Irving v Smith

INTRODUCTION AND BACKGROUND 1 The proceeding before the Court arises out of a resolution of creditors of Longreach Capital Pty Ltd (Administrators Appointed) ("the Company") passed at a meeting of creditors held on 14 August 2008 pursuant to s 439A of the Corporations Act 2001 (Cth) ("the Act") that the Company execute a deed of company arrangement pursuant to the provisions of Pt 5.3A of the Act and the execution of a Deed of Company Arrangement by the Company on 21 August 2008. The plaintiff: · appeals from the decision of the chair of the meeting to accept certain proofs of debt, for the purposes of voting at the meeting, by assignees of debts due by the Company; · seeks anorderterminatingtheDeed of Company Arrangement executed on 21 August 2008. 2 On 13 May 2008 Westpac Banking Corporation ("Westpac"), the holder of a fixed and floating charge over the whole of the Company's property, appointed Murray Campbell Smith and Colin McIntosh Nicol as Administrators of the Company pursuant to the provisions of s 436C(1) of the Act. On that date Mary Gaywin Irving, the plaintiff, was the sole director of the Company. 3 On 23 May 2008 the first meeting of creditors of the Company required to be held pursuant to s 436E of the Act was held. The meeting was chaired by Mr Smith. At the meeting Mr Smith noted that the Company's main assets were the former Kenmore Hospital site and adjacent land located at Goulburn in New South Wales. 4 On 11 June 2008 the Administrators, pursuant to s 439A of the Act, sent a report to the creditors of the Company and notified them of the second meeting of creditors to be held on 18 June 2008. In the report to creditors the Administrators noted that the Company was insolvent and said that their opinion was that in the absence of a deed of company arrangement proposal providing a better outcome for creditors than liquidation, it was in the creditors' best interests that the Company be wound up. 5 Prior to sending the report to the creditors, the Administrators had been told that the Company was proposing that it enter into a deed of company arrangement but they had not received any documents. On 10 June 2008 the Administrators received a deed of company arrangement proposal to acquire the assets of the Company from Mr Jim Byrnes on behalf of an entity yet to be identified. The Administrators did not have time to consider the proposal fully. 6 The second meeting of creditors was held on 18 June 2008 and was chaired by. Mr Smith. He informed the meeting that the Administrators had received two proposals for a deed of company arrangement to be entered into by the Company, one from Mrs Irving and one from Mr Byrnes. There was general discussion about the two proposals. The meeting was adjourned until 3 July 2008 to enable further investigation and negotiations in relation to the two proposals. 7 The adjourned meeting was held on 3 July 2008 and, again, it was chaired by Mr Smith. Mr Smith circulated to the creditors present a further report from the Administrators entitled "Alternative Courses of Action". In that report the Administrators noted that they had received two deed of company arrangement proposals, one from Mrs Irving and the other from Mr Byrnes. In the report they analysed and assessed each of the proposals. In the light of the issues they raised and discussed they said that they could not then recommend Mrs Irving's proposal to creditors. They noted that Mr Byrnes' proposal was well articulated and considered but their analysis indicated that it did not clearly provide a better return to all classes of creditors and on that basis, they could not recommend it. In the report they stated that their analysis indicated that liquidation was likely to provide the best return to each class of creditors and on that basis they recommended that the Company be wound up. 8 There was discussion about the matters raised in the Administrators' report. The meeting was adjourned for some time to enable the Administrators to hold further discussions with the proposers of the two deeds. When the meeting resumed the Administrators advised creditors that amendments had been made to Mr Byrnes' proposal and there was further discussion about both proposals. 9 At the request of Mr Byrnes, Mr Smith put a resolution to the meeting that the Company execute a deed of company arrangement as proposed by Mr Byrnes and as amended at the meeting. Mr Smith informed the creditors that he would exercise proxies held by him in favour of the resolution. The resolution was passed. According to Mr Smith, eleven creditors voted for the resolution and ten creditors voted against the resolution. Mr Smith declared the resolution carried on the voices. No creditor requested a poll to be called and no poll was conducted. 10 On 17 July 2008, in the course of finalising the minutes of the meeting and reviewing the names of the creditors, Mr Smith realised that there was a risk that at the meeting eleven creditors had voted against the resolution as he realised he may have omitted to recognise the vote of one of the creditors. 11 Consequently, on 21 July 2008 Mr Smith procured an originating process to be filed in the Supreme Court of New South Wales seeking a declaration that the administration of the Company had not terminated and an order that the meeting of creditors held on 3 July 2008 had not been terminated but was to be treated as having been adjourned to a time and place to be notified by the Administrators to the creditors. 12 On 23 July 2008 Justice Austin declared that the administration of the Company had not terminated and ordered that the meeting of creditors of the Company under s 439A of the Act had not terminated but was to be treated as having been adjourned to a time and place to be notified by the Administrators to the creditors. 13 On 24 July 2008 the Administrators sent a notice to creditors reconvening the second meeting of creditors on 5 August 2008. Mr Smith sought an adjournment of the meeting until 14 August 2008. Shortly before the meeting he had received a number of new and revised proofs of debt, proxies and debt assignments and he needed time to consider and adjudicate upon them. The meeting was adjourned by the creditors until 14 August 2008. 14 At the meeting on 14 August 2008 Mr Smith again circulated an "Alternative Courses of Action" report from the Administrators. In the report the Administrators analysed and considered the Deeds proposed by Mrs Irving and Mr Byrnes. The Administrators through Mr Smith expressed the following opinion in their report in relation to the Deed proposed by Mrs Irving: "I have not received sufficient evidence from the Proposer to indicate the likely timing of a DOCA and related sale, nor have we received sufficient evidence to suggest that there is a genuine purchaser and that the DOCA and sale are likely to complete. In light of these uncertainties, I cannot presently recommend this proposal to creditors." 