Gould Bros & Co Pty Limited (Administrators Appointed), in the matter of... [2012] FCA 285 | Case summary

REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT) 1 The second plaintiffs seek an order pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act) as to how Pt 5.3A of the Act is to operate in relation to the first plaintiff (the company) concerning the borrowing of certain funds to enable the company to continue to operate while the second plaintiffs investigate whether all, or any, of its business and assets can be sold as a going concern. 2 More specifically, the orders concern the operation of s 443A(1) of the Act and the extent to which the second plaintiffs are personally liable for funds advanced, and to be advanced, to the company under a funding arrangement with third parties (being two members of the company), and the priority of the repayment of the debts represented by those funds. 3 On 15 March 2012 the directors of the company resolved to appoint the second plaintiffs as joint and several administrators of the company. One of the second plaintiffs, Mr Bournelis, has made an affidavit in support of the making of the orders that are now sought. 4 In accordance with Pt 5.3A of the Act, the first meeting of the company's creditors has been convened for tomorrow, 23 March 2012, at 10.30 am. Mr Bournelis has given evidence that it is his intention to report to creditors at that meeting about the application that has been made today and its outcome, and to make available to creditors a copy of his affidavit for inspection at that meeting. 5 The company was incorporated in 1927. It trades under the name Gould Building Supplies. It supplies hardware and building materials to trade and retail customers. It operates its business from five locations in the Hunter Valley region of New South Wales, namely, at Maitland, Muswellbrook, Singleton, Scone and Newcastle. It has two manufacturing divisions that produce heritage joinery and aluminium windows. The company's principal activities for the year ended 30 June 2011 were the sale of timber, building materials and general hardware, and the manufacture of joinery and aluminium windows, doors, shower screens and shopfronts. 6 Of the five sites from which the company operates, four are owned by it or by Woodturn Pty Ltd (Woodturn), a wholly-owned subsidiary company. The company owns the properties at Singleton, Muswellbrook and Scone. Woodturn owns the site in Maitland, as trustee of a particular trust. The business in Newcastle operates from leased premises, of which the company is presently the lessee. 7 The company currently has 78 employees. These employees are employed in a variety of functions, including in head office central management roles, in retail shop staff roles, and in carrying out the manufacturing operations to which I have referred. A number of the employees have been employed for a period in excess of 10 years. 8 The company's financial statements for the year ended 30 June 2011 show that it holds property, plant and equipment valued at approximately $2.9 million. This includes the real property to which I have referred above. The company has a liability to Westpac Banking Corporation (Westpac) in the amount of approximately $1.4 million, pursuant to three loan agreements. It has a current wage bill of approximately $300,000 per month. Its financial statements show that it had an operating loss for the year ended 30 June 2011 of approximately $474,000. After accounting for income tax, the loss for the period was $435,600. 9 The company's balance sheet as at 6 March 2012 shows that it has total current assets of approximately $6.6 million, and total non-current assets of approximately $3.2 million. Mr Bournelis has drawn attention to the following matters with respect to those assets. 10 First, based on the investigations and inquiries that he has been able to make to date, a significant proportion of the stock in hand is either non-current stock or slow-moving lines, which are not expected to be readily realisable. A significant proportion of the stock is also subject to retention of title rights in favour of suppliers. 11 Secondly, the balance sheet estimates the fixed assets of the company to be approximately $2.8 million. This figure includes the real property to which I have referred. Mr Bournelis has expressed a concern that if the real property is sold unoccupied, its value may be significantly less than expected, because alternate uses for the properties are limited. His concern is also motivated by the fact that, according to his experience and understanding, the market in the Hunter Valley region for properties such as those owned by the company is particularly slow. The market for the properties would be improved with the benefit of a long-term tenant in place. 12 Thirdly, the balance sheet shows trade receivables of approximately $2.2 million. Mr Bournelis has expressed the view that it is likely that it will take some considerable time for these debts to be collected. 13 The balance sheet shows total current liabilities of approximately $4.2 million, and total non-current liabilities of $2.4 million. Mr Bournelis has drawn attention to the following matters with respect to those liabilities. 14 First, trade creditors are owed approximately $2 million. The majority of these trade creditors are suppliers. I have already referred to the fact that a significant number of suppliers appear to have the benefit of retention of title rights with respect to the stock. The likely realisations for these creditors may be limited. 