• Lawyers in Sydney
• Lawyers in Melbourne
• Lawyers in Brisbane
• Lawyers in Perth
• Family lawyers
• Employment lawyers
• Criminal lawyers
• Wills and estates lawyers
• Find a lawyer

Judgment - ex tempore

1. By Interlocutory Process filed by leave on 31 October 2016, the Plaintiffs, Mr McKenna, Ms Barnet and Mr Armenis ("Administrators"), as joint and several administrators of some 42 companies ("Companies"), seek directions under s 447D of the Corporations Act 2001 (Cth) that they would be justified in executing a business sale agreement and a management deed in a particular form. This application has been conducted in circumstances of urgency, having been brought as a duty application in the Corporations List and heard, with interruptions by reason of the pressure of other matters, from this morning until 6 pm today. The urgency of the matter arises in circumstances where the purchaser has indicated that it seeks to execute the business sale agreement and management deed by 1 November 2016 which will allow it to take possession of the operation of the relevant sites within the business from that date. The purchaser has claimed, in correspondence from its solicitors, that it would re-evaluate its position in respect of the transaction if completion does not occur by that date.
2. The receivers appointed to the Companies, who have been heard by leave in this application, the Administrators and the Court are all left in the position where we are, necessarily, unsure as to whether the purchaser means what it says, or whether it is engaging in a negotiating tactic so as to place pressure upon the receivers, the Administrators and, indeed, the Court. The difficulty, however, for the receivers, the Administrators and the Court itself, is that none of us can assume that the purchaser does not mean what it says and that has brought about an intrinsic urgency in the application.
3. The parties have led voluminous evidence and I have been assisted by careful submissions from Counsel. It will not be possible to do justice to the depth of the evidence or the subtlety and detail of Counsel's submissions in delivering this judgment, since it is necessary to deliver the judgment within a reasonable time and to have orders entered, if the directions sought by the Administrators is to be given, so that the commercial imperatives of the transaction may be met. I will focus, in delivering this judgment, on the matters which are of the greatest significance to my determination, including particularly the criticisms that were advanced by an intervening party, Good Living Company Pty Limited ("GLC"), but I have had regard to the bulk of the evidence and the detail of the submissions made in reaching my conclusion.
4. The Administrators rely on affidavits of Ms Barnet, dated 29 June 2016 and 18 July 2016, which outline the background to the administration. They also rely on confidential and non-confidential affidavits of Mr McKenna, each dated 30 October 2016, together with documents tendered on a confidential and non-confidential basis in respect of those affidavits. Those affidavits outline the steps which have been taken by the Administrators to deal with creditors and with an alternative deed of company arrangement proposal put forward by a special purpose vehicle associated with the Companies' directors or GLC, and to assess the proposal which is now advanced by the potential purchaser and supported by the receivers. The receivers in turn rely on an affidavit of Mr Kelly dated 31 October 2016 which sets out the background to their appointment and indicated the reasons they have formed the view that the proposal by the potential purchaser to acquire now six of the venues operated by the businesses should be accepted. The receivers also there indicate the steps which they have taken to assess the deed of company arrangement proposal put by persons associated with the Companies and GLC which has led them to form the view that the proposal by the potential purchaser is preferable. Mr McKenna and Mr Kelly also gave additional oral evidence, about a particular issue which took greater significance in the course of submissions, as to the certainty or otherwise of the financing available to the potential purchaser in respect of the transaction.
5. GLC in turn relied on an affidavit of Mr Facioni dated 31 October 2016, together with an exhibit to that affidavit, which sought to advance the merits of the deed of company arrangement proposal in a form now put by those associated with GLC and to criticise several steps which have been taken in respect of the sale process. Mr Facioni's affidavit and, to some extent, the submissions which were put by Mr Rich on behalf of GLC tended to assume the success of the deed of company arrangement proposal, that is that it would be implemented, and to assert its attractiveness on that assumption rather than focus upon the issues that have emerged as to the capacity to implement that proposal and the adequacy of funding for it.
