Killer, in the matter of North Coast Wood Panels Pty Ltd (Administrators Appointed) [2011] FCA 776

REASONS FOR JUDGMENT 1 The present proceedings concern an application by Mr Graham Robert Killer and Mr Michael Gerard McCann for directions under s 447D of the Corporations Act 2001 (Cth) ("the Act") in conjunction with s 447A of the Act. The applicants were appointed joint and several voluntary administrators of North Coast Wood Panels Pty Ltd (the "Company") by National Australia Bank Limited ("NAB") under s 436C of the Act on 8 June 2011. On 28 June 2011, the Court made the following orders: 1. Pursuant to section 447A(1) of the Corporations Act 2001 (Cth) (the Act), section 447D(1) of the Act operates in relation to North Coast Wood Panels Pty. Ltd. (Administrators Appointed) (the Company) so that, pursuant to section 447D(1), the Court may direct that the plaintiffs may properly and justifiably enter into, and perform, the agreement between Company, Charter Financial Planning Limited and Robert Desmond Peter Wintour dated 21 June 2011 (the Agreement). 2. Pursuant to section 447D(1) of the Act, as it operates in accordance with paragraph 1 above the plaintiffs may properly and justifiably enter into, and perform, the Agreement. 3. The costs of and incidental to this application be costs in the administration of the Company. 2 The Court advised the applicants that reasons for judgment in support of those orders would be published at a later time. These are the reasons in support of those orders. 3 The relevant facts are these. 4 The Company was incorporated on 28 November 1995. The sole director, secretary and shareholder of the company has been Mr Robert Wintour. From late 2005 until recently, the company carried on the business of providing financial planning advice to clients under the trading name Argentis and as an authorised representative of Charter Financial Planning Limited, a company within the group of companies known as the "AXA Group" ("AXA"). The Company as trustee for the First Unit Trust conducted that business pursuant to a Deed of Appointment between the Company, Mr Wintour and AXA dated 27 October 2005 (the "Corporate Appointment") and under a Representative Services Agreement between AXA and the Company (as trustee) dated 8 November 2005 (the "Representative Agreement"). 5 On 30 January 2009, the Company granted a fixed and floating charge over all of its assets and undertaking in favour of NAB. NAB is the sole secured creditor of the Company. The NAB charge is registered with the Australian Securities and Investments Commission ("ASIC"). It is the only charge registered against the assets of the Company. 6 On or about 6 February 2009, NAB, the Company and AXA entered into a deed called the Tripartite Deed. 7 In 2006, Mr Leo Menkens and Mr Reid Menkens commenced proceedings against the Company and Mr Wintour in the Supreme Court of Queensland. On 23 February 2011, judgment was obtained against the Company and Mr Wintour in favour of the plaintiffs in the sum of $664,680.00. On 22 March 2011, the Supreme Court further ordered that the Company and Mr Wintour pay the plaintiffs' costs of the action on an indemnity basis. 8 On 26 May 2011, Mr Killer was appointed by NAB under the charge as an investigative accountant to investigate the affairs of the Company. 9 On 27 May 2011, Mr Wintour became a bankrupt upon the presentation of his own petition. Mr David Hambleton was appointed trustee of Mr Wintour's estate. 10 On 8 June 2011, NAB gave notice to AXA pursuant to the Tripartite Deed of its intention to appoint administrators to the Company and on that date AXA consented to NAB's appointment of administrators. On 9 June 2011, AXA gave notice of termination of the Corporate Appointment previously mentioned. Mr Killer has conducted discussions with Mr Wintour to determine background matters in relation to the conduct of the business of the Company. Mr Killer has been informed by Mr Wintour and accepts these matters. The Company previously traded from commercial premises at 28 Balaclava Street, Woolloongabba. The Company has no employees and conducted its business by contracting for the provision of services with Argentis Pty Ltd to provide premises, administrative staff, office furniture, telephone services and related services. The only representative authorised on behalf of the Company and AXA to provide financial planning advice was Mr Wintour. Since Mr Wintour's bankruptcy on 27 May 2011, Mr Wintour has not attended the Company's premises on a regular basis or at all since 4 June 2011; Mr Wintour has provided only limited financial planning advice to clients of the Company and no advice to clients since 7 June 2011; any clients of the Company who have sought to contact the Company by telephone have been advised that Mr Wintour is away from the office on personal leave and may be contacted on his mobile telephone; and Mr Wintour cancelled all meetings with clients scheduled for or after 9 June 2011. 11 Since the appointment of the administrators, the Company has not provided financial planning advice to any client. 