YATES J:
1 This is an application under s 447A of the Corporations Act 2001 (Cth) (the Act) for an order as to how Pt 5.3A of the Act is to operate in the case of two companies, Vical N.S.W. Pty Ltd (Administrators Appointed) (Vical) and Arsonello Pty Ltd (Administrators Appointed) (Arsonello) (together, the Companies), which were placed in administration on 30 August 2018. The plaintiffs, George Georges and Ryan Reginald Eagle, were appointed as joint and several administrators of the Companies pursuant to s 436A(1) of the Act.
2 More specifically, the plaintiffs seek orders that will have the effect of extending beyond 45 business days the period for an adjournment of the second meetings of creditors of the Companies. Absent the orders sought, r 75-140(3) of the Insolvency Practice Rules (Corporations) 2016 (the Rules) will apply. That rule must be seen in context of ss 438A and 439A of the Act, and r 75-140(2) of the Rules.
3 Section 438A of the Act provides that, as soon as practicable after the administration of a company begins, the administrator must investigate the company's business, property, affairs and financial circumstances; and form an opinion about whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement; whether it would be in the creditors' interests for the administration to end; and whether it would be in the creditors' interests for the company to be wound up.
4 Section 439A provides that an administrator must convene a meeting of the company's creditors within the convening period fixed by s 439A(5). Apart from the exceptional circumstance provided in s 439A(5)(a), the convening period is the period of 20 business days beginning on the day after the administration begins or, if that day is not a business day, the next business day. Section 439A(6) provides that the Court may extend the convening period.
5 As I will explain, in the present case the second meetings of creditors have already been convened, and it is in that context that the plaintiffs seek an extended adjournment period.
6 Rule 75-140(2) of the Rules provides that a meeting of creditors must not be adjourned to a day that is more than 15 business days after the first day on which the original meeting was held. However, r 75-140(3) provides:
Despite subsection (2), a meeting convened under section 439A of the Act must not be adjourned to a day that is more than 45 business days after the first day on which the original meeting was held.
7 The present application is supported by an affidavit made by the first-named plaintiff, Mr Georges. It is necessary for me to refer to a number of the matters deposed to by Mr Georges.
8 Vical was established in June 1994. It runs two pharmacies. One is known as "Amcal Plus Pharmacy", and the other is known as "Guardian Pharmacy". Both pharmacies operate in the Westfield Shopping Centre at Belconnen in the Australian Capital Territory. Vical is the sole trading entity, and employs all the employees and holds the relationships with suppliers necessary to operate the pharmacies.
9 On the evidence before me, the position in relation to Arsonello is not entirely clear. I was informed that it is a related company of Vical and, on Mr Georges' evidence, it, together with Vical, has given security to Sigma Healthcare Limited (Sigma) which is the main supplier to the pharmacies and is owed approximately $2.6 million in respect of inventory supplied. Sigma has also provided a guarantee to Westpac Banking Corporation (Westpac) in respect of a lending facility which the bank provides to, it seems, Vical and Arsonello, jointly.
10 The Companies have fallen into financial difficulties in recent times. They have attributed this to the significant rent expenses to which Vical is exposed, and to what has been referred to as "external family issues" which, apparently, have hindered the director's ability to effectively manage the pharmacies on a day-to-day basis. Prior to entering administration, the Companies had been pursuing options including the sale of the pharmacy businesses, and a reduction of floor space in the rented premises to reduce rent and outgoings. These approaches were unsuccessful.
11 Based on the report as to affairs (RATA) prepared by Benjamin Jackson, the director of the Companies, it seems that the Companies have debts in excess of $2.8 million. There is, firstly, the secured debt to Sigma to which I have already referred. There are also employee leave entitlements in the vicinity of $51,000. As at the date of the plaintiffs' appointment, 42 employees were engaged in the pharmacy businesses, with approximately half engaged on a casual basis. Since the plaintiffs' appointment, employees have continued to be paid. Several employees have voluntarily resigned, but there had been no redundancies. The amounts that are owed to employees vary according to their respective lengths of service. As Mr Georges has deposed, for as long as the employees continued to work in the businesses, their entitlements will continue to accrue. However, entitlements such as redundancy pay and payment in lieu of notice will only arise if an employee's employment is terminated. It is for this reason that Mr Georges said that it is difficult to provide an exact figure for employee entitlements.