6. I should return to the scope of the discretion which I am asked to exercise under s 447D of the Corporations Act. That section, which is broadly analogous with the court's power to give directions to a court-appointed liquidator under s 479 of the Corporations Act and to a liquidator in a voluntary liquidation under s 511 of the Corporations Act or a trustee under s 63 of the Trustee Act 1925 (NSW), provides that the administrator of a company under administration may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. The operation of that section has been considered in a number of cases on which the parties rely in submissions. I referred to the scope of that power in Re National Buildplan Group Pty Ltd (subject to deed of company arrangement) [2014] NSWSC 146, and noted (at [2]) that, by analogy with the other sections that apply to directions in respect of a liquidator, the court's power to give such directions is intended to facilitate the administrator's functions and should be interpreted widely to give effect to that intention and in particular, not only to provide directions on matters of law but to provide the administrator with protection against accusations that it acted unreasonably: compare Re Green (as voluntary administrators of Bevillesta Pty Ltd) [2011] NSWSC 417; (2011) 84 ACSR 215. I also there referred to the observations of Goldberg J in Re Ansett Australia Ltd and Korda [2002] FCA 90; (2002) 40 ACSR 433, where his Honour observed (at [65]) that the court will ordinarily refrain from giving directions that relate merely to the making and implementation of business and commercial decisions but may give a direction where something more is involved, namely, an issue of power, propriety or reasonableness so as to support the need for such a direction.
7. In Re Ansett Australia Ltd and Mentha [2001] FCA 1439; (2001) 39 ACFR 355, Goldberg J recognised it was not the role of the court to make a commercial judgment for liquidators or administrators or to substitute its judgment for their judgment but nonetheless recognised that the court will act in an appropriate case to protect liquidators and administrators from claims that they have acted unreasonably in entering into particular transactions. That case is of particular significance for the present matter as to which it bears some analogy. His Honour also noted (at [75]) that the administrators there did not have the luxury of the time to undertake a thorough investigation and were faced with a decision that needed to be made quickly if they wished to keep open a particular opportunity. His Honour recognised that the decision in that case was a commercial decision in character, nonetheless his Honour considered that the appropriate order to make in the circumstances of that case was that the Court approved the particular arrangement and that the administrators may properly perform it and give effect to it.
8. At the risk of some simplification, the position adopted by the receivers and administrators involved an assessment that, in the particular circumstances, the transaction which is proposed by the purchaser is in the interests of creditors of the Companies, primarily because it, and other transactions in respect of other assets of the Companies, will generate the greatest return to the Companies, whether that return is ultimately available to the secured creditors or is available to other creditors, and that transaction has greater certainty than the deed of company arrangement proposal put by persons associated with GLC. GLC advanced several criticisms of that analysis to which I will refer below. Before doing so, I should note several uncontroversial facts.
9. The Companies operated a number of hospitality venues, including some bars and a group of franchised restaurants from leased premises. They had numerous employees, although many of them were employed on a casual basis, but limited fixed assets. The senior secured creditors had advanced substantial funds to the Companies, which comprise a substantial proportion, in the order of 80 per cent, of the debt that will be provable in the administration but had, in the relevant circumstances, not been able to obtain security over the leases because that required the consent of the lessors which was largely not obtained. GLC is security trustee for a group of subordinated secured noteholders, who are subordinated by a contractual arrangement with the senior secured creditors. The amount lent by the subordinated secured noteholders is a significantly lesser amount than that lent by the senior secured creditors. The amount of approximately $77 million is owed by the Companies to the senior secured creditors, an amount of approximately $5 million is owed to the subordinated secured note holders, an amount of approximately $18 million is owed to unsecured creditors and numerous employees will have an interest in the outcome of the application.
10. The receivers appointed by the senior secured creditors have security over many assets of the business and have had resources to conduct the business but did not have control of the leases by reason of the difficulties in respect of the lessor's consent and security over the leases to which I referred above. The Administrators had control of the leases but did not have the financial capacity to conduct the businesses. Third parties, including GLC, which might have advanced moneys to support particular steps by the Administrators, including the conduct of the businesses, have not done so.
11. The receivers have led evidence, as I have noted above, of their assessment that the proposal put by the potential purchaser of the six venues is the most attractive proposal presently available to them which will operate beside other proposals by other key purchasers in respect of two other groups of assets. Mr Rich points out that there is no detailed evidence before me as to the other proposals which are not presently the subject of any application by the Administrators. That proposition is correct. However, there is affidavit evidence of the receivers and the Administrators of their assessment of the relevant proposals.
