Kogan (Administrator), in the matter of Red Lea Chickens Pty Ltd (receivers and managers apptd) (administrators apptd) [2018] FCA 669

GLEESON J: 1 On 3 May 2018, I heard an ex parte application made by the joint and several voluntary administrators ("administrators") of Red Lea Chickens Pty Ltd ("Red Lea Chickens") and nine related companies (together "companies") under ss 439A and 447A of the Corporations Act 2001 (Cth) ("the Act") to extend the convening periods for the second meeting of the companies' creditors to 2 July 2018 (that is, a period of two months), and for consequential orders. 2 The convening periods were due to expire on 7 May 2018. I was satisfied that the convening periods should be extended. Accordingly, I made orders to the effect of those sought by the administrators, with minor modifications. My reasons for making those orders are as follows. 3 The application was supported by an affidavit of Barry Kogan, one of the administrators, sworn 3 May 2018 and by oral submissions made by Mr Jack Hynes, counsel for the administrators. 4 In summary, the administrators sought the extension of the convening periods to allow time: (1) for a potential deed of company arrangement ("DOCA") to be formalised; (2) to consider other restructuring proposals which may arise; and (3) to prepare advice for inclusion in the report to creditors required under r 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) ("Insolvency Rules"), which will provide the administrators' recommendations as to the companies' future. 5 On 2 May 2018, a meeting of the committee of inspection of Red Lea Chickens passed a resolution in support of the application to extend the convening period.

Facts 6 The Red Lea Group of companies was founded in Western Sydney in 1957. Prior to the appointment of the administrators, the companies' principal activities included: (1) processing of chicken livestock into wholesale and retail chicken products; (2) distribution of chicken products to retailers and wholesale customers; (3) management of farming operations and livestock grower network; and (4) operation and management of retail and franchise network. 7 Prior to the administrators' appointment, Red Lea Chickens was the main trading entity in the group of companies, managing the farming operations and employing the majority of staff. The companies employed in excess of 400 employees under various arrangements. 8 Red Lea Retail Holding Pty Ltd ("Red Lea Retail") ran seven Red Lea branded stores. 9 Red Lea Franchise Pty Ltd ("Red Lea Franchise") and Red Lea Franchising Pty Ltd ("Red Lea Franchising") were the franchisors in respect of 22 independently owned stores. 10 Red Lea Logistics Pty Ltd ("Red Lea Logistics") provided logistics and distribution to support operations and owned approximately 70 vehicles. 11 The remaining five entities were largely dormant and/or non-trading entities from before the administration began. 12 Shortly prior to the administrators' appointment, three of the four directors resigned from each of the companies. Assad Asif was left as the sole director of each company. 13 The administrators were appointed to the companies on 29 March 2018, in each case pursuant to a resolution of Mr Asif.

Administration to date 14 Since their appointment, the administrators have undertaken the following tasks in relation to each of the companies: (1) attending to statutory duties including informing the Australian Securities and Investments Commission ("ASIC") of the administrators' appointment; (2) reviewing the books and records for the purposes of understanding the general business, property and affairs of the companies; (3) liaising with the "directors", management and advisers for the purpose of understanding the business, property and affairs of the companies; (4) issuing a request to the "directors" to complete a report as to affairs ("RATA") and director's questionnaire; (5) liaising with over 400 employees of the companies with respect to the appointment of the administrators, the first meeting of creditors and their entitlements; (6) commencing the calculation and verification of employees' entitlement claims and residency; (7) attending to a winding-down of trading operations; (8) reviewing the secured creditor position and responding to extensive and detailed queries from creditors; (9) liaising with growers who manage and grow the chicken livestock on various properties in NSW; (10) liaising with franchisees in relation to product distribution, potential claims against Red Lea Franchise and Red Lea Franchising and termination of the respective franchise agreements; (11) arranging for the sale of over 600,000 chickens to Baiada; (12) considering and seeking advice in relation to the insurance policies in respect of the companies; (13) considering the reasons for companies' failure and entry into voluntary administration; (14) holding the first meeting of creditors; (15) conducting preliminary investigations into any potential claims/recoveries that would be available to the liquidators; (16) liaising with the "directors" and their advisers regarding their intention to propose a DOCA for the consideration of creditors and their reasons for their request for an extension of time in which to do so; (17) instructing solicitors to assist and advise the administrators including with respect to litigation and the appointment of receivers over certain of the companies; and (18) preparing for the present application with their solicitors. 15 Preliminary investigations indicate that, on a winding up, any returns to priority employee creditors and ordinary unsecured creditors would be wholly reliant on successful litigation of claims that may be available to the liquidator. 16 The first creditors' meetings for the companies were held concurrently on 12 April 2018. On that occasion, a resolution was passed in respect of Red Lea Chickens to form a committee of inspection and that the following persons be appointed to the committee: (1) Patricia Fernandez of the Australasian Meat Industry Employees Union representing various employees; (2) Justin Sammut of LAS Lawyers and Consultants representing various creditors; (3) Matthew Clarke representing Peduba Cleaning Services; (4) Pam Natoli representing herself; (5) Ross Quattroochi representing Ingham Enterprises Pty Ltd; and (6) Gavin Rakoczy of King & Wood Mallesons representing Remagen Capital Management Pty Ltd.