12 The sole asset of the Company of any material value is its financial planning business. 13 On 15 June 2011, Mr Killer was advised by Mr Wintour (which Mr Killer accepts) that a competitor of the Company had approached at least one of the Company's clients seeking to entice that client to the competitor's business. 14 Having regard to all of these matters, Mr Killer says that he is concerned that the value of the Company's assets consisting principally of its client base and client relationships is deteriorating as the Company is no longer an authorised representative of AXA; advice is no longer being provided by the Company to clients; and scheduled client meetings have been cancelled. Mr Killer believes that there is a risk that clients of the Company may seek the advice of alternative financial planners in those circumstances. Mr Killer says that since the Company operates on what he describes as a "fee for service" model, the value of the Company's principal asset is deteriorating in a "potentially substantial" way. 15 These matters reflect the judgements made by the administrators about the nature, scope and content of the business of the Company and the present risks to that business. 16 Clause 6 of the Representative Agreement confers an option on the Company to sell (or put) the business of the Company to AXA under the terms of what is referred to as the "Buy Out Option" pursuant to AXA's "standard practices". The administrators have been provided with a document entitled "Buy Out Option" which outlines the standard practices of AXA in the exercise of the Buy Out Option under clause 6 of AXA's Representative Agreement. 17 Consequent upon Mr Killer and Mr McCann's appointment as administrators of the Company, Mr Killer negotiated with AXA for the sale of the Company's client base to AXA. AXA expressed interest in purchasing the business of the Company on the following commercial terms. First, the purchase price is a multiple of 2.44 times the "recurrent revenue" received by the Company from clients. The purchase price is thus $736,000.00 plus GST. 18 Secondly, having regard to the potential substantial deterioration in the Company's business, settlement of the transaction would take place within two or three business days of an agreement being executed between the Company and AXA. 19 Thirdly, the purchase price would be adjusted to take account of these matters. If within two months of settlement of the sale, one or more former clients leave AXA, an adjustment would then be made to reflect the loss of those clients. After 12 months from settlement, a further adjustment would be made to take into account the loss of any former clients of the Company identified by Mr Wintour as being "at risk" clients (being those clients who have indicated a present intention to no longer remain as clients of the Company), and clients consisting of the family and friends of Mr Wintour. The category of clients representing "at risk" clients or family and friends of Mr Wintour comprise approximately 17% of the recurrent revenue of the Company. 20 Fourthly, the purchase price would be payable as to 80% on settlement and, subject to any adjustment as previously mentioned, as to the remaining 20% within two months and 12 months from settlement respectively. 21 These four terms represent the elements of AXA's offer to purchase the business of the Company. 22 The administrators have tested that offer by seeking advice from Mr Prendeville, an experienced financial planning business valuer and broker. Mr Prendeville has provided the administrators with a report dated 9 June 2011. Mr Prendeville expresses this opinion. The average price paid in the last 12 months for financial planning businesses is 3.3 times recurrent revenue; in Mr Prendeville's experience, the price which would be likely to be paid for the Company's business in its present circumstances lies in the range of 2 to 2.5 times recurrent revenue; the average time taken to sell a financial planning business is three to six months; the usual payment terms for the sale of a financial planning business is payment of 70% of the price upon signing the agreement with 30% retained and rendered subject to adjustment after 12 months to take account of loss of client business in the hands of the purchaser; the terms which could reasonably be expected if the Company's business was to be offered for sale in the present circumstances is 33% upon signing the agreement, 33% retained for six months after settlement and 33% retained for 13 months for adjustment after settlement; and the Company ought to accept the AXA offer having regard to the present circumstances. 