Global Foods Group Pty Limited v Limar International Pty Limited, in the matter of Limar International Pty Limited

REASONS FOR JUDGMENT 1 This is an application under s 440A(2) of the Corporations Act 2001 (Cth) (the Act) to: … adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. 2 The principles upon which such applications are to be determined are well established, and I need not repeat them. It is sufficient to say that they were usefully summarised by Black J in Weriton Finance Pty Ltd v PNR Pty Ltd (2012) 92 ACSR 88. A good deal of the learning on the subject may be found in the decision of McPherson JA in the Queensland Court of Appeal in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 to which reference was made by the defendant in the present case. 3 The application today may be regarded as somewhat unusual, and perhaps premature, because Mr Healey, who appears for the plaintiff in the winding up action, is not in a position to proceed today. Nonetheless, the matter was referred to me as the Duty Judge from the Registrar in what was said to be an urgent application. It therefore seemed to me after I was taken to some of the evidence that the preferable course was nevertheless to deal with it today. In saying that, I should mention that ordinarily it is undesirable for matters which are not urgent to be referred to the Duty Judge in the circumstances which have arisen today. 4 The basis upon which the defendant company, Limar International Pty Limited (Limar), seeks the adjournment may be stated shortly. A Deed of Company Arrangement (DOCA) has been proposed under which a deed fund comprising a $50,000 cash contribution is to be provided to meet the claims of creditors. However, it is the circumstances in which the deed is proposed and the terms of the deed, as well as the background to it, which form the basis of Mr Healey's opposition to the adjournment. 5 Before turning to the circumstances, I should mention briefly the terms of the proposed deed. The deed is proposed by Mr Peter Yiasemides and Mr Andrew Yiasemides on behalf of Limar. It is conceded by Mr Hegarty that Limar is insolvent but the payment of the sum of $50,000 is to be guaranteed by the "director" and "the shareholders". The director at present is Mr Peter Yiasemides who is, or at least was until recently, a resident of the United Kingdom. The cash contribution of $50,000 has apparently been partially satisfied by a payment of $20,000 to the voluntary administrators. Priority creditors will include employees who have claims, and the landlord of the premises leased by Limar. 6 The landlord is a party which may be described as a related party; it is known as Bon Bon Investments which is apparently the trustee for a family trust. Mr Healey made a number of criticisms of the fact that the parties who are apparently related will be given priority. That is not a matter which I will take into account as a principal reason for the views that I have expressed, although it is a matter which has some bearing on the conclusion which I have reached as to the proper disposition of the application. More importantly, it is what I have described as the background that leads me to the conclusion which I have reached. 7 The relevant background is that the plaintiff, Global Foods Group Pty Limited (Global) and Limar were involved in proceedings in the Local Court in which Global made claims against Limar, and Limar cross-claimed against Global. Both parties achieved some measure of success, but Global achieved a greater level of success than Limar and became entitled to a judgment for an amount of approximately $23,000. After the Local Court proceedings were concluded, Limar ceased to trade. This occurred in about September 2012 and it is an important consideration in addressing the matters which I need to take into account to determine whether the pre-condition established by s 440A(2) of the Act has been satisfied. 8 Moreover, following the completion of the Local Court proceedings, and after Limar ceased to trade, Mr Andrew Yiasemides, who was then a director of the company, filed a notice of motion to pay by instalments the debt which was payable under the Local Court judgment. A notice of motion was filed on 19 November 2012 and was supported by an affidavit of Mr Andrew Yiasemides. The affidavit stated that Limar had an estimated gross annual income of $2.2 million and that it was engaged in the business of manufacturing. The statement of assets recorded that Limar had funds in banks or financial institutions comprising $75,000 and the total value of assets was said to be $113,000. 9 The application to pay by instalments was refused in the Local Court but on 28 November 2012 Mr Andrew Yiasemides filed a further notice of motion to pay by instalments, again supported by an affidavit. The affidavit described the income of the business as $2.2 million, however the cash at bank had declined from $75,000 to $3,180. The total value of the assets had also declined to $19,630. The liabilities in the financial statement were said to consist of $190,000 payable for "tax". The administrators of Limar were appointed as joint and several administrators on 9 May 2013. They had not yet prepared a report to creditors which would need to be provided to the second meeting of creditors. That meeting is due to be convened in accordance with the provisions of s 439A of the Act on or about 17 June 2013. 10 However, the company has provided a report as to affairs. The report as to affairs discloses that the company has no assets whatsoever. Creditors are shown at a figure of $451,400. This is notwithstanding the fact that the company had already ceased to trade at a time when Mr Andrew Yiasemides swore his affidavits in support of the application to pay the judgment debt in the Local Court by instalments. Quite plainly, the amount of creditors referred to in the report as to affairs differs very substantially from the position described in the affidavits in support of the notices of motion to pay by instalments. Quite how this occurred is not clear. 11 I appreciate that Mr Hegarty has had little opportunity to explain the position but it seems to me that the position speaks largely for itself. What is of particular concern is that a company which was described in November 2012 as a manufacturer with an estimated gross annual income of $2.2 million is now said to have no assets whatsoever. Mr Hegarty seeks to explain that position and indeed the change in position revealed in the report as to affairs. He says that it is clear enough that it is commonplace in the business community for companies to operate as operating companies in which they lease their plant and equipment and premises from other companies and, in particular, from related companies within the group. 