12. Several substantive propositions are raised by Mr Facioni in his affidavit evidence and by Mr Rich in his submissions in opposition to the application by the Administrators for approval. The first, which is amply demonstrated by the evidence, is that the Administrators had a relatively short time, or possibly a very short time, in the order of two business days (or four days, if they worked through the weekend), to reach satisfaction as to the relevant proposal. Mr Rich points out that the Administrators have moved, within a relatively short period, from a state of doubting the feasibility of implementing the transaction by the date which the purchaser had nominated to supporting the transaction. Mr Rich submits that their assessment was necessarily rushed and pressured. I can accept that the Administrators may have reached the view which they have reached under extreme time pressure, although I also recognise that the Administrators have set out in affidavit evidence the reasoning process which they have adopted and that they are satisfied with the view that they have reached. It does not seem to me that the criticism that the decision of the Administrators has been made under time pressure is reason not to make the direction that is sought. Administrators, like company directors, must address the world as they find it, not the world as they wish it to be. No doubt the Administrators would each have preferred that they had a longer time to consider this proposal, but they did not. It does not seem to me that there is any basis to suggest that, in the circumstances, the Administrators would not be justified in taking the view that they should do the best they can within the time they have rather than run a significant risk that the transaction would be lost if they delayed in making their decision.
13. Next, Mr Rich points to the fact that, on one view, the Administrators had access to the most valuable assets of the businesses, namely, the leases and that the transaction which is proposed may allow the senior secured creditors to access the proceeds within the scope of their security when it could not access the leases within the scope of the security. Whether that is so or not is a matter that will not be determined in this application. It seems to me, however, that the answer to that proposition is, as Mr Pritchard has emphasised in the course of submissions and as the Administrators' evidence makes clear, that they may have control of the leases but they do not have capacity to take control of the businesses operated in them or to themselves commence occupying the premises in circumstances that they are not funded to do so. In particular, the Administrators could not be expected to take on for themselves the personal risk of operating those businesses where there is no evidence that they have clarity of the outcome. It is notable that GLC, so far as the evidence goes, has not at any time advanced a proposal that it would indemnify the Administrators for the risks that they would assume by taking that course.
14. Next, Mr Rich submits, and I accept, that the question whether the direction should be given should be considered in the context of Part 5.3A of the Corporations Act and in particular s 435A of the Corporations Act which provides that the object of the Part 5.3A of the Corporations Act is to provide for the 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 of the company. I have regard to that matter.
15. I also have regard to the fact that s 437A of the Corporations Act confers on the administrator a power to dispose of all or part of the business and dispose of property through the administration in certain circumstances, which may be a proper course for an administrator to take notwithstanding that will necessarily exclude any decision of creditors as to whether to approve a deed of company arrangement which might attach to that property: compare Re Eisa Ltd [2000] NSWSC 940; (2000) 35 ACSR 394. Mr Rich points out, and I accept, that s 437A of the Corporations Act goes to the question of power not to the question of the justification of the decision of an administrator. However, the question of justification requires attention to several of the matters to which I have already referred, including the Administrators' assessment of the likely outcome of the transaction, the comparison of the transaction and its prospects of coming to completion with the deed of company arrangement foreshadowed by GLC and the Administrators' assessment, applying their expertise, that the transaction is in the interests of creditors.
16. Mr Rich submits that the Administrators should call a meeting of creditors so that those associated with GLC may at least advance the deed of company arrangement for the creditors' consideration. I accept that is, in one sense, a course that is open to the Administrators. However, the decision whether to take it involves a complex assessment, which the Administrators have made, as to the prospect that the deed of company arrangement foreshadowed by GLC may ultimately be implemented; the risks that will arise if they take that course and the deed of company arrangement, which has been amended now twice before, is further amended or withdrawn and creditors are then left with no option other than a liquidation, which will plainly have adverse consequences for the value of the assets of the Companies; and, on the other hand, the prospect that the purchaser's proposal that is supported by the receivers, the senior secured creditors and the Administrators based on their analysis can reach completion.
