Mann v Abruzzi Sports Club Ltd

Federal Court of Australia|2009-04-08|Before: Jacobson J

INTRODUCTION 1 This is an application to extend the convening period of the second meeting of creditors of Babcock & Brown Limited (BBL). The application is made under sections 439A and 447A of the Corporations Act 2001 (Cth) (Act). 2 The first meeting of creditors of BBL was held on 25 March 2009. The effect of section 439A(5) of the Act is that the second meeting of creditors is required to be held by 17 April 2009. Section 439A(6) permits the court to extend the convening period, provided that an application is made within the period stipulated in section 439A(5). This application is made within the stipulated time. 3 The administrators seek a four month extension of the convening period to 17 August 2009. That period is longer than the period which is ordinarily granted. However, this application involves somewhat different considerations from those which arise in the ordinary case. 4 The application is supported by an affidavit of Mr David John Frank Lombe who is one of the administrators of BBL. The affidavit sets out in some detail the circumstances and reasons why the extension is sought. The background facts, which I will set out, are drawn from Mr Lombe's affidavit.

BACKGROUND 5 The Babcock & Brown group of companies is an international investment and specialised fund and asset management group founded in 1977 in San Francisco. The group opened a Sydney office in 1982, but it was not until the early 1990s that it began to focus upon investment management and investment banking. 6 BBL was listed on the ASX in 2004. It is the parent company of a large and complex group of local and offshore companies. The BBL group appears to comprise in excess of 1500 subsidiaries, which operate internationally in over 40 countries. 7 BBL is not a trading company. Its income is derived from subsidiaries' trading activities. The primary operating subsidiary of BBL is the Australian company Babcock & Brown International Pty Ltd (BBIPL). BBL owns approximately 99.78% of the issued shares in BBIPL. BBIPL is not presently subject to any form of external administration. 8 BBIPL is indebted to a syndicate of local and offshore banks for a sum in excess of AU$3 billion. BBIPL and its banking syndicate have been involved in a highly publicised restructuring of its debt facilities which took place in 2008 and 2009. 9 In 2005 and 2006, BBL raised approximately AU$610 million by an issue of subordinated notes denominated in Australian dollars and quoted on the ASX. There were two separate note issues. The first set of noteholders has their first opportunity to redeem the notes in the ordinary course on 15 February 2010. The first opportunity for the noteholders in the second tranche to redeem their notes in the ordinary course would be 15 September 2011. There is now almost $610 million still owing to the noteholders. The notes were issued pursuant to trust deeds and there is one trustee for the noteholders in both tranches of the note issues. 10 The repayment obligations of BBL to the noteholders are guaranteed by BBIPL. However, it appears from present inquiries undertaken by the administrators that there is no charge or security over the BBL Group's assets to secure the obligations from BBL to the noteholders. 11 Following the issue of the notes, it appears that BBL granted loans to BBIPL and that the amount presently outstanding from BBIPL to BBL, pursuant to the loans, is approximately $621,904,000. The repayment obligations of BBL to noteholders appear to be subordinated to claims of other creditors of BBL. Moreover, the repayment of the loan by BBIPL to BBL and the guarantee given by BBIPL in favour of the noteholders also appear to be subordinated to the repayment of BBIPL's creditors, namely, BBIPL's $3 billion of borrowings from its bank syndicate. 12 There have been a number of ASX press releases in relation to BBL and the issue of the unsecured notes. A release dated 6 February 2009 stated, inter alia, that the board of BBL did not believe that it would be in a position to resume paying interest on the subordinated notes. A further ASX release on or about 13 February 2009 indicated that a trigger event had occurred under the terms of the notes which enabled noteholders, amongst other things, to request repayment of the notes and to issue what are known as exit notices. It was these trigger events and the inability of BBL to meet the next scheduled interest payment to noteholders which resulted in the appointment of the administrators.

