Fekala Pty Ltd v Cenbond Pty Ltd

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

11062/2000 - FEKALA PTY LTD & ORS v CENBOND PTY LTD & ORS

1 HIS HONOUR: There are two interlocutory applications before me today under the Corporations Law concerning the secured debt owing by a company in administration to the plaintiffs. 2 It seems to me that as things have turned out the only application that really needs to be considered is the application of the administrators for an order under s 441D(2) of the Corporations Law that the plaintiffs not perform specified functions or exercise specified powers in relation to the property over which the security is held, except as permitted by order of the Court. 3 The evidence before me is extensive and it is not necessary to summarise it all. The mortgage in question appears to be a solicitor's contributory mortgage over property which was being used as a private hospital. The plaintiffs have been endeavouring to gain possession of that property for the purpose of sale for over a year. 4 On some of those occasions they have obtained an order for possession and have issued the appropriate writ of execution to the sheriff but on some other occasions they have stayed the sheriff because the company has paid some amounts off the mortgage. However, on the last occasion when the sheriff was ready to execute he was stopped in his tracks by the information that the company was now under administration. The sheriff seems to have presumed that s 440F and s 440G of the Corporations Law require him to stop his activities. Whether that is so or not is a matter which has come to the Court for decision on a couple of occasions but has never yet been decided; see eg Albert v Namba Pty Limited (1997) 24 ACSR 577, 579, and I do not consider I need to decide it today. 5 The administrators were appointed on 5 March 2001. They say to the Court that the only worthwhile asset available to unsecured creditors is the equipment in situ in the former hospital building and the goodwill of the hospital, and that it is only if the property is sold in one line that the personal property will realise any substantial money. They say that they should be given an opportunity to procure a buyer for the business and the land in one line and that the secured creditors should be restrained from enforcing their security so that this may be done. 6 Mr Haffenden, counsel for the secured creditors, vigorously opposes any such order. He says, in effect, that his clients have been continually delayed from enforcing their security for at least fifteen months; that this is not a case where administrators have been put in to rehabilitate a company; it is a case where it is clear that the only outcome of the administration will be that the company will go into liquidation. It is not appropriate to grant a stay because the debtor has clearly just bought himself another two months or so of delay by appointing an administrator. Indeed, the administrators have not yet even put up any firm proposal as to what they propose to do. 7 I was greatly attracted by this last argument for a while as it seemed to me that under s 441D(3) of the Corporations Law the Court is required only to make an order such as the administrators seek if "satisfied that what the administrator proposes to do during the administration will adequately protect the chargee's interest." This means that there has to be put some detailed proposal which is not just within the mind of the administrator, but which has to be communicated; see eg Re GAE Pty Limited [1962] VR 252. 8 However, Mr Newlinds, who appeared for the administrators this afternoon, has convinced me that in the light of the approach taken in cases such as Debis Financial Services (Australia) Pty Limited v Allied Bellambi Collieries Limited (1999) 17 ACLC 1636, which is affirmed in [2000] NSWCA 274, the section is not as prescriptive. As long as the administrators inform the Court as to what they intend to do during the administration, that may be sufficient and it is then a matter of discretion as to whether the order will be made or not. 9 The Debis case shows that there is a two stage process to be gone through when the Court is considering an application under section 441D of the Corporations Law. First, the Court must consider whether the administrator has shown that what he or she proposes will adequately protect the chargee's interests. If that is demonstrated, then the Court can consider whether in its discretion it should make an order limiting the powers etc of the chargee. 10 When one looks at the explanatory notes to the Corporate Law Reform Bill 1992, par 543, it can be seen that the prime occasion in the mind of the legislature was that an administrator might wish to offer a secured creditor security over some other asset so that he can continue to use the charged asset for the rehabilitation of the company. That illustration gives reinforcement to the thought that the Court should be looking to see something which the administrator will do which gives to the chargee a protection that it is not otherwise entitled as a matter of law. Conversely, if the only thing that is proffered to the chargee is what it is under the general law entitled, then it could not be said that what the administrator proposes to do is something which gives adequate protection to the chargee's interest. Again, I was attracted by this concept initially but what Mr Newlinds has submitted has convinced me that it is not necessarily so. 11 One must necessarily look at s 441D in the context in which it appears. Part 5.3A of the Corporations Law was enacted for a particular purpose. That object of purpose is set out in s 435A of the Corporations Law, ie to endeavour to maximise the chances of a company with problems continuing in existence, or if it is not possible for that to happen, then to maximise the return of the unsecured creditors and members. 