23 In addition, Mr Wintour has informed Mr Killer (which Mr Killer accepts) that Mr Wintour will only agree to sign a covenant preventing him from competing with any purchaser of the business of the Company if the purchaser is AXA. 24 On 10 June 2011, Mr Killer received a valuation of the business of the Company from Mr Prendeville. Mr Prendeville expresses the view that the value at that date of the business is $605,068.00. On 15 June 2011, Mr Killer made enquiries of Mr Prendeville as to the likely costs of marketing the business of the Company for sale and the likely time it would take to secure a sale. Mr Prendeville expresses the opinion that it would take approximately three months to market the business, solicit buyers and negotiate and settle the sale agreement; it would cost approximately $47,500.00 to market the business comprising agent's commission and other costs; and additional revenue would be lost to the Company during the time taken to market and sell the business. 25 On 10 June 2011, Mr Killer met with Mr Reid Menkens who expressed interest in also purchasing the business of the Company. On 10 June 2011, the solicitors for the administrators provided detailed financial information in relation to the Company and its clients to the solicitors for Mr Menkens in order to consider a possible offer to purchase the Company's business. On 20 June 2011, Mr Killer sent an email to Mr Reid Menkens informing Mr Menkens that if he wished to make an offer to purchase the business of the Company he would need to do so by 9.30am on 21 June 2011. That time period was extended until 4.00pm, 21 June 2011. On that day (at 4.30pm) Mr Killer was advised by Mr Reid Menkens that he would not be making an offer to purchase the business of the Company. 26 No such offer has been made. 27 At 11.00am on 21 June 2011, the first meeting of the creditors of the Company was held. 28 Proofs of debt were lodged by the following creditors prior to the first meeting of creditors: the Menkens - $664,680.00; NAB - $394,795.00; Ms Sharon Wintour as trustee for the Wintour Family Trust - $188,215.00; Agentis Pty Ltd - $4,200.00; and Northern City Financial Services Pty Ltd - $109.00. Those creditors were represented either personally or by proxy at the meeting. Mr Killer informed the creditors at the meeting of the commercial terms of the AXA offer and told the meeting that it was his intention to cause the Company to accept the AXA offer. No objection was raised during the meeting to that course. 29 At approximately 6.30pm on 21 June 2011 Mr Killer caused the Company to enter into a "Client Sale Agreement" with AXA and Mr Wintour. 30 Mr Killer has formed the business judgement that the sale is in the best interests of the Company and that it serves the Company's interests to complete the sale, for these reasons. 31 First, the value of the Company's business is deteriorating in circumstances where the Company is not (and is not able to) provide financial planning advice to its clients with the resultant concern on the part of the administrators that clients may be seeking the advice of alternative financial planners having regard to the circumstances of the Company. 32 Secondly, Mr Killer understands that at least one client has been approached by a competitor of the Company already. 33 Thirdly, there is a risk that if the business is marketed for sale over a three month period, further clients will be lost to the business. 34 Fourthly, the AXA offer provides 80% of the purchase price immediately (subject only to the adjustment arrangements). 35 Fifthly, the AXA offer is on terms superior to those that might otherwise be secured according to the advice of Mr Prendeville. 36 Sixthly, the AXA offer provides a purchase price greater than the value attributed to the Company's business by Mr Prendeville in his valuation, is conditional only upon NAB and Court approval and is an offer made by a financially reputable company. 37 Seventhly, Mr Wintour will enter into a covenant which restrains him from competing with AXA if AXA is the purchaser. If not, the business judgement of the administrators is that the sale price will be less than AXA's offer in part because clients loyal to Mr Wintour might continue to seek his services and he might take steps to compete with any purchaser. 38 On 23 June 2011, the administrators sent a letter by email to the creditors of the Company enclosing a copy of the AXA agreement for their consideration. Mr Killer advised creditors that an application would be made to the Court for directions and sought their advice as to whether they objected to the Company completing the proposed sale. The administrators say that some creditors have expressly stated that they do not object to the agreement and copies of responses from such creditors are exhibited to the affidavit of Mr Killer. The administrators observe that the Menkens have expressed some concern about the agreement but have taken the position that they are not going to oppose the orders sought by the administrators in the present application. 39 The administrators advise that the Commissioner of Taxation asserts the position that a debt of approximately $6,000.00 is owed to the Commissioner. However, no proof of debt has been lodged by the Commissioner. No representative of the Commissioner attended the first creditors' meeting. The administrators have also identified a further possible creditor, namely, Herbert Geer Lawyers, in an amount of $30,000.00. No representative of that firm attended the creditors' meeting and nor has a proof of debt been lodged. 