Financial position 13 The administrators were appointed on 13 March 2009. As I have said, a first meeting of creditors was convened on 25 March 2009. It was disclosed at the first meeting that, upon the basis of BBL's draft accounts, the book value of its net assets was approximately $3.2 billion but that the administrators' estimate of the realisable value of those assets was yet to be determined. The primary assets of BBL are the loans receivable from BBIPL in the amount of approximately $621 million and BBL's investment in the shares of BBIPL which have a book value of $2.6 billion. 14 Mr Lombe deposes that in order to determine that there will be any return to the BBL noteholders, the administrators will need to determine whether any value can be derived from the assets. He says that in order to do this, the administrators will need to investigate the affairs, operations and financial position of BBIPL, in particular having regard to its arrangement with its banking syndicate, and that they will need to seek and consider legal advice in relation to the subordination arrangements between BBL and BBIPL. Mr Lombe also states that it will be necessary to investigate and instruct lawyers to consider whether any valuable causes of action arise in favour of BBL against any party. 15 Mr Lombe observes at [35] that these matters involve complex legal and valuation issues and will take some time to investigate thoroughly. He says that it is crucial for the administrators to be allowed a sufficient amount of time to receive advice as to BBL's legal rights, investigate its affairs and negotiate with any stakeholders who might be encouraged to propose a deed of company arrangement. The ability of the administrators to determine the financial position of BBL and to investigate the question of recoveries is, at present, constrained by a number of factors, including the fact that the administrators have yet to receive the statutory Reports as to Affairs, and also by the lack of direct access to the books and records of BBL.

Access to BBL's documents 16 There have been substantial discussions between the staff of the administrators and the directors of BBL. BBL does not own or lease any office premises but its office is notionally located within the premises of BBIPL. The staff who control the access to the documents of BBL are employed by BBIPL or another entity in group. 17 Mr Lombe has set out in his affidavit in some detail the conversations which have taken place to permit access to the books and records. Mr Lombe had a conversation with Mr Larkin, the Chief Executive Officer of BBL and BBIPL, on 31 March 2009 in which Mr Larkin indicated that BBIPL management is committed to providing the information which is needed by the administrators but that a system needs to be established to log and manage the information flows, which are likely to be substantial. 18 Mr Lombe also says at [48] that although he has not yet received a complete response to his request for information, his staff have spent significant time discussing and agreeing with BBIPL the arrangements pursuant to which documents will be provided from the Sydney offices to the administrators. He says that the administrators continue to work with the directors and staff of BBIPL toward obtaining the documents necessary for the conduct of the administration as expeditiously as possible. 19 The administrators agreed to an extension of time for the provision of the directors' Reports as to Affairs. The extension was originally granted to 6 April 2009 but a further extension has been granted to 20 April 2009.

General administration tasks 20 Mr Lombe's affidavit sets out at [53] the scope of the work that has been carried out to date. I do not need to deal with that in any detail. He observes at [54] that in addition, there has been a significant amount of work which has been reflective of the unique and complex nature of BBL.

the second meeting of creditors 21 The administrators have considered the possibility of convening the second meeting of creditors within the period provided in the Act and recommending to creditors that BBL be placed in liquidation instead of making the present application to extend the convening period. However, the administrators have decided that this would not be in the interests of BBL or the noteholders because of two essential factors. These are, first, in the absence of completed Reports as to Affairs, the administrators are not able to fully assess the financial position of BBL so as to be able to make a recommendation to creditors. Second, the administrators' investigations would not be sufficiently advanced prior to the second meeting to be able to encourage or negotiate a deed of company arrangement from interested stakeholders. 22 Mr Lombe has set out in his affidavit the opinion that an extension of the convening period for four months is justified and that it is in the interests of creditors of BBL. He observes that the affairs of BBL and the BBL group are particularly complex and that extra time is required to fully investigate the financial affairs, business assets and liabilities of BBL in order to discharge the requirements of the Act. He also refers to the need to review and consider potential causes of action that may provide a better return to noteholders than a liquidation of the company. A number of other matters are also referred to, including the need for time to be able to consider whether a proposal for a deed of company arrangement ought to be made. 23 Mr Simon John Cathro, who is Mr Lombe's joint administrator, gave additional evidence in the witness box as to why the four month period is appropriate. The first reason is the complexity of the BBL group. The second is the need to investigate the restructure of the affairs of BBIPL and to be able to determine the question of how long it may take to realise the assets of that company. Mr Cathro also observed that even if the extension is granted, it would be open to the administrators to call the meeting earlier than 17 August and to recommend that BBL be placed into liquidation if the necessary cooperation from other parties is not forthcoming.