17. Mr Rich also drew attention to one matter which has caused me significant concern in respect of the application, namely, the extent to which the proposal put by the potential purchaser of the several venues is itself conditional. My attention has been drawn to several conditions precedent to the sale agreement which includes some conditions which may be routine in a transaction of this kind, but nonetheless will involve some uncertainty, and a further condition as to buyer finance. The latter condition is a condition precedent and involves confirmation to be obtained from the existing bank financier of the proposed purchaser as well as documented and unconditional financing from senior secured creditors to fund payment of the full amount of the purchase price as defined. It is plain from the structure of the business sale agreement that there is a possibility that that condition precedent may not be satisfied and that the sale agreement would then not proceed to completion. It is also plain that the potential purchaser will obtain access to the economic benefit of the several venues, which will be lost to the Companies under the management deed, between the time the transaction documents are executed and the time of completion and, as Mr Rich points out, it would be very difficult to reverse that result if the potential purchaser has gone into possession, obtaining those economic benefits, and the financing condition precedent or other conditions precedent are not satisfied.
18. Further evidence has been tendered to establish the extent to which negotiations as between the senior secured creditors and the potential purchaser have proceeded, including a term sheet and document headed Intercreditor Principles which deals with the position as between the existing bank lender and the senior secured creditors in respect of the transaction. It appears that both of those documents have reached what might be described as a state of commercial agreement but neither is presently legally binding. Each of Mr Kelly and Mr McKenna gave evidence of their reasoning in respect of the commercial likelihood that these conditions precedent and particularly the financing condition would be satisfied. Neither suggested that it was certain that those conditions would be satisfied although each suggested that the commercial logic of the transaction would promote that result. I proceed on the basis that there is a degree of uncertainty in the satisfaction of the financing condition precedent and I also proceed on the basis that, if the sale agreement does not ultimately proceed to completion and the potential purchaser has had occupation of the several businesses for a period under the management deed without proceeding to completion, then at the least the potential benefits which were anticipated from the transaction will not be realised and it may ultimately be disadvantageous to the Companies, with hindsight.
19. However, it seems to me that is not the end of the analysis. Both the receivers and the Administrators have given attention to the comparison between the element of uncertainty in respect of the business sale agreement and management deed on the one hand and the element of uncertainty in respect of the deed of company arrangement which those associated with GLC propose on the other hand. There is evidence there is a significant degree of uncertainty as to the latter transaction, including a very substantial financing risk and other risks which are addressed in the affidavit evidence. This seems to me a commercial judgment of the kind that was referred to by Goldberg J in Re Ansett Australia Ltd and Mentha above. In this case the Administrators have had to make a particularly difficult decision in particularly difficult circumstances with consequences that are potentially adverse whichever decision they make. They have not had the luxury of making no decision, because making no decision would be, in effect, to decide to run the risk that the potential purchaser's transaction fails by expiry of time. They have, in those circumstances, undertaken a balancing of considerations which seems to me to involve issues of commercial judgment.
20. It seems to me that, in these circumstances and having regard to the entirety of the evidence, it cannot be said the view that the Administrators have formed that the business sale agreement and management deed have a greater likelihood of coming to conclusion and a greater prospect of a return to creditors is irrational, unreasonable or unjustified. That view was plainly open to the Administrators and reasonably taken within the circumstances in which they have found themselves. In circumstances that there is plainly a challenge to the Administrators' decision by GLC and those associated with it that are significant creditors of the Companies, this is an appropriate case to provide protection to the Administrators in respect of the difficult decision they have had to make, with the usual qualification that it is subject to the adequacy of disclosure of the relevant issues before the Court. On the face of it, the intensity of the examination of the relevant issues in this application suggest that the relevant issued have been exposed.
21. For all those reasons, I am satisfied that I should grant the relief that is sought by the Administrators. I make the following directions and orders:
22. Direct that under s 447D(1) of the Corporations Act 2001 (Cth), that the First Plaintiffs would be justified in executing: (a) a business sale agreement in the form of or substantially in the form of the Business Sale Agreement being part of Confidential Exhibit A5; and (b) a management deed in the form of or substantially in the form of the Management Deed being part of Confidential Exhibit A5.
23. The costs and expenses of this application be costs and expenses of the administration of the Second to Forty Third Plaintiffs.
24. These orders to be entered forthwith.