REASONS FOR JUDGMENT
1 This is an application under ss 439A and 447A of the Corporations Act 2001 (Cth) for an extension of the convening period set by s 439A and for certain other relief under s 447A in relation to the operation of s 439A. It is important in considering this application to bear in mind that the extension of time which is sought is not for a fixed period, but rather for a period of up to 90 days. This is an important consideration for reasons which I will set out below.
2 The relevant background facts and circumstances are set out in an affidavit of Mr Brian Keith McMaster affirmed on 15 December 2008. Mr McMaster, Mr Mark Mentha and Mr John Park are the joint and several administrators of Hans Continental Smallgoods Pty Ltd (Administrators Appointed) (Hans), Swicker's Kingaroy Bacon Factory Pty Ltd (Administrators Appointed) (Swicker's) and Sun Pork Foods Pty Ltd (Administrators Appointed) (Sun Pork). Messrs McMaster, Mentha and Park were appointed administrators of the companies by the boards of those companies in accordance with s 436A of the Corporations Act on 28 November 2008.
3 The effect of s 439A(2) of the Act is that the date for convening the second meeting of creditors of the companies is 30 December 2008. The meeting would then be required to be held within five business days, that is to say, in the first week of January 2009. The application for an extension of time is made in accordance with s 439A(6) and is made during the period referred to in s 439A(5)(b).
4 Hans, Swicker's and Sun Pork are related entities in the Hans group. The ultimate holding company of the group is Japan Tobacco Inc (Japan Tobacco) which owns 100 per cent of the shares at Hans. Hans owns 65 per cent of the shares in Swicker's and Swicker's owns all of the issued shares in Sun Pork.
5 Hans is a producer of smallgoods products including processed hams and salami products. It has production facilities in Queensland and New South Wales and storage facilities elsewhere in Australia. Swicker's owns and operates an abattoir in Kingaroy Queensland. Sun Pork sells offal as a by-product of the abattoir process. Hans and Swicker's have a total of approximately 1450 employees.
6 The companies' creditors fall into three groups. The first group consists of Japan Tobacco which is a secured and unsecured creditor for loans totalling more than $100 million. The second group consists of employee entitlements totalling approximately $10 million. The third group consists of trade and other creditors totalling approximately $30 million.
7 In [16] of his affidavit, Mr McMaster sets out in some detail the work which he and his staff have carried out since their appointment on 28 November. I do not propose to set out the detail, but Mr McMaster records at [17] that the work has involved approximately 2100 hours. Because of its complexity, the work has been handled by senior staff.
8 Prior to the appointment of Messrs McMaster, Mentha and Park as administrators, Japan Tobacco undertook a sale process in relation to Hans in 2008. However, this did not result in a sale prior to the appointment of the administrators.
9 Mr McMaster affirms at [19] that he is of the opinion that the interest of creditors of the companies would be best served by the sale of the business of the companies as a going concern. To that end, advertisements have been placed in The Australian and The Australian Financial Review and confidentiality agreements have now been dispatched to approximately 15 interested parties.
10 Mr McMaster and his staff are in the process of preparing and providing due diligence to the interested parties. Mr McMaster anticipates that the sale process will involve due diligence being undertaken by the interested parties during January 2009. He considers that indicative bids will be submitted by 30 January 2009 and he anticipates that the sale process will conclude in March 2009, but this is subject to any delays in relation to final negotiations and documentation and possibly in obtaining regulatory approval such as approval which may be required by the Australian Competition and Consumer Commission.
11 Each of the companies held a first meeting of creditors during December 2008. The meeting of creditors of Swicker's was held on 8 December 2008. More than 115 creditors attended in person or by proxy. The creditors did not resolve to appoint a committee of creditors. Mr McMaster chaired the meeting, and informed creditors that it was the intention of the administrators to make an application to the Court for an extension of the convening period, because in the view of the administrators, it would not be possible to provide creditors with a sensible analysis of the return to them, without progressing the sale process. No objections, or concerns about that proposal were articulated during the meeting.
12 The first meeting of creditors of Sun Pork was held on 10 December 2008. Japan Tobacco is the sole creditor, and it was present at the meeting, being represented by a proxy. The creditors did not resolve to appoint a committee of creditors, and there was no discussion about the extension of the convening period at the meeting. Apparently, this was because it was thought to be unnecessary to raise those issues, in view of the fact that Japan Tobacco supports the extension of time, which is now sought.