12 There are unsecured creditors in the vicinity of $186,000. Of that sum, $48,000 is owed to related party creditors. It appears that there are amounts owing to the Australian Taxation Office, but those amounts have not yet been determined, given that there are outstanding lodgements.
13 Based on the information provided in the RATA, there are assets with a book value of over $802,610. This sum includes an amount for inventory valued at $581,430. The realisable value of the inventory is subject to any potential business sale or price discounting necessary during a wind-down phase, and is subject to the security interest held by Sigma. The assets include an amount of $114,300 for plant and equipment. Plant and equipment realisations will be subject to security interests. A number of these interests are registered on the Personal Property Securities Register. As the plant and equipment is largely made up of fixtures and fit-out for the stores, the realisable value is unlikely to be the full amount attributed to this item in the RATA, especially if the businesses are not sold.
14 There are two leases with the same landlord, Westfield Belconnen Scentre Group Limited (Scentre). Part of the ability of the plaintiffs to continue to trade the businesses has required negotiations with Scentre to make arrangements for the continued occupation of the premises. Rent has continued to be paid during the administrations, at a discounted monthly rate for both locations.
15 The plaintiffs have received expressions of interest from parties interested in acquiring the businesses. The effect of making the orders now sought would be to allow the plaintiffs to continue to explore a possible sale of some or all of the businesses or the other assets, as well as to allow the negotiation of the deed of company arrangement (DOCA).
16 The plaintiffs' present strategy has been to take control of the assets, continue to trade the business, raise funds, review expressions of interest from potential purchasers of the businesses and commence investigations into the affairs of the Companies. In his affidavit, Mr Georges has given an account of the tasks undertaken by the plaintiffs to date in their administration of the Companies.
17 The primary reason for seeking the present orders is to allow the director of the Companies to propose a DOCA. As I have noted, the plaintiffs have been trading the businesses since their appointment and liaising with potential purchasers. While some progress had been made in relation to achieving a sale, before today there had been no DOCA proposal for the creditors to consider. The prospects of such a proposal by the director has now been held out. An extension of time in respect of the permitted period of adjournment would allow the plaintiffs to continue to trade the businesses in order to keep negotiating with potential purchasers and also to allow a DOCA proposal to be formulated and put to creditors for their consideration. Mr Georges has expressed the opinion that this dual approach will lead to greater competitive tension and increase the likely return to creditors. That is an important consideration in the present application.
18 The first meeting of creditors was held on 11 September 2018. The second meeting of creditors was convened to be held on 5 October 2018. For that purpose, the plaintiffs prepared a report pursuant to the requirements of r 75-225 of the Rules. In that report, the plaintiffs advised that they were exploring a number of options with the objective of recapitalising the Companies through a DOCA. They also informed creditors that they were proposing an adjournment of the second meeting for a period of up to 45 business days to fully exhaust the options discussed in the report. In their report, the plaintiffs said that these options were only at a very preliminary stage and that they would provide a supplementary report in the event that a DOCA was proposed.
19 On 5 October 2018 the creditors did, in fact, resolve to adjourn the meeting for 45 business days. The adjourned meeting is to be held this Friday, 7 December 2018. A further report, dated 29 November 2018, has been prepared by the plaintiffs in anticipation of that meeting.
20 As I have said, an indication has now been received that the director of the Companies wishes to propose a DOCA. This would be with the support of Sigma. Mr Georges has deposed that it is likely that a DOCA will provide a superior return to unsecured creditors than under any other scenario which, at the present time, only appears to be a liquidation of both Companies. Indeed, Mr Georges has deposed that if the orders sought are not granted, and the reconvened second meeting is held this Friday, it is likely that the plaintiffs will recommend to the creditors that the Companies be placed in liquidation.