12 That may be so, but it is the unfolding of the events since September 2012 in which Limar ceased to trade and then made applications to pay by instalments that ultimately lead me to the view that it is not in the interests of creditors to continue the administration. Rather, it seems to me that the position in the present case is analogous to that which was referred to by Barrett J in Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391 at [20]. His Honour there referred to eight reasons why he was of the view that the proposal was one which, in effect, gave rise to a finding that the proposed deed of company arrangement was nothing more than an abuse of process. 13 The matters which are of particular significance in the present case seem to me to be that Limar is insolvent. It is not clear how long it has been so but the fact that the company has no assets and appears to have had little of substance behind it to carry on the business as a manufacturer with a very substantial turnover does suggest that the company may have been insolvent for a considerable period of time. As Barrett J observed at [20], the company, in this case Limar, no longer carries on any business activity. It has ceased to carry on business for at least the period since September 2012. That seems to me to put the present application entirely at odds with the objectives which underlie Part 5.3A of the Act, as set out in s 435A of the Act. 14 The objective of Pt 5.3A is to maximise the chances of a company, or as much as possible of its business, continuing in existence or, if that is not possible, to result in a better return for the company's creditors and members than would result from an immediate winding up of the company. Ordinarily, what will be involved is something which provides for the business to be carried on, either in a different form or perhaps to be sold as a going concern and to provide by that means a better return. Here, the company has ceased to trade and is seeking to force upon the creditors of the company a payment of less than 100 cents in the dollar, particularly where previous applications to pay a debt by instalments have been refused. 15 It seems to me that what is proposed is not consistent with the objectives sought to be obtained in s 435A. As Barrett J said at [20] in the Blacktown Council matter, the present DOCA proposal cannot involve any element of commercial rehabilitation and resumption of business activities. That seems to me to be at the heart of the matter. 16 Mr Healey points to the fourth aspect identified in the Blacktown Council matter at [20], namely, that the deed as drafted cannot give any assurance that the core fund of $50,000 would be forthcoming. This is because Limar, by its own admission, has no assets and the creditors must therefore look to the personal guarantee of the director and shareholders. The director is now Mr Peter Yiasemides, who on the evidence before me, was a resident of the United Kingdom at the relevant times. I am told that he has now relocated to Australia but the matter is one which I must take into account in considering whether it is in the interests of creditors, bearing in mind the commercial reality that the creditors will need to look to the guarantors to receive payment of what appears to be the outstanding balance of $30,000. 17 The next matter to which Barrett J referred was that the outcome of the meeting of creditors is likely to be determined "predominantly from the selfish viewpoint" of the controller of the company. Mr Hegarty conceded that related or associated parties would be able to vote at the meeting to consider the DOCA. It is plain that without necessarily answering the question of who is and who is not a related party, the parties who are associated with the Yiasemides' interests are in a position to control more than a substantial majority of the votes at the meeting. His Honour also observed that the meeting seemed to be slanted towards an outcome which would preclude the investigation of insolvent trading. On the facts of the present case, this also seems likely to emerge from the matters which I have addressed today. 18 It is true, as Mr Healey submits, that there is no firm assurance that litigation claims for insolvent trading and for recovery of preferences will be pursued, but it is a matter which bears upon the necessary comparison which underlies the question raised by s 440A(2). That is to say, there must be more than a mere optimistic speculation that creditors' interests would be accommodated to a greater degree in an administration than in a winding up. Indeed, the applicant for an adjournment bears some onus of satisfying the Court that there is a sufficient possibility of such an outcome, rather than what is described in the authorities as mere optimistic speculation. 19 The circumstances that have been put before me today suggest no more than a mere optimistic speculation. It is true, as Mr Hegarty submitted, that at least on the figures which he put to me this afternoon, there would, in theory, be a dividend of 22 cents to 26 cents in the dollar under the DOCA, however, this assumes that all of the sum of $50,000 which is to comprise the deed fund will be available for distribution to unsecured creditors. Again, it is true that, on the face of the figures described in the report as to affairs, the unsecured creditors would get nothing under a winding up. 20 Bearing in mind the circumstances before me, including my substantial concerns about the true asset position of the company, I do not think that I can confidently proceed upon the basis that there will be no dividend at all in the winding up. One factor which is of considerable importance seems to be that it is likely that the goodwill of Limar consists of important trade secrets. The evidence before me today indicates that, whereas that may well have been an asset of Limar, it is now in the hands of a related company, which continues to carry on the business formerly carried on by Limar. I do not see how I can overlook that factor in undertaking the exercise required in order to satisfy the precondition laid down by s 440A. 21 Mr Healey sought to press upon me a very large number of other detailed considerations as to why the adjournment and continuation of the administration was not in the interests of creditors. I do not need to consider those matters. It is sufficient to say that I am satisfied, for the reasons referred to above, that this is nothing more than a last ditch effort to stave off a winding up of an insolvent company upon a basis which is not commercially desirable. Indeed, it seems to me, to be one which ought not to be countenanced. 22 The DOCA has unsatisfactory features, including the question of whether, under cl 7 of the draft, companies which are in truth allied with the Yiasemides' interests would be able to prove under the DOCA. The proper and appropriate measure in relation to an insolvent company is that it be wound up. The circumstances which have been dealt with today support a winding up order: see, for example, the authorities referred to by Barrett J in Grocon Constructors Pty Ltd v Kimberley Securities Ltd (2009) 72 ACSR 305 at [109]. 23 For these reasons, the order that I will make is that the application for an adjournment under s 440A(2) is refused. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.