Secured creditors and refinance 17 Mr Kogan identified three secured creditors: St George Bank, Scottish Pacific Business Finance ("ScotPac") and Remagen Capital Partners ("Remagen"), explaining their facilities prior to the administrators' appointments as follows: (1) St George Bank provided a bill acceptance and discount facility to Red Lea Chickens ("St George Bank Facility") and Red Lea Chickens and others of the companies, granted a General Security Deed over its assets. The obligations of Red Lea Chickens under the St George Bank Facility have been guaranteed by Redlea Group Holdings Pty Ltd ACN 602 950 505 (Receivers and Managers Appointed) ("Holdings") (Holdings is the parent company of Red Lea Chickens and several of the companies and is not in administration). (2) ScotPac entered into a debtor finance facility with Red Lea Chickens ("ScotPac Facility") for which: (a) Red Lea Chickens, among others of the companies, provided security in the form of: (i) a General Security Deed; (ii) a security interest by way of a transfer of accounts to ScotPac; and (iii) control over its receivables account held with the Australian and New Zealand Banking Group Ltd (ANZ). (b) Holdings guaranteed the obligations of Red Lea Chickens under the ScotPac Facility. (3) Remagen provided a bridging and working capital loan to Holdings ("Remagen Loan"). Red Lea Chickens, among other companies in the Red Lea Group, guaranteed the obligations of Holdings under the Remagen Loan and have also granted a General Security Deed. 18 Mr Kogan's evidence was that, on or about 24 April 2018, Remagen agreed to provide funds to Holdings to refinance the St George Bank facility and the ScotPac facility so Holdings would be subrogated to their security and claims against Red Lea Chickens. Terms for the refinance of St George Bank have been agreed and the refinance has occurred.

Appointment of receivers and Supreme Court proceeding 19 On 24 April 2018, ScotPac appointed Alan Lee Walker and Mark Raymond Hutchins as receivers and managers of Red Lea Chickens. 20 ScotPac also appointed Mr Walker and Mr Hutchins as receivers and managers of Holdings and another company RL Property No. 6 Pty Ltd ACN 603 436 282 (Receivers and Managers Appointed) ("RLPN 6"). 21 Later that day, Holdings and RLPN 6 obtained interim orders in proceedings commenced in the Supreme Court of New South Wales ("Supreme Court Proceedings") restraining Mr Walker and Mr Hutchins from performing any actions as receivers and managers up to and including 27 April 2018 in respect of Holdings and RLPN 6. 22 The dispute in the Supreme Court appears to have concerned the amount to be paid to ScotPac in order to complete the refinancing. 23 On 27 April 2018, Holdings and RLPN 6 obtained further interim orders restraining Mr Walker and Mr Hutchins from performing any actions as receivers and managers up to and including 4 May 2018 and extending the injunction to include Red Lea Chickens. 24 Mr Kogan's evidence was that, following completion of steps contained in orders made by the Supreme Court on 27 April 2018, required to be completed by 8 May 2018: (1) Holdings will be subrogated to the rights of Scotpac under the securities identified above; and (2) the receivers and managers will retire in respect of Holdings, RLPN6 and Red Lea Chickens. 25 Thereafter, Mr Kogan believes, the administrators will have more certainty as to the position of the companies and, in particular, whether there is scope for a DOCA to succeed.

Delays in obtaining information from directors 26 Mr Kogan has been dealing with Todd Gammel of HLB Mann Judd, who is said to be acting as an advisor to the "directors". Mr Gammel has told Mr Kogan that the circumstances of the refinancing and associated litigation have caused a delay in the provision of information to the administrators and a formal proposal for a DOCA.

DOCA 27 On 30 April 2018, Mr Asif provided Mr Kogan with indicative terms for a DOCA from Holdings. Mr Asif explained that the proposal required certain approvals, including that of Holdings' secured creditors. Mr Asif also requested that the administrators seek an eight week extension to the convening period. 28 Mr Kogan summarised the terms of the draft proposal as follows: (1) DOCA contributions to be paid by Holdings; (2) secured creditors - full repayment; (3) employee entitlements - full repayment; (4) unsecured creditors - partial repayment (cents in the dollar not disclosed); and (5) related parties - claims deferred. 29 As at 2 May 2018, the draft proposal had not been formalised into a DOCA proposal for consideration by the administrators or into a form which could be annexed to a report to creditors. 30 Mr Kogan was informed by Mr Gammel that the contribution to be made under the DOCA would be funded by the Remagen Loan. Additionally, he understands from Mr Gammel that as a condition of Remagen advancing the relevant funds, they would require security over (amongst other property), the assets presently encumbered to ScotPac. 31 Accordingly, in order that Mr Asif may submit and, ultimately, perform his obligations under the DOCA, the ScotPac refinancing must occur. 32 Mr Kogan's understanding is that this is the key driver for Mr Asif's request for the application to extend the convening period.