21 The plaintiffs believe, therefore, that the proposed extension of the adjournment period will be in the best interests of all creditors. The major creditors, Sigma, Westpac and Scentre, have provided their support to the present application which is that the period for adjourning the second meetings be extended to no later than 8 February 2019.
22 If that extension were to be granted, then the rights of some stakeholders may be affected. However, the plaintiffs believe that the prejudice to stakeholders is likely to be minimal in the circumstances. For example, the plaintiffs will continue to pay Scentre the agreed rent relating to the period while the businesses continue to trade. The plaintiffs are of the opinion that Scentre will be in no worse position by reason of the period for adjournment being extended. Indeed, as I have said, Scentre has provided its support to the present application.
23 Further, the plaintiffs are personally liable for employees' wages during the period of the administration. They anticipate that the revenue to be generated by continuing to trade the businesses will be sufficient to cover all current employee entitlements. The Commonwealth government's Fair Entitlements Guarantee may be called on in respect of unpaid leave and redundancy entitlements if the Companies eventually go into liquidation. The current endeavour, however, is to seek to maximise the prospects of employees retaining their employment via a DOCA or sale of the businesses.
24 Given the recent change in events, with the prospect of a DOCA being proposed by the director, and given Mr Georges' view that this event holds out the prospect of a greater return for creditors, in particular the unsecured creditors, it seems to me that the case is one where it is appropriate that the period for adjourning the second meetings of creditors be extended. I take into account particularly the fact that the present application is supported by the Companies' major creditors.
25 Section 447A provides that the Court may make such orders as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company. The extension that is sought is specifically with respect to the period referred to in r 75-140(3) of the Rules which, of course, is not found in Pt 5.3A of the Act. Nevertheless, I am satisfied that I have the power to make the orders that are sought.
26 A similar question arose in Re Porter & Anor as joint administrators of Priceright Construction Pty Ltd (Admin Apptd) (2006) 57 ASCR 206; NSWSC 324. The question in that case was whether s 447A of the Act could be invoked to provide that Pt 5.3A of the Act was to operate in respect of a particular company on the basis that reg 5.6.18(2) of the Corporations Regulations 2001 (Cth) did not apply. Barrett J reasoned that such an order could be made in reliance on s 447A because, even though the time limit was one prescribed by the particular regulation, the orders sought were still about how Pt 5.3A of the Act was to operate in relation to the company concerned. See also In the matters of Keystone Group Holdings Pty Ltd (Receivers & Managers Appointed) (Administrators Appointed) and Others [2017] NSWSC 454, especially at [14]-[15].
27 The same reasoning applies in the present case. Although r 75-140(3) mandates that the period of adjournment in respect of a meeting convened under s 439A of the Act must not be more than 45 business days after the first day on which the original meeting was held, an order invoking the facility provided by s 447A of the Act, and which has the effect of modifying the stipulated maximum period, is still an order about how Pt 5.3A is to operate, particularly in relation to a meeting that is required to be held under s 439A of the Act.
28 Further, making the orders that are now sought will be consistent with the object of Pt 5.3A of the Act, and Sch 2 to the Act (Insolvency Practice Schedule (Corporations)) to the extent that it relates to Pt 5.3A, which is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or, if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and members than would result from an immediate winding up.
29 Although the extension of the otherwise permitted period of adjournment is lengthy, I accept that what is now envisaged by the plaintiffs may take some time, particularly with the intervention of the Christmas period where representatives of the parties may be away for an extended period, and given, further, that many creditors will be away in the first half of January, making it appropriate for the plaintiffs to communicate with those creditors about the details of any DOCA, and the plaintiffs' recommendation in respect of it, after that time.
30 Orders will be made accordingly.
I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.