15 Secondly, in addition to trade creditors, there are sundry creditors of approximately $185,000, and other unsecured creditors of approximately $24,000. 16 Thirdly, the liabilities include provisions for annual leave and long service leave in an amount of approximately $577,000. In the event that the company's business is closed down and the employees are terminated, those employees will become creditors of the company for this amount, together with unpaid wages and redundancy entitlements. 17 Fourthly, the company owes approximately $900,000 in loans from associates. 18 At the present time, the company's bank account with Westpac is overdrawn in the amount of approximately $43,000. There is evidence that, because of the administration, the company's business overdraft account has now been frozen. 19 In light of these and other matters, Mr Bournelis has formed the view that the company has limited available assets and very little cash on hand. The value of certain assets, primarily the company's stock, is likely to be insignificant in the event that the business is closed down. Indeed, Mr Bournelis has expressed the view that, as at the date of his appointment, the company was either insolvent or likely to become insolvent in the near future. 20 The evidence reveals that the company is currently experiencing losses of $100,000 per month. The company's shareholders have, in the past, been prepared to inject funds into the business, with a view to ensuring that it continues as a going concern. This injection of funds has, of course, increased the company's liability for loans to associates. More importantly for present purposes, the shareholders have indicated that they are not prepared to continue to fund the losses being incurred by the company. A forecast summary of payments and receipts for the period to the end of April 2012, which has been prepared by an employee of the company, estimates that, by that time, the total projected cash deficit for the company will be at least $261,790. Mr Bournelis has expressed the view that that forecast may, in certain respects, be understated. 21 Mr Bournelis has also expressed the view that the sale of the company's business and assets as a going concern would lead to the best possible result for the company's employees and creditors. It would, most likely, result in the creditors receiving a better return than would be the case if the company were to be immediately liquidated. 22 Since his appointment, Mr Bournelis has explored the possibility of selling the company's business and assets as a going concern. It is sufficient for me to note that he has been in contact with a number of potential purchasers, and that discussions with those potential purchasers are ongoing. He has expressed the belief that it is in the best interests of creditors for those discussions to continue for a further short period of time, to explore whether or not the business and its assets, or part thereof, can be sold. Quite properly in that context, the second plaintiffs have given consideration to the practical extent of the indemnity provided for their benefit and protection in s 443D of the Act. 23 Mr Bournelis has expressed the view that there is a risk that, if a going-concern sale of the business of the company is not achieved and he and his co-administrator are forced to close the business, the assets of the company may be insufficient to satisfy the indemnity and cover the personal liabilities that would be incurred by them during the period of ongoing trading. In short, Mr Bournelis has expressed a real concern that the indemnity contained in s 443D of the Act may, in all likelihood, be of very limited value. 24 With those circumstances in mind, he has formed the view that, without the benefit of the orders now sought, he would be forced to immediately close the company's business. If that were to happen, any possibility of achieving a sale of the business and assets on a going concern basis would be destroyed. 25 In that event, the valuable assets of the company, being essentially its long-term assets such as real estate, may take a significant time to sell, during which time the liabilities of the company will increase. Of course, the immediate closure of the entire business due to lack of funds would likely result in the immediate termination of all employees. It is also likely that suppliers who have supplied stock, subject to retention of title terms, will seek to recover that stock, or otherwise attach to the proceeds of that stock, there being few other assets capable of being realised. 26 It is in these circumstances that certain shareholders of the company have come forward to offer funding by way of loan to enable the administration to continue with a view to investigating whether a going concern sale of the business and assets is possible. 27 I have seen a draft of the Funding Deed which is proposed. In essence, the funding shareholders propose to advance in total the sum of $500,000, with provision for the possibility of a further funding amount being made available. The sum of $50,000 has already been provided as an initial advance. The further sum of $450,000 would be provided upon the Funding Deed being entered into. 28 There are no preconditions to the execution of the Funding Deed, but the second plaintiffs will only enter into the Funding Deed upon the Court making the orders that they seek in this application. The funds that would be provided would permit them to continue to trade the business and meet all accruing liabilities while investigations for the possible sale of the business and assets continue. 