13 The first meeting of creditors of Hans was held on 10 December 2008. The meeting was attended by more than 400 creditors. The creditors resolved to appoint a committee of creditors, consisting of 16 companies, or persons. Mr McMaster chaired the first meeting of creditors of Hans. During the meeting, he informed the creditors who were present of the need to convene a second meeting of creditors by the end of December, and to hold the meeting in the first week of January. He said that in the circumstances, the administrators were of the view that holding the meeting at that time would have no utility. He said that this was because of the progress of the sale process. He said he thought it would be appropriate to seek an extension of time to convene and hold the second meeting of creditors, so that the meetings could be held after the sale process had been completed. Mr McMaster informed the meeting that he would make the application in the coming week, for an extension for up to 90 days. No objections or concerns were articulated during or at the first meeting of creditors of Hans, but a number of creditors have expressed concern since the date on which the meeting was held.
14 Of the 16 creditors comprising the committee of creditors of Hans, 14 have responded to a circular, to which I will refer shortly. Of these, 11 expressed their unequivocal agreement to the extension which is now sought. One of the members of the committee agrees to an extension of no more than 60 days. Another agrees to an extension of 30 days, and has indicated a readiness to agree to up to 45 days. One other member of the committee would not be in favour of an extension of more than 30 days.
15 The creditor who has suggested the extension of no more than 30 days considers that 90 days is too long a period and too uncertain. He points to the fact that his business is suffering by not being paid now. In his most recent email, that creditor points to the fact that the Australian economy is slowing, and growth will reduce during 2009. He also observes that Hans was not operating profitably prior to the appointment of the administrators and queries whether the administrators will be able to return a "neutral cash" result without major restructuring or perhaps other changes. I should point out that this creditor has indicated in correspondence that he may be prepared to consent to an extension of up to 45 days.
16 The other creditor who opposes the extension of 90 days specifically says that he cannot support an extension beyond 30 days. He also expresses concern about the market conditions in the coming year and says that in his opinion "time is now our enemy." It is important to note that this creditor stresses that he does not oppose the fundamental initiatives of the administrators but he merely considers that the 90 day extension would be counter-productive to a quick and effective sale. It is implicit in the remarks made by the other creditor who opposes the extension of 90 days that he is not opposed to the objective of the administrators, but he does oppose an extension for the period to the end of March.
17 In [41] of his affidavit Mr McMaster sets out a number of considerations which he has taken into account in forming the view that an extension of time up to the end of March is appropriate. These considerations include the logistical difficulties arising from the intervening holiday period, the volume of work that is involved, the administrators' opinion that it is in the creditors' best interests that the companies continue to trade, the time needed to properly conduct the sale process, and the possibility that a deed of company arrangement may be a feature of the bid in the asset realisation process.
18 Mr McMaster considers that the convening and holding of a second meeting of creditors within the time prescribed by the Act would have limited utility and would be likely to result in poor creditor attendance. He is not confident that the administrators would be able to prepare their report for the purposes of s 439A and to make recommendations to the company's creditors about the future of the companies before 30 December 2008. He says that for the same reason, until the sale process has been completed, it would not be possible to formulate the terms of a deed of company arrangement or to analyse the benefits of a DOCA.
19 Mr McMaster says that the administrators estimate that the sale process and preparation of the report to the companies' creditors setting out the benefits of any proposed deed of company arrangement compared to liquidation of the companies will take until approximately early to mid March 2009. [43] and [44] of Mr McMaster's affidavit are important and I will set them out in full:
43. If the sale process is completed in a shorter period of time than currently anticipated, the Administrators will immediately look to convene the meetings of creditors of the Companies for [the] purposes of section 439A of the Act, there being no value in prolonging the process any longer than is necessary.
44. I am conscious of the impact that the statutory moratoriums provided by Part 5.3A of the Act have on the Companies' creditors and accordingly the impact on such creditors of an extension of the convening period. The Administrators are currently comfortable that post appointment creditors (including landlords) will continue to be paid in respect of post-appointment liabilities from ordinary cash flow.
20 The principles which apply to an application for an extension of time to convene and hold a second meeting of creditors have been considered in a series of cases commencing with a decision of Young J in Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 at 612. The principle applied by Young J was also stated in Re Diamond Press Australia Pty Limited [2001] NSWSC 313 at [10] by Barrett J. His Honour said that:
The function of the Court on an application such as this is…to strike an appropriate balance between…the expectation that the administration would be a relatively speedy and summary matter and…the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders.