40 The sole director and shareholder of the Company, Mr Wintour, has not been served with the application for directions. Mr Wintour's interests are represented by his trustee. The trustee has not been served with the application for directions. Affidavit material has been filed by Mr Killer which demonstrates that there is no realistic prospect of any return to the members arising out of the sale of the business of the Company. The unsecured creditors will not be paid in full. NAB has a security and there is a large debt in favour of the judgement creditors represented by the two Menkens. 41 The administrators also observe that the present application has not been served on ASIC. 42 The present application is a little unusual. 43 The administrators have decided to sell the business of the Company having regard to the circumstances earlier outlined. The administrators have not tested the market fully and the sale has been brought about in an extremely short period of time. Plainly enough, the administrators may dispose of all or part of the business of the company (s 437A(1)(c) of the Act) and the administrators have control of the Company's business, property and affairs (s 437A(1)(a) of the Act). In addition, the administrators have the powers conferred under s 442A of the Act. 44 However, in the ordinary course of the exercise of the powers and role conferred by the Act upon administrators of a company under Part 5.3A, the administrators would investigate the company's affairs in a preliminary way, convene the first meeting of creditors, express preliminary views about the state of the company or the likely scope of enquiries to be made, determine the steps to be taken in connection with the business of the company which best serve the interests of the creditors (Division 4, Part 5.3A), convene a second meeting of creditors at which the administrators would communicate their view of the state of affairs of the company and advise the creditors (and receive their decision) whether their interests are best served by executing a deed of company arrangement (according to the particular documents); or resolving that the administration should end; or resolving that the company be wound up (s 439C of the Act and Division 5 generally). 45 By the present application, the administrators have formed a business judgement that the business of the Company be sold to AXA having regard to all of the matters earlier mentioned. The course they propose will result in a disposition of the only asset of the Company and in that sense, as the administrators acknowledge, their course of action will determine the fate of the Company without the orthodoxy of a complete investigation as contemplated by the Act. The disposition will occur within a short period of time and without the benefit of the administrators conducting a full examination of the affairs of the Company and seeking the views (and decision) of the creditors at a second meeting of creditors. 46 The administrators have reached a commercial judgement that it is in the best interests of the Company and its creditors to take this course particularly having regard to the substantially deteriorating nature of the Company's business and the highly personal relationships between clients of the business and Mr Wintour. 47 The administrators are concerned to ensure that their conduct is proper, justifiable, reasonable and prudential in the circumstances confronting them. They are officers of the Company during the period of administration and they must exercise reasonable care and diligence. 48 The role of the Court in relation to such an application is not one of second-guessing the merits of the commercial decision of the administrators and lending the authority of the Court to the business decisions or business judgements of the administrators in the discharge of their role and the performance of their powers and functions. The character, scope and content of the commercial arrangements the administrators seek to perform and whether doing so is prudential in a business sense, is fundamentally, a matter for the administrators. 49 That is not to say that the content of the commercial transaction is irrelevant to the question engaging the exercise of the power of the Court to give directions "about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers" (s 447D(1)). 50 Although the Court does not have express power to "approve" an agreement entered into or proposed to be entered into by administrators appointed and acting under Part 5.3A of the Act or to direct that the administrators may properly and justifiably enter into an agreement and perform it, s 447A of the Act nevertheless empowers the Court to make such an order (Re Ansett Australia Ltd and Mentha (2001) 39 ACSR 355; Re Ansett Australia Ltd (No. 1) (2002) 115 FCR 376 at [42] per Goldberg J). At [42], Goldberg J also observes that "[a]lthough courts will not pronounce upon the commercial prudence of an agreement entered into by administrators, they will act in an appropriate case to protect administrators from claims that they have acted unreasonably in entering into particular agreements" [emphasis added]. 