Further investigations 33 The administrators' work to date has identified the following lines of inquiry that might identify claims that could be pursued by a liquidator: (1) the acquisition and restructure of the companies which commenced in 2015; (2) corporate governance practices within the companies; (3) the transfer of real estate, fixed assets and motor vehicles from the companies to, among others, Holdings; (4) related party transactions and those which concern various intercompany loan accounts; (5) potential insolvent trading (19 statutory demands have been received by the companies since the beginning of 2017); (6) potential breaches of directors' duties; and (7) potential voidable transactions including those characterised as unfair preferences and uncommercial transactions. 34 However, as Mr Kogan noted, as with any litigation, there are significant risk, cost and delay implications that need to be properly considered before any such claim is prosecuted.

Statutory framework 35 Section 439A of the Act provides relevantly: (1) The administrator of a company under administration must convene a meeting of the company's creditors within the convening period as fixed by subsection (5) or extended under subsection (6). (2) The meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period. … (5) The convening period is: (a) if the day after the administration begins is in December, or is less than 25 business days before Good Friday - the period of 25 business days beginning on: (i) that day; or (ii) if that day is not a business day - the next business day; or (b) otherwise - the period of 20 business days beginning on: (i) the day after the administration begins; or (ii) if that day is not a business day - the next business day. (6) The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires. 36 Requirements for the giving of notice of a meeting pursuant to s 439A are set out in rr 75-15 and 75-255 of the Insolvency Rules. 37 By s 447A(1) of the Act, the Court may make such order as it thinks appropriate regarding how Pt 5.3A will operate in relation to a particular company.

Relevant principles 38 In Strawbridge, re Custom Coaches (Sales) Pty Ltd (Admin Apptd) [2014] FCA 683, Jacobson J said (at [22]): The statutory and legal framework is well-known. The principles have been stated in a number of authorities. The essential principle is that the Court attempts to strike a balance between the expectation that the administration be conducted relatively quickly and the need to ensure that the speed with which it is dealt does not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders. That principle was stated by Barrett J in Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] and has been cited on numerous occasions in decisions of this Court and in the Supreme Court of New South Wales.

Consideration and conclusion 39 I was satisfied that the Court had power to make the orders sought and that those orders were appropriate. In particular, I was satisfied that the proposed two month extension was reasonable having regard to: (1) The steps that have already been taken to refinance the companies. (2) The fact that, on 2 May 2018, Mr Gammel told the administrators that they could anticipate a "compelling DOCA proposal" within 14 days of the completion/resolution of certain specified matters. Mr Asif's bona fides concerning the proposed DOCA, are supported by his retainer of Mr Gammel to advise him in connection with the refinancing and consequent DOCA proposal. (3) The prospect that successful completion of the refinancing process will lead to the formalisation of a DOCA under which, at least, secured creditors and employees will be paid in full. In this regard, it is relevant that in excess of 400 employees may presently be out of pocket. (4) The fact that, conversely, if the orders were not made, this would almost certainly have resulted in the immediate winding up of each company in circumstances where, according to Mr Kogan, the only assets of the companies were likely to be causes of action. (5) The fact that the committee of inspection was in favour of the extension of time. (6) The apparent need for the administrators to carry out further investigations in order to make a properly informed recommendation to the companies' creditors at the second creditors' meetings, because of Mr Asif's delay in providing information to the administrators. (7) The orders proposed make provision for any person who can demonstrate sufficient interest to apply to the Court for modification of those orders. 40 Although the committee of inspection was in favour of the extension of time, in order to further protect the interests of creditors, I made an order requiring the administrators to give prompt notice of the orders made to the companies' creditors. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

SCHEDULE OF PARTIES NSD 707 of 2018 Plaintiffs Fourth Plaintiff: RED LEA FRANCHISE PTY LTD (ADMINISTRATORS APPOINTED) ACN 165 331 724 Fifth Plaintiff: RED LEA FRANCHISING PTY LTD (ADMINISTRATORS APPOINTED) ACN 109 704 163 Sixth Plaintiff: RED LEA LOGISTICS PTY LTD (ADMINISTRATORS APPOINTED) ACN 609 797 051 Seventh Plaintiff: RED LEA LEASING PTY LTD (ADMINISTRATORS APPOINTED) ANC 165 774 443 Eighth Plaintiff: RED LEA HATCHERY PTY LTD (ADMINISTRATORS APPOINTED) ACN 609 804 999 Ninth Plaintiff: RED LEA FEED PTY LTD (ADMINISTRATORS APPOINTED) ACN 609 805 147 Tenth Plaintiff: RED LEA CORRUGATION & FLEXO PTY LTD (ADMINISTRATORS APPOINTED) ACN 610 759 512 Eleventh Plaintiff: RED LEA RETAIL HOLDING PTY LTD (ADMINISTRATORS APPOINTED) ACN 610 630 469