THE APPLICATION: DISCUSSION 24 There are a number of other factors which need to be taken into account in determining whether the four month period is appropriate. Briefly, as Mr Cathro observed, BBL appears to be the second-largest investment bank in Australia. Also, this is not a normal case, in that the ordinary parties affected by the statutory moratorium are not involved in the administration. In particular, there are no employees, no leases of premises or of plant and equipment, and there are no secured creditors. 25 Another matter to which Mr Cathro referred, and which is also covered by Mr Lombe's evidence, is that at the first meeting of creditors on 25 March 2009, the administrators informed the meeting that they would seek an extension of the convening period of four months, and they sought objections from creditors and noteholders present at the meeting. 26 The attendance register is in evidence before me, and it shows that approximately 100 noteholders were present at the meeting in Sydney, including a number of noteholders who apparently attended by telephone from New Zealand. There were no objections voiced at the meeting. In addition, Mr Lombe has put in evidence before me a letter from the administrators to the trustee for the noteholders stating that the administrators consider an extension of up to four months is necessary in order for them to be able to conduct thorough investigations and prepare a comprehensive report to creditors in accordance with their statutory obligations. 27 There is also a letter from the trust company dated 7 April 2009 consenting to the proposal to request an extension of the convening period. The letter does not specifically refer to the four month period, but it is apparent that the consent is to the period of up to four months referred to in the letter from the administrators. 28 The principles applicable to the extension of the convening period prescribed by section 439A of the Act have been considered in a number of authorities. The authorities commence with a decision of Young J in Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 at 612. The principle referred to by Young J was also stated in Re Diamond Press Australia Pty Limited [2001] NSWSC 313 by Barrett J at [10]. His Honour observed that: The function of the Court on an application such as this is, as I see it, to strike an appropriate balance between, on the one hand, the expectation that the administration will be a relatively speedy and summary matter and, on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed toward maximising the return for creditors and any return for shareholders. 29 There are a substantial number of authorities dealing with the principles to be applied, many of which are referred to in the written submissions of the administrators. They include the decision of Lindgren J in Re Pan Pharmaceuticals Ltd (2003) 46 ACSR 77 at [41] and [42], and the decision of Hayne J in Re Brash Holdings Ltd (1994) 13 ACSR 793 at 794. 30 I am satisfied that it is appropriate to grant an extension of time to convene the meeting, However, I have given careful consideration to the question of what is an appropriate time for an extension. 31 In Re AFG Insurances Ltd [2002] NSWCA 803 at [5] and [9]-[11], Barrett J considered a number of authorities which have dealt with the question of the time to be extended for convening the meeting, particularly bearing in mind administrations of some complexity. The authorities to which his Honour referred indicate that in certain cases, an extension of up to five months has been granted. 32 I also referred to the difficulties which arise in determining the period to permit the appropriate period for an extension in Mentha, in the matter of Hans Continental Small Goods Pty Ltd (Administrators Appointed) [2008] FCA 1933 at [23]-[25]. 33 It seems to me that I ought to take into account the careful consideration which has been given to this question by both of the administrators. It is plain that the administration is a complex one, bearing in mind in particular the size of the BBL Group and the substantial inquiries which the administrators need to pursue, including the need for legal advice. 34 I am mindful of what Barrett J said in AFG Insurances at [11]. His Honour emphasised that that was a special case with complications and difficulties which one would not expect to be encountered in the normal course and that every case must be approached on its merits without any particular reliance on what has happened in other cases. Nevertheless, this case does have some similarities to the considerations which arose in AFG Insurances. In particular, as I said earlier, BBL has no employees, no leases and no secured creditors. In substance the only substantial creditor of BBL is the 8000 noteholders for whom the trustee has been appointed. Accordingly, the question which often arises in these applications is not present here. That is to say, there appear to be no persons affected by the statutory moratorium who might wish to complain about the extension of time which is sought. 35 I also, of course, take into account the fact that no objection was voiced at the first meeting of creditors, albeit that only approximately 100 noteholders were present and that not all of the 8000 noteholders attended that meeting. I also take into account that the trustee has not objected. 36 There are, it appears, some other very minor creditors of BBL, but on the evidence before me these creditors appear to amount in value to approximately $200,000. 37 The orders which are proposed take into account the form of the order made by Lindgren J in Re Daisytek Australia Pty Ltd (2003) 45 ACSR 446. His Honour there observed that it is desirable that there be an order permitting the meeting to be held before the end of the extended convening period, so that in this case, the administrators will have the ability to convene the meeting earlier than 17 August 2009 if they see the need to do so. Moreover, liberty to apply is granted to any person who can demonstrate sufficient interest to modify or discharge the orders that I will make today, upon appropriate notice being given to the administrators. 38 For those reasons I propose to grant the extension which is sought. However, I would add this. Bearing in mind the careful consideration which has been given to the period of the extension, without of course wishing to fetter the discretion of a judge who may be called upon to do so, I would have some doubts as to whether it may be appropriate for any further extension to be granted. It seems to me that careful consideration has thus far been given to the required period of the extension, but there is always the need to balance the considerations which have been referred to in the authorities of the need to strike the appropriate balance between the speed of the administration and the ability of creditors and shareholders to maximise their return. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Associate: Dated: 15 April 2009 Solicitor for the Plaintiffs: Blake Dawson

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