15 The Administrators expressed the following opinion in their report in relation to the Deed proposed by Mr Byrnes: "The obvious disadvantage of the DOCA proposed by Mr Byrnes is the sale value at $4.4m against an independent valuation of $5.93m (although the benefits of withdrawing claims totalling approximately $888,000 and the caveats must be considered). This results in lower estimated funds available after the secured creditor's claim when compared to the liquidation mid and high scenarios. However, there is a risk that if the sale of the assets under a liquidation is delayed for an extended period or fails to achieve sufficient proceeds then creditors may receive less under a liquidation scenario. In addition, I have significant concerns that the property can be sold at or near to valuation. Those concerns include the history of the property (contamination, heritage issues, costs of remediation) and also the history of past sales efforts. The benefit of the Byrnes DOCA proposal is the early sale and settlement, and certainty around the minimum amount of funds available for creditors. The proposal by Mr Jim Byrnes is well documented and advanced to final draft stage (including asset sale contracts); however my analysis indicates that it does not clearly provide a better return for all classes of creditors and on that basis I cannot recommend it." 16 The reference to an independent valuation of $5.93 million was a reference to a valuation received by the Administrators earlier. 17 In the report the Administrators estimated that: · under the Deed proposed by Mr Byrnes the total distribution to unsecured creditors would be between 1.44 cents to 4.01 cents in the dollar; · liquidation would result in a dividend to unsecured creditors of between 76.24 cents under a high scenario, 35.24 cents under a medium scenario and no dividend under a low scenario depending on the price received for the sale of the land. Their analysis indicated to them that liquidation was likely to provide the best return to each class of creditors and on that basis, they recommended that the Company be wound up. 18 It should be noted that the Administrators' estimates depended upon a number of assumptions which the Administrators set out in their report: "The key assumptions are that: + The high scenario estimated outcome assumes one marketing campaign and 14 weeks to realise the Longreach Properties, whereas the low estimate assumes that the Longreach Properties are put to the market but require an extended marketing period that takes 30 weeks until settlement (and also additional creditor claims); + The low scenario sales price has been discounted to reflect our understanding of the results of previous sales campaigns; and + An increase in both legal and administration fees associated with managing and realising the Longreach Properties will be required compared to the DOCA proposals. I have also been provided with a valuation dated 14 April 2008 by Langshaw Valuations as instructed by Mr John Benjamin. The valuation is at $10.7m for Lot 5 only but notes a number of critical assumptions which impact on value, including around the DA and Masterplan, improvements and the application of the property as an expanded retirement village. It is not clear what action or cost is required to achieve that valuation. As such, I consider my valuation which is more appropriate as it is on an 'as is' basis." 19 The Administrators set out in the report the benefits of liquidation: "+ The potential increase in return to creditors (under the medium to high range); + The opportunity to further investigate whether there are any other recoveries or voidable transactions for the benefit of creditors (these have not been included in our analysis and there are significant doubts about the costs/benefit of further investigation); and + It provides both parties who proposed DOCAs with the opportunity to purchase the Longreach properties on the open market." They also set out in their report the disadvantages of liquidation: "+ The timing of the sale of the former Kenmore Hospital site, which may potentially be delayed by a number of months due to legal or other action from a number of separate parties if the company proceeds to liquidation; " + The costs and likelihood of removing the caveats currently on the property; + The ultimate sale price achieved if the property is sold on the open market by a liquidator. This is a highly specialised asset with a limited market as such despite conducting a thorough marketing campaign, there is a very real risk that the property may not sell for the full appraised value; and + The ongoing holding costs (in particular, the first ranking secured creditor's interest costs) and professional fees associated with managing the property and conducting a sales campaign." 20 The report contained the following evaluation by the Administrators in relation to the execution of a deed of company arrangement compared to liquidation: "Execution of a DOCA At the creditors meeting on 3 July 2008, Mr Benjamin stated that Ms Mary Irving was to provide a DOCA proposal that was unconditional and superior to the proposal provided by Mr Byrnes. I have not received anything further since the 3 July meeting. As detailed previously, Ms Irving's DOCA proposal is silent on a number of keys [sic] points. In particular, how the caveats over the property will be removed. If the caveats cannot be removed, the DOCA cannot be completed. Accordingly, due to the lack of detail provided and the highly uncertain nature of what has been provided, it is not possible to offer a meaningful comparison. I therefore cannot recommend the Irving DOCA proposal. I have compared the estimated return to each creditor group from the DOCA proposed by Mr Byrnes to that estimated to be available under a liquidation. While there are a number of factors which make the comparison difficult and subjective, the return to creditors under the Byrnes DOCA is not clearly superior to that under a liquidation. Accordingly, I cannot recommend the Byrnes DOCA to creditors. Longreach to be wound up As set out in the Dividend Analysis at Annexure 'C', liquidation provides for a realisation of the company's assets at their market value and the following estimated returns to creditors: Low Medium High Secured (Westpac) 100c 100c 100c Priority Nil 100c 100c Unsecured Nil 35c 75c