangements involve third-line forcing which has been notified under the Competition and Consumer Act 2010 (Cth). Mr Farnsworth has advised that any sale of the business will involve consideration of these arrangements and likely further approval by the Australian Competition and Consumer Commission (the ACCC) having regard to the identity of the intending purchaser. His evidence was that this may take some time. 15 It is Mr Farnsworth's opinion, given the: required periods of due diligence, which are ongoing; negotiations with parties on terms of sale; and likely complexities in preparing contracts for the sale of the business, including potential issues involving the TGA, the ACCC, and the various licensing arrangements that have been entered into, that the sale process will not be complete for at least one month. 16 Mr Farnsworth's evidence was that, on the information available to him to date, a sale of the business is likely to take a substantial part of the period of the extensions he has sought. It would then be necessary to prepare a report to creditors with respect to any sale, its conditions, and any deed of company arrangement proposal to be put forward, which is highly likely to take into account, or be conditional on, the sum available to creditors after any sale of the business. 17 In this connection, Mr Farnsworth said that any deed of company arrangement proposal is likely to be a pooled one involving all of the corporate plaintiffs. Mr Farnsworth said that, until a sale of the business is completed, it would not be possible to estimate the recoveries that will be made from the assets of each corporate plaintiff. As such, it would be difficult to put forward any deed of company arrangement proposal. The likely position of each corporate plaintiff on a liquidation would not be clear until the business is sold and the assets of each corporate plaintiff are allocated a value. The proceeds of the sale are proposed to be included as part of any deed of company arrangement proposal. 18 Given that no proposal for a deed of company arrangement has yet been received, nor will one be received prior to the sale of the business, Mr Farnsworth said that it is likely that, were the second meeting of creditors of each corporate plaintiff to be held as presently required, each corporate plaintiff would be placed into liquidation at those meetings. Importantly, he said that, in his experience, a higher price for the sale of the business is likely to be received if the sale is effected during the administration of each corporate plaintiff as opposed to during a liquidation of them. Plainly, a higher sale price for the business is in the interests of all creditors. 19 Another matter to be noted is that a Report as to Affairs has not yet been prepared and completed by the directors of the corporate plaintiffs.

Consideration 25 In considering an application of this nature, the Court is involved in a balancing exercise. A balance needs to be struck between the expectation that an administration under Part 5.3A of the Act be conducted with relative speed, to which the relevant provisions of the Act give due recognition, and the requirement that "speed not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders": Collective Olive Groves Limited, in the matter of Collective Olive Groves Limited; application by Reidy [2009] FCA 177 at [18]; Diamond Press Australia Pty Limited [2001] NSWSC 313 at [10]. 26 In Re Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) (ACN 102 298 279) and Others (2009) 72 ACSR 352, Austin J surveyed the case law that informs the exercise of the discretion that arises in the present case. His Honour observed (at [16]) that 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 because that would skew the balancing process: 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 Re 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; Allbuild Construction Co Pty Ltd [Ex parte Featherby [2000] WASC 227]. 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. 27 In my view, grounds have been established for the extensions that have been sought. The circumstances I have summarised above show that the conduct of the administrations is complex. Part of that complexity is represented by the circumstances of the sale of the business. I am satisfied that a sale of the business in the course of the administrations would be likely to yield a higher return for creditors than a sale of the business in a liquidation of the corporate plaintiffs. The sale process will take time to be sensibly conducted. It is in the interests of all creditors that the sale process continue, albeit with due expedition. This will enable them to be presented with choices which, absent the extensions that are sought, would not be available to them. 28 Nothing has been put before me that indicates that any substantial prejudice to any creditor would be created by granting the extensions that are sought. I am reassured in this regard by Mr Farnsworth's evidence that the financial forecasts available to him indicate that, at the least, the business will break even during the extended convening periods. I am also reassured by the evidence of his belief that he will be able to reach agreement with Symbion to continue the present distribution operations of the business. Moreover, I am reassured that Mr Farnsworth has continued to receive payments from Bibby as invoices issued to Symbion are factored, and that Bibby has made clear that it does not oppose the extensions that are sought. 29 The relief sought includes an order with respect to each corporate plaintiff that the operation of Part 5.3A of the Act be modified to permit the second meeting of creditors to be held during the extended convening period or within five days thereafter. For the reasons discussed by Lindgren J in Re Daisytek Australia Pty Ltd (admin apptd) and Another (Bowen and Hall as joint admins) (2003) 45 ACSR 446 at [10]-[18], it is appropriate that that relief be granted. 30 There is a final matter. Some of the material in evidence (confidential exhibit APF-2) contains business agreements and financial information in respect of which confidentiality is sought. It includes material that has been made available under appropriate confidentiality arrangements to those who have responded to the advertisement for the sale of the business. I have reviewed the material and I am satisfied that an order for confidentiality should be made. It is clear that it was necessary to place this material before the Court for the present application to be properly considered. I am satisfied that unfettered use of the information would be likely to prejudice the financial interests of the group. In the circumstances, a confidentiality order should be made to prevent prejudice to the proper administration of justice.

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Judgment (16 paragraphs)

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