51 The reference to the Court acting in an appropriate case, corresponds with the language of s 447D(1) which contemplates directions "about a matter arising" in connection with the performance or exercise of any of the administrator's functions and powers. The matter arising is to be understood as a legal matter or the propriety or reasonableness of the decision. 52 In Re Ansett Australia Ltd (No. 3) (2002) 115 FCR 409, Goldberg J expressed this view at [46]: The authorities are not uniform on the issue as to the extent to which a court may give a direction to a liquidator or to an administrator in relation to a matter which involves a business or commercial decision made, or to be made, by the liquidator or administrator. In some instances where directions have been given, it might be thought that the distinction between a business decision and a non-business decision has become blurred. Nevertheless, it does not appear from the authorities that courts have given liquidators and administrators directions approving of business or commercial decisions in circumstances where no issue has arisen in relation to a legal matter or the propriety or reasonableness of the decision. [emphasis added] 53 There are generally two reasons advanced for that view. 54 The first is that Part 5.3A expressly vests such decisions in the administrators and secondly a Court is generally thought not qualified or ill equipped to "make or approve such business decisions" especially in circumstances where the Court has not investigated the contextual circumstances involved in the making of the business decision in question (see Re Ansett Australia Ltd (No. 3) per Goldberg J at [47]). 55 A consideration of the commercial issues remains contextually relevant to the "matters arising" and the Court is not precluded from giving consideration to aspects of those issues in dispositively resolving the application for directions. 56 At [66] in Re Ansett Australia Ltd (No. 3), Goldberg J said this: The administrators may be correct in their submission that there is no rule of law and no fixed principle that a consideration of commercial issues is precluded, as the jurisdiction of the Court to give directions under provision such as ss 447D and 479(3) of the Act is discretionary. The exercise of that discretion will vary depending upon the nature and novelty of the matters and issues which are brought before the Court. From time to time, the Court is necessarily drawn into a consideration of commercial issues where there is a matter giving rise not only to the need to make a business or commercial decision, but also to issues of propriety, power, reasonableness of conduct, contested issues of legal principle or procedure or challenges to the decision made by the liquidator or administrator … Nevertheless, there is a well-established principle to which I have referred, namely that a court will not give directions approving of a commercial or business decision made by a liquidator or administrator where the decision is within the power of the liquidator or administrator, and there is no challenge to it or other issue arising in relation to it such as propriety or reasonableness, or calling for the exercise of legal judgment. [emphasis added] 57 See also In the matter of Bevillesta Pty Limited (in Voluntary Administration) Application under Corporations Act: Martin John Green and Peter Paul Krejci as Voluntary Administrators of Bevillesta Pty Limited [2011] NSWSC 417 (10 June 2011) per Bergin CJ in Eq at [11]. 58 In these proceedings, a question arises about whether it is proper and reasonable in all the circumstances reflected in the matrix of fact deposed to by Mr Killer and accepted by the Court, to enter into, perform and settle the transaction for the sale of the business of the Company. That question is a "matter arising" for the purposes of s 447D which properly goes to the exercise of the discretion in order to provide protection to the administrators. I am satisfied having regard to the matters identified by the administrators that it is proper and reasonable to enter into and perform the transaction. 59 As earlier mentioned, the application for directions has not been served on ASIC. The application is not required to be served on ASIC (Federal Court (Corporations) Rules 2000, r 2.8). Having regard to the circumstances of urgency and the need to secure a commercial disposal of the business of the Company and the absence of any opposition from any creditor, there seems little to be gained in serving the interests of the creditors by deferring or adjourning the application in order to require service of the material upon ASIC. The principal creditors of the Company have been given notice of the application and do not oppose it. The Menkens who litigated against the Company and have secured a substantial judgment do not oppose the application and have elected to make no offer to acquire the business. 60 Having regard to all of these considerations, the Court made the orders set out at para 1 of these reasons on 28 June 2011. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.