REASONS FOR JUDGMENT
1 The plaintiffs, Joseph David Hayes, Murray Campbell Smith, Scott Bradley Kershaw and Colin McIntosh Nichol, are voluntary administrators of a number of companies (the EPG Administrators), including Estate Property Group Limited (EPG), Estate on Hunter Pty Limited (Hunter), and Estate Project Developments Pty Limited (Developments). Hunter and Developments, together with all of the other companies, are subsidiaries of EPG (the EPG Group). The EPG Administrators were appointed on 28 May 2007, pursuant to s 436A of the Corporations Act 2001 (Cth) (the Act).
2 Australian Capital Reserve Limited (ACR) is another member of the EPG Group. It is also subject to administration. ACR has raised funds by the issue of unsecured notes under a trust deed, in respect of which Permanent Nominees (Aust.) Limited (PNAL) is the trustee. ACR has lent substantial funds to various companies in the EPG group, including Hunter and Developments.
3 As at 31 March 2007, ACR was the largest creditor of the EPG Group, having lodged an initial proof of debt totalling $331,915,360. In addition, as at 31 March 2007, there were 12 prior ranking secured creditors of the EPG Group, other than ACR, whose debts totalled approximately $224,738,826. Unsecured trade creditors of the EPG Group totalled approximately $11,185,001. The unsecured creditors of both Developments and Hunter are predominantly trade creditors, including, in the case of Developments, claims by third party builders for payments due for building work which is presently being undertaken.
4 The EPG Group are engaged in real estate development. Their real property assets consist of:
· properties that have not yet been developed,
· properties that are currently under construction, and
· properties where construction has been completed but sales have not yet been completed.
At the date of the appointment of the EPG Administrators, there were several projects under construction in different stages of completion. Where moneys had been advanced by ACR to members of the EPG Group, the advance was secured by a first mortgage over the property owned by the borrower. A number of companies of the EPG Group, however, borrowed from outside lenders. In those instances, ACR agreed to subordinate its borrowing to the borrowing from the outside lenders by appropriate priority arrangements.
5 On 13 July 2007, the Court made orders extending to 31 August 2007 the convening period in respect of the administration of ACR and the EPG Group companies. The EPG Administrators are presently of the view that it would be in the interests of the creditors of the companies for deeds of company arrangement to be executed. However, they are of the view that the short term cash flow requirements of the EPG Group are such that deeds of company arrangement could not be propounded. They have formed the view that it would be desirable to arrange a facility of up to $7 million to enable them to maintain the operations of the EPG Group and to propound deeds of company arrangement. That would involve significant legal and other fees.
6 Arrangements are presently in place for much of the proceeds of property sales and rental income from the EPG Group's properties to be paid directly to first mortgagees. It is only the surplus that is available for ACR under its second mortgages. Funding is also required to continue the development of the properties still in the process of development.
7 The EPG Administrators put a proposal to the Commonwealth Bank of Australia for the grant of a facility in the sum of $7 million. The proposal included a summary of the their cash flow forecast, demonstrating that, with funding of $7 million, there would be a cash surplus of $1,305,000 for the period of three months, ending August 2007. If the forecast comes about, it would be necessary for the EPG Administrators to draw down somewhat less than the full facility amount of $7 million.
8 The proposal to the bank involved the grant of security over properties owned by Hunter and Developments. Hunter is the registered proprietor of a property located at 984 Hunter Street, Newcastle, which is the subject of a first mortgage to ACR. Developments is the registered proprietor of a group of properties known as Brentwood Estate, Broke Road, Pokolbin, which are also the subject of first mortgages to ACR. The proposal is that the bank would be given priority in respect of mortgages over those two properties and the mortgages to ACR would become puisne mortgages.
9 At present, the direct loans to Hunter and Developments by ACR are for sums of $3,570,000 and $216,097,508, respectively. However, each of the companies in the EPG Group has guaranteed the obligations of all of the others, such that, in addition to the direct liability, Developments and Hunter each have liabilities as sureties to ACR, in respect of the total liability owing to ACR of $331,915,000. The mortgages to ACR by Developments and Hunter secure their liabilities as sureties.
10 It is proposed that, when the EPG Administrators draw funds down under the proposed Commonwealth Bank facility, they will be applied in partial repayment of the existing secured indebtedness of Hunter and Developments to ACR. Those funds would then be available to the administrators of ACR to lend to other companies in the EPG Group whom the administrators consider require immediate funding for their continuing developments. Any such advances would be secured by the existing securities that ACR has over the properties of the EPG Group companies'. Arrangements have been entered into between the EPG Administrators and the administrators of ACR, whereby, before any request for a drawdown is given to the bank the ACR administrators must approve the proposed use of the funds. Thus the administrators of ACR must be satisfied that funds drawn down under the proposed facility would be applied for the ultimate benefit of those companies to which ACR has lent money.
11 The EPG Administrators, being the plaintiffs in this proceeding, consider that the unsecured creditors of Developments and Hunter would not be prejudiced by the proposed facility, because:
· the mortgages granted by Developments and Hunter to ACR already secure all of the indebtedness to ACR; and
· the overall indebtedness of Developments and Hunter to ACR will in due course be reduced by the increased or enhanced values of the assets of the other EPG Group companies, being the projects and developments to which borrowings under the bank facility will be applied.
12 The EPG Administrators are also of the view that the benefits that will accrue to Developments and Hunter include the fact that secured liabilities presently owing incur interest at rates between 13% and 17%, whereas the rate payable in respect of the proposed Commonwealth Bank facility will be below 8.5%. Further, by enabling fresh loan capital to be introduced, the value of the assets of the EPG Group generally will be maximised. That will, in turn, increase the likely return to ACR which will reduce the residual guaranteed liabilities of Developments and Hunter to ACR as sureties.
13 The application presently before me is for an order under s 447A of the Act, that Part 5.3A of the Act is to operate in relation to Hunter and Developments as if s 443A provided that any advances made by the bank under the proposed facility were debts incurred by the EPG Administrators in the performance and exercise of their functions and powers as administrators of Hunter and Developments.
14 Section 447A(1) of the Act provides that the Court may make such order as it thinks appropriate about how Part 5.3A of the Act is to operate in relation to a particular company. Part 5.3A is concerned with the administration of the affairs of companies with a view to executing a deed of company arrangement. It is pursuant to that Part that the EPG Administrators have been appointed. Section 443A of the Act, which is within Part 5.3A, provides that that administrator of a company under administration is liable for debts incurred by the administrator in the performance or exercise, or purported performance or exercise, of the functions and powers as administrator for:
(a) services rendered; or
(b) goods bought; or
(c) property hired, leased, used or occupied.
15 Section 443C provides that the administrator of a company under administration is not liable for the company's debts except under Subdivision A, within which s 443A is to be found. None of the other provisions of Subdivision A would extend to a borrowing of the nature to which I have referred. Section 443D provides that the administrator of a company under administration is entitled to be indemnified out of the company's property for debts for which the administrator is liable under Subdivision A.
16 The purpose of this application is for the Court to make an order, in effect, that the liability of the EPG Administrators for any drawdown that they make under the facility that they propose to enter into with the bank will be a liability for which they are personally liable under s 443A, such that they will be entitled to be indemnified out of the property of Developments and Hunter pursuant to s 443D. The EPG Administrators have informed the Australian Securities and Investments Commission (the Commission) of the proposal. The Commission has informed the administrators that it does not intend to express a view about the proposed application to the Court. PNAL supports the application, as do the administrators of ACR. In all of the circumstances I consider that it is appropriate to accede to the application.
I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.