12 When one gets to s 441D and like sections the Court is faced with a classic conflict of interest. First, creditors lend money on security on the basis that on default they can realise the security and be repaid. It would be wrong to put barriers in the way of the enforcement of secured charges because such barriers in themselves lighten the value of a secured debt, make commercial borrowing more difficult, and increase interest rates to cover risks. Accordingly, there is a very strong public interest that secured creditors should be able to realise their security as promised. Even some of the cases in the area of administration abide this principle, such as the decision in Albert v Namba Pty Limited referred to above at p 580 line 15. 13 However, bearing in mind those rights of the secured creditor, the other interests involved are the rights of the unsecured creditors and the members. These rights are to be given weight where a company is in administration. 14 Accordingly, it does seem to me that the better construction of section 441D(2) is that provided what is put to the Court shows that the chargee's interests are at least protected to the stage they are under the general law, there is no barrier to the Court making an order under that section. 15 The matter then gets into the area of the Court's discretion. The principal factors dealing with discretion I have already mentioned. 16 So far as the plaintiffs are concerned, they emphasise they are suffering prejudice in that the mortgage is now substantially in default. The mortgage was due for repayment on 3 July 2000; a writ of possession has been issued; there is about $3.56 million including costs due for repayment. The probability will be that at auction the property will not raise quite as much so that as every day goes by interest of $1402 per day will accrue with no chance of it being repaid. 17 Furthermore, there have been over the last year repeated rubbery offers to purchase the property or to sell it in one line, which have come to nothing. The hospital licence has been cancelled. The evidence suggests that the property is probably not viable as a hospital anyway, it ceased trading and has not had any patients in it since February 2001. An offer has been made by a person who appears to be a business associate of the former director in the recent past but this is mere window decoration. The administrators have had time to put forward some firm proposal and yet even today the best the experienced administrators can do is put forward a speculative proposal that they will now take immediate steps to procure a buyer for the business and the land. 18 Furthermore, the administrators are in no position at all to give any undertaking as to damages. 19 Ordinarily the Court does not make any order restraining anybody from exercising their legal rights unless there is an undertaking as to damages. However, the way in which Pt 5.3A of the Corporations Law is framed suggests that the Court should not apply that rule too strictly but it still takes into account the fact that the chargee's rights are being affected without any compensatory undertaking being given. 20 On the other side it is put that the chargees really do not suffer any prejudice by the order being made. One of two scenarios will occur. The first is that the administrators will find a buyer for the land and business which will be sufficient to pay out the chargees in full, in which case they will have suffered no prejudice at all, and indeed they may have obtained a benefit. The second is that the company will go into liquidation without there being any sale and it is possible that the chargees will be prejudiced to the extent of $1402 a day, but that is really because the property has already reached its value rather than any other act on the part of the company. One has to say that argument quickly to make it sound convincing, but that was one of the propositions that was put. 21 The question really is whether there is a sufficient chance of the unsecured creditors being paid more if the business could be sold in one line or not. If that can occur then the answer must be "yes". But the real question is whether there is any real likelihood that it will occur. The chances are that it will not because, if it were possible to sell the building as one, with the goodwill and chattels as one line, it would have happened by now. On the other hand, there is still a realistic chance, and if it comes off everybody will benefit. 22 I would be prepared to direct that the chargees not take any action to sell or advertise for sale the subject property up to and including 30 April 2001 on conditions that:

(a) the administrators forward to the Court a firm proposal for obtaining a buyer for the business and land no later than 27 April 2001 at 4 p.m.

(b) that the administrators do not themselves advertise the property for sale;

(c) that they undertake to the Court to keep the property fully and properly insured in the meantime and on the basis that the administrators pay today's costs. 23 On that basis I would be prepared to make that restraining order up to and including 30 April and list the matter in my list at 9.50 a.m. that day. 24 Upon that undertaking being given, those are the orders I make. I stand the matter over to 30 April 2001 at 9.50 am. Liberty to apply.

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