Farnsworth v About Life Pty Limited

THAWLEY J: 1 The plaintiff was appointed the administrator of About Life Pty Limited on 17 December 2018 under s 436A of the Corporations Act 2001 (Cth). By reason of s 439A(5)(a) of the Act, the convening period for the meeting of creditors of the company under s 439A(1) expires on 24 January 2019. By reason of s 439A(2), unless an extension is granted, the second meeting of creditors is to be held between 17 January 2019 and 1 February 2019. 2 The plaintiff seeks an extension of the period to convene the meeting of creditors under s 439A(1) (the second meeting of creditors). The Court has power to grant the extension under s 439A(6).

Principles 3 The purpose of the power to grant an extension is to enable the Court to allow further time where to do so is appropriate to advance the purposes of the administration. Extensions should generally be brief, although substantial extensions may be appropriate in complex cases. Extensions are not to be granted where doing so undermines the statutory object of a quick and summary consideration of the alternatives or if to do so has the effect of creating an administration of a different nature to that contemplated by the Act. 4 The Court balances the expectation that an administration will be undertaken in a relatively speedy and summary manner with the need to ensure that the administration is not concluded without consideration of sensible and constructive options that may provide better returns for creditors and any return to shareholders, or to enable the company to return to trading in the interests of creditors and shareholders: Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] (Barrett J); Re Dimidium Group Pty Ltd [2010] NSWSC 1086 at [15] (Barrett J); Mighty River International Limited v Hughes; Mighty River International Limited v Mineral Resources Limited [2018] HCA 38; 92 ALJR 822 at [73] (Nettle and Gordon JJ); Jones, in the matter of Eastern Goldfields Limited (Administrators Appointed) [2018] FCA 2081 at [3] (Colvin J). 5 In Silvia, in the matter of Austcorp Group Limited (Administrators Appointed) [2009] FCA 636 at [18], Lindgren J summarised relevant considerations in the following way: The overlapping considerations affecting the exercise of the discretion whether to extend the convening period may be summarised as follows: (a) the Court should recognise the objective of speed of administration that was associated with the introduction of Part 5.3A by the Corporate Law Reform Act 1992 (Cth) as from 23 June 1993. The Court should also recognise the objectives stated in para 507 of the explanatory memorandum associated with the Bill for that Act, that it was expected that the power to extend the period would be exercised infrequently since it is an important objective of Part 5.3A that creditors be fully informed about the company's position as early as possible and have an opportunity to vote on its future as soon as possible: Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 (Young J) at 612; Re Geraldton Building Co Pty Ltd (Administrators Appointed); ex parte Trevor [2000] WASC 320 (Owen J) at [5]; (b) the function of the Court is to strike an appropriate balance between the legislature's expectation that the administration will be a relatively swift and summary procedure, and 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: Re Diamond Press Australia Pty Limited [2001] NSWSC 313 (Barrett J) at [10]; Re Pan Pharmaceuticals Ltd [2003] FCA 598; (2003) 46 ACSR 77 (Lindgren J) (Pan Pharmaceuticals) at [42]; Re New Horizons Corporation; ex parte De Vries [2004] NSWSC 253 (Austin J) at [5]; (c) the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration: Re Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192 (Barrett J) (Fincorp) at [18]; (d) a particular consideration against the too ready grant of an extension is the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others: Fincorp 62 ACSR 192 at [4]; Chamberlain, in the matter of South Wagga Sports and Bowling Club Ltd (Administrator Appointed) [2009] FCA 25 (Jacobson J) at [9]; (e) the application is to be assessed by reference to whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and, in particular, to arrive at the opinion referred to in s 439A(4), in order to inform creditors adequately so that they will be in a position to decide whether to terminate the administration, execute a deed of company arrangement or place the company in liquidation: Pan Pharmaceuticals [2003] FCA 598; (2003) 46 ACSR 77 at [41]; ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No.7) [2009] FCA 454 (Emmett J) (ABC Learning Centres)at [28]; (f) it is often desirable that any extension be accompanied by an order under s 447A, permitting the meeting to be held at any time during the convening period as extended: see the order made in Re Daisytek Australia Pty Ltd [2003] FCA 575; (2003) 45 ACSR 446 (Daisytek) at [10]-[18]. 6 In Re Riviera Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2009] NSWSC 585 at [13], Austin J identified the following categories of cases in which an extension had been granted: • 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] FCA 622. 7 These are not exhaustive and serve merely as examples. Whether an extension is appropriate turns on the particular circumstances of the case. 8 In Mighty River at [73], Nettle and Gordon JJ (in dissent, but not relevantly in this respect) referred to a number of cases including Re Riviera and observed: … Generally speaking, courts have been disposed to grant substantial extensions in cases where the administration has been complicated by, for example, the size and scope of the business, substantial offshore activities, large numbers of employees with complex entitlements, complex corporate structures and intercompany loans, and complex recovery proceedings, and, more generally, where the additional time is likely to enhance the return to unsecured creditors. Provided the evidentiary case for extension has been properly prepared, there has been no evidence of material prejudice to those affected by the moratorium imposed by the administration, and the administrator's estimate of time has had a reasonable basis, the courts have tended to grant extensions for the periods sought by administrators ...