21 Barrett J observed at [11] of Diamond Press that experience suggests that transactions of the kind contemplated in that case do take time, particularly where an informal tender or competitive selling process is undertaken and structured due diligence procedures are adopted. His Honour said that all of those matters are conducive to the aims of s 435A(b) of the Act and that they would allow the administrators to present a clearer picture to the second meeting. It seems to me that his Honour's observations are particularly apt in the circumstances of this case.
22 More recently in Lehman Brothers Australia Ltd [2008] NSWSC 1132 at [4], Barrett J reiterated the principles referred to above. His Honour said at [13] of Lehman Brothers that a matter to be considered closely in such an application is the impact that prolongation of the administration will have on persons whose claims are affected by the statutory moratoriums arising from Pt 5.3A of the Act.
23 In Fincorp Group Holdings Pty Limited (2007) 62 ACSR 192, Barrett J granted an extension of time, the effect of which was that the convening period set by s 439A would be some three months longer than if the extension had not been granted. His Honour in that case at [10] and [11] pointed to the complexity of the sale process as a matter which justified the extension.
24 In Hayes, in the matter of Estate Property Group Ltd (Administrators Appointed) [2007] FCA 935, Gyles J took a slightly different approach from that which was adopted in the cases referred to above. His Honour made orders extending the convening period for up to 60 days but he reserved consideration of any application to further extend the period if a case were made out for such a further extension. His Honour said he would then exercise the power provided for by s 447A. (See also Hall, in the matter of Australian Capital Reserve Ltd (Administrators Appointed) [2007] FCA 1328 at [1]). The effect of the approach taken by Gyles J, if adopted in the present case, would be for an extension of time to be dealt with in stages and that is a matter I have considered carefully in considering the application that was made to me this morning.
25 It seems to me that there are three reasons why I ought to grant the extension of up to 90 days as sought by the administrators rather than to adopt the staged process suggested by Gyles J.
26 The first reason is that the cases indicate that an extension of two and a half to three months is not unusual where there is a relatively complex sale process. Bearing in mind the intervention of the holiday period, it seems to me that the effect of the orders which are presently sought is to grant an extension of up to two and a half months, because the Christmas and New Year holiday period intervenes and it is not unusual for a period of up to two working weeks to be lost as a result of that holiday period.
27 Second, I have taken into account that Mr McMaster considers that if the sale process is completed in a shorter period of time than is currently anticipated, the administrators will immediately look to convene a meeting of creditors because there is no value in prolong the process for any longer than is necessary. That is the importance of the extension for 'up to' 90 days rather than for a fixed period of 90 days. It allows a degree of flexibility, which would not otherwise be available in accordance with the process contemplated by s 439A(2), (5) and (6). I accept Mr McMaster's opinion and I note that the statements made by the two creditors who oppose an extension for up to 90 days seem to proceed upon the basis that there will actually be an extension to 30 March 2009, whereas in truth, what is proposed is that the extension be for up to 90 days. Accordingly, as Mr McMaster has said, if he is able to do so, he will convene the meeting of creditors earlier than 30 March 2009.
28 The third reason I have come to the view that the staged process is unnecessary, is that Mr McMaster considers that cash flow will be sufficient to enable post-appointment liabilities to be met. Although attention has been drawn to the fact that the company was unable to trade profitably prior to the appointment of the administrators, it seems to me that what is important is that Mr McMaster's opinion looks only at the post-appointment position. It is implicit in what he says that the post-appointment position is different from that which prevailed prior to the appointment of the administrators. I consider that that is a matter which is significant in considering the position and I accept Mr McMaster's opinion to that effect.
29 It seems to me that there is a benefit to the administration in extending the convening period only once rather than adopting the staged process suggested by Gyles J. That is not to say that in an appropriate case the process contemplated by Gyles J would not be suitable. But in this case where the administrators are of the view that the company will be able to meet post-appointment cash flow, in effect, obtaining the benefit of the moratorium period provided for in Pt 5.3A, the staged process would not be of any utility. Indeed, it would be costly in the administration and would divert resources from the completion and attention to the details of the sale process which is now being undertaken.
30 I have already referred to the fact that extension is not for a fixed period, but is for a period of up to 90 days, and that Mr McMaster says if he is able to do so, he will convene the meeting of creditors at the earliest possible time. He does not wish to prolong the process unnecessarily. Mr McMaster is an experienced administrator and I consider that I ought to act upon the statement set out in [43] of his affidavit.
31 For these reasons, I propose to make the orders set forth in [1] to [7] of the short minutes of order which I have signed and dated and placed with the Court papers.
I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.