29 Mr Bournelis has given consideration to the position of creditors. He has expressed the view that he does not believe that the pre-appointment unsecured creditors of the company would be likely to suffer any prejudice as a result of the orders being made and, it would follow, the funds being provided under the Funding Deed for their specific purpose. This is because the funding shareholders will not receive any additional benefit from the arrangements that are proposed, nor will their position change in respect of other amounts that may be owing to them under present arrangements. The only effect would be that the funds being advanced would be granted the priority that is sought. The practical effect would be that the funding shareholders would stand in the position of the second plaintiffs to recover any amounts that may be available under the indemnity provided in s 443D of the Act. 30 I have referred to Mr Bournelis' opinion that the sale of the business and the assets on a going concern basis is likely to lead to a better result for creditors. This is so particularly in the case of the pre-appointment unsecured creditors compared to their position should the company be immediately liquidated. If a going concern sale were to be agreed, it is possible that the company's employees will be transferred to a purchaser of the business and will retain their roles. Accordingly, certain employee entitlements for which the company would otherwise be liable, such as redundancy payments, would not crystallise. Also, agreements with suppliers may also be assigned, together with stock and the company's liability to those suppliers. I have also referred to the fact that the value of the real property assets is likely to be significantly enhanced if the business is sold on a going concern basis. 31 If funds are not provided and the business is forced to close down, then this will likely have an adverse effect on the return to pre-appointment unsecured creditors. Plant, equipment and stock would be sold on a forced-sale basis; agreements with suppliers may be terminated; the real property assets are likely to be realised on a vacant possession basis; and employees would need to be made redundant, giving rise to certain employee entitlements crystallising. 32 Mr Bournelis has also expressed the view that he does not believe that post-appointment unsecured creditors will be prejudiced by the contemplated arrangements. This is because the provision of the funding will permit those creditors to be paid on a timely basis during the administration period. This, of course, will assist with the trading of the business. It goes without saying that employees will also be paid on a timely basis. Their role in the sustainability of the business is critically important. 33 The company's only secured creditor is Westpac. It has been notified of the present application. It has indicated, through its solicitors, that it does not oppose the orders being made. 34 There is particular urgency for the making of this application. I have referred to the parlous financial circumstances of the company. There is a need, which is an immediate need, to continue to pay employees and to provide funds to enable the business to continue on a day-to-day basis. 35 The unsecured creditors have not been informed as yet of this application. As I have indicated, the first meeting of creditors will take place tomorrow, and, at that time, a copy of Mr Bournelis' affidavit, but not the exhibits, will be made available for inspection. Normally it would be desirable for the creditors to have knowledge of such an application. However, I am satisfied that the urgency of which Mr Bournelis speaks is real. 36 In this connection I note that orders that are sought specifically provide for leave to be granted to the parties and any other interested party to apply on one day's notice. The significance of this lies in the fact that, once the funds proposed to be advanced under the Funding Deed are paid into a trust account, they will be drawn down from time to time. Thus, provision will exist for any interested party to apply to the Court for a variation of the orders. This will enable any such parties to raise for the Court's consideration any appropriate reason why the orders should not remain in the form in which I propose to grant them. 37 I am satisfied on the totality of the evidence that is presently before me that the orders should be made. In my view they are consistent with the objectives of Pt 5.3A of the Act. The evidence satisfies me that the endeavours of the second plaintiffs to seek to have the company's business and assets, or at least some part of them, sold on a going concern basis speak of a real possibility of a better return to the company's creditors and members than would result from an immediate winding up of the company. 38 The orders that I will make are those set out in paragraphs 1, 2 and 3 of the originating process, varied such that the word "debt" should be substituted for the word "debts" where appearing in paragraph 1(b) of the originating process. 39 I will also order that the creditors be given notice of the making of these orders, in the first instance by being informed of the orders at the meeting to be held tomorrow. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

Gould Bros & Co Pty Limited (Administrators Appointed), in the matter of Gould Bros & Co Pty Limited (Administrators Appointed) [2012] FCA 285

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Judgment (6 paragraphs)

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