Summary Background 9 About Life operated a number of organic or natural food supermarkets and café outlets in Sydney and Melbourne. The administrator has ascertained that each outlet has been either sold or vacated before his appointment. Initial investigations indicate total liabilities of $11.7 million, consisting of: trade creditors of approximately $4.7 million; statutory creditors (the Australian Taxation Office and Revenue NSW) of approximately $1.4 million; employee entitlements of two directors of About Life of approximately $273,000; related party loans from two directors of About Life of approximately $4.8 million. 10 All other employee entitlements appear to have been paid and a secured claim of the Commonwealth Bank has been discharged from the sale of assets and site closures. 11 Assets, apart from the potential proceeds of litigation or claims referred to later in these reasons, appear to amount to $237,000. 12 The administrator has indicated that the company is involved in complex litigation in the Supreme Court of New South Wales concerning Harris Farm, Woolworths and the company's former solicitors. This litigation apparently arises from a previously proposed sale of a business conducted by the company at Double Bay. The proposed sale was to Harris Farm. Apparently, Woolworth successfully enjoined the sale and then purchased the Double Bay business. This has resulted in consequential litigation between Harris Farm, the company, its directors and the company's former solicitors. The company's claims are said to be potentially substantial, although the proceedings are presently stayed pending the company complying with a security for costs order.

Consideration 13 As recorded earlier, the administrator was appointed on 17 December 2018. The first meeting of creditors, required by s 436E of the Act, was held on 31 December 2018. If not extended, the convening period for the second meeting of creditors would expire on 24 January 2019. An extension is sought until 31 March 2019. 14 Section 438A of the Act provides: 438A Administrator to investigate affairs and consider possible courses of action As soon as practicable after the administration of a company begins, the administrator must: (a) investigate the company's business, property, affairs and financial circumstances; and (b) form an opinion about each of the following matters: (i) whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors' interests for the administration to end; (iii) whether it would be in the creditors' interests for the company to be wound up. 15 The administrator desires further time to make investigations relevant to forming the opinions he is required to form under s 438A(b) and to communicate those opinions in a notice given to creditors in accordance with r 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) (formerly s 439A(4) of the Act). 16 There is a clear deficiency to unsecured creditors in the absence of significant asset realisations. The potential asset realisations identified are: (a) the Double Bay Litigation; and (b) recoveries that might be available in a winding up (available only to a liquidator). The administrator wishes to form a better assessment of the prospect of recovery in connection with the Double Bay Litigation. This involves investigation both of the merit of the litigation and whether and how it might be funded. It is likely that legal advice will be needed. 17 The administrator has also indicated that certain creditors desire insolvent trading investigations to be carried out. Further, the administrator wishes to investigate and assess related party loans to the company and to investigate potential actions against the directors. 18 The administrator also wishes to explore any Deed of Company Arrangement (DOCA) proposal. The administrator has had brief and preliminary discussions with a director of the company. This has led the administrator to believe that the directors intend to propose a DOCA. This might involve contributions, including contributions in connection with the Double Bay Litigation and by the deferral of related party claims which, as noted above, are substantial. 19 On the evidence adduced on this application, the administrator acted without delay and has taken appropriate steps to obtain information and advice. The gathering of information, in particular in relation to the Double Bay Litigation, has been made difficult by the time of year, including the Christmas and New Year holiday period. 20 It is relevant to consider the wishes of, and any specific opposition from, creditors. The evidence indicated that the view of creditors attending the first meeting was in favour of seeking an extension of the convening period, which was then proposed to be until around the end of February 2019. There was no evidence on this application of any opposition by any creditor. 21 Raw Materials Pty Ltd filed an originating process on 23 October 2018 in the Supreme Court of Victoria seeking orders to wind up the company on the grounds of insolvency. Raw Materials has since been substituted by Integria Health Care. Those proceedings have been adjourned to 23 January 2019. The evidence on this application was to the effect that Integria's solicitor indicated that his instructions as at 21 December 2018 were to adjourn those proceedings until after the second meeting of creditors. At that time, there was no proposal on the part of the administrator to seek an extension of the convening period. 22 On 10 January 2019, the plaintiff's solicitor left a voicemail message and sent an email to Integria's solicitor concerning a consent adjournment of the winding up proceedings. As at the time of hearing this application, no response has been received. I propose to deal with Integria's position by granting liberty for it to apply to vary or discharge the orders which I will shortly make. 23 Five non-related creditors, with claims just shy of $700,000, were appointed to a Committee of Creditors as provided for by s 436E(1). On 11 January 2019, that committee unanimously resolved to apply to the Court for an extension of the convening period up to and including 29 March 2019. 24 In my view, it would not be in the interests of creditors to convene the second meeting until the administrator has had an opportunity to obtain further information and advice, particularly in respect of the Double Bay Litigation, and has been able to formulate informed recommendations. I note also that the company is not trading, it has sold or vacated all of its outlets and, on the evidence on this application, its employees have all been paid their entitlements (with the exception of the aforementioned entitlements of two of the company directors). 25 In all the circumstances, I am satisfied that there should be an extension of the convening period. 26 The administrator seeks an extension of nine weeks or 64 days and stated that this would permit sufficient time. However, the evidence did not indicate, other than in the general terms already identified, what precisely was to be done over that period, nor did it identify any particular reason why such a lengthy extension was appropriate. It may be accepted that difficulties have existed in light of the time of year in which the administrator has been operating. Most of those difficulties are likely to be over; it is possible that certain professional advisers relevant to determining the prospects of the Double Bay Litigation may be unavailable until the end of January 2019. The statutory scheme contemplates expedition, albeit not at the expense of exploring sensible and constructive options in the interests of creditors. 27 In my view, on the evidence on this application, it is appropriate to extend the convening period until 1 March 2019. 28 I will grant the plaintiff liberty to apply to the Court for further extensions or variation of the convening period at any time before that extended period expires. Whether such an extension is appropriate will obviously depend on the circumstances as they then exist, including the steps the administrator has taken before making any such application. 29 The administrator also seeks an order under s 447A(1) that the meetings may be convened at any time during or within five business days after the end of the extended convening period. Such an order provides appropriate flexibility as to the convening of the second creditors meeting and should be made: Silvia at [18(f)]; Jones at [17]. 30 The costs of the application should be costs in the administration. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Thawley.