Mann v Abruzzi Sports Club Ltd

A.C.N. 169 352 443 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 169 352 443 (and others named in the Schedule) Third Plaintiff

order made by: DERRINGTON J DATE OF ORDER: 29 MARCH 2023

1. Pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (Act), that Part 5.3A is to operate in relation to the second to ninth plaintiffs (Companies) as if the convening period, for the meeting of creditors required to be held under s 439A(1) of the Act, is the period ending on 30 June 2023.
2. Pursuant to s 447A(1) of the Act, and further or alternatively s 90-15 of the Insolvency Practice Schedule (Corporations) 2016, that Part 5.3A of the Act is to operate in relation to each of the Companies such that the meeting of creditors required by s 439A(1) of the Act may be held at any time during, or within five business days after the end of, the convening period as extended by Order 1 above, notwithstanding s 439A(2) of the Act.
3. Pursuant to ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth), and in order to prevent prejudice to the proper administration of justice, the affidavit of Timothy Joseph Heenan sworn and filed on 28 March 2023 (other than in its redacted form as filed on that date) is to be treated as confidential and to be sealed on the Court file so as to be marked "Not to be opened except by leave of the Court or a Judge".
4. Within 2 business days of these orders, the first plaintiffs are to cause notice of the orders made to be given to creditors of the Companies.
5. Any person who can demonstrate sufficient interest to vary or discharge Order 1 or Order 2 above has liberty to apply on not less than 72 hours' notice to the first plaintiffs.
6. The first plaintiffs' costs of and incidental to the application be costs and expenses in the administration of the Companies and be paid out of the property of the Companies. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 This is an application for a second extension of time for the convening of the second meeting of creditors in the administration of eight companies (the Companies). The first plaintiffs in the application are the current administrators, Mr Graham Killer and Mr Matthew Byrnes, and the Companies are the second to ninth plaintiffs. 2 The circumstances of the application are somewhat unusual. Receivers have been appointed to all of the Companies, except the ninth plaintiff, by a secured creditor, Westpac Banking Corporation (Westpac). The administrators effectively seek the extension of the convening period in order to advance the interests of Westpac by giving the receivers additional time to sell the relevant Companies' businesses whilst permitting them to take advantage of the moratoria imposed by the administrations. 3 Despite my initial reluctance to make the order sought, which, prima facie, would only benefit the secured creditor, Mr Psaltis of Counsel persuaded me that a broader perspective was required and that the granting of the extension would, at least in theory, advance the interests of the unsecured creditors

Background 4 The second to eighth plaintiff companies were placed into administration on 28 November 2022, and a Mr Baskerville was appointed as the administrator of each. 5 Approximately a week later, on 5 December 2022, Westpac appointed Mr Heenan and Mr Marsden receivers of the assets of the second to eighth plaintiff companies. 6 At this point in time, no receiver has been appointed to the assets of the ninth plaintiff company. 7 Mr Graham Killer and Mr Matthew Byrnes were appointed as administrators to the second to eighth plaintiff companies on 8 December 2022 at the first meeting of creditors for those companies, and were appointed administrators of the ninth plaintiff on 15 December 2022 at that company's first creditors' meeting.

The circumstances prior to the administrations 8 The Scooter Group of companies, which includes the Companies, owns and operates one of Australia's largest cabinetry manufacture and supply businesses. 9 That business is conducted primarily from premises located at Bells Creek, Queensland, and the evidence of Mr Killer was to the effect that the enterprise is substantial and incorporates state-of-the-art cabinet-making equipment, much of which is located in leased premises. That is particularly important, because the equipment is large and site-specific, in that it is located in the premises from which the manufacturing takes place. If no extension of the time for convening the second creditors' meetings of the Companies is granted, it is most likely that the Companies will be placed in liquidation, which would have a severely deleterious effect on the ability to sell the businesses together with the assets. The large pieces of site-specific equipment would probably have to be moved from the premises where they are presently located for the purposes of sales and sold in isolation from the other equipment. The administrators and receivers assert that a better price overall would be obtained from selling the equipment as part of a going concern. 10 It appears that the Scooter Group cabinet-making business has been carried on by several of the Companies acting in concert, although the essence of it has historically been conducted by the third plaintiff. The eighth plaintiff company, Ultimate Spray Pty Ltd, conducts a spray painting business on leased premises at Warana, Queensland. 11 The Scooter Group business is substantial and apparently employed up to 650 employees at its peak. Presently, there are 138 persons working in the Companies' businesses. The expression "working in the Companies' businesses" is used deliberately, because most of those persons are not now employed by any of the Companies, except for Ultimate Spray Pty Ltd. This appears to be consequent upon some dealings which have occurred in recent times in respect of the Companies' assets, which have led to third parties conducting the Companies' businesses. 12 The evidence before the Court discloses that the fourth and fifth plaintiffs were historically trading entities which undertook the client-facing installation work for the cabinetry businesses. They have ceased trading. 13 The second, sixth, seventh and ninth plaintiffs are either holding companies or own real property. 14 The Companies' financial position is dominated by the existence of a secured creditor, being Westpac. Generally, the Companies, save for the ninth plaintiff, are interconnected by a deed of cross-guarantee. Other entities in the Scooter Group, which are also subject to the appointment of a receiver but not involved in this proceeding, are also parties to that cross-guarantee. 15 The evidence shows that, presently, the Companies are indebted to Westpac for approximately $9.8 million. 16 The only other substantial creditor is the Commissioner of Taxation, who is owed approximately $16 million. There may also be some related company creditors, together with some relatively small trade creditors or state taxation liability creditors. 17 The evidence indicates that, in or about mid-2022, some questionable dealings occurred in relation to the Companies' assets. The second to eighth plaintiff companies and other companies in the Scooter Group entered into transactions with certain third parties, pursuant to which the business enterprises of some of the Companies were to be transferred. Those third parties were corporate entities owned or controlled by a Mr Matthew Richards, who is or was the Scooter Group's external accountant. Although there is limited evidence as to these matters, that which presently exists indicates an attempt to shift assets out of the Scooter Group, including from the Companies, at a time when they were all experiencing financial stress. Nevertheless, it appears that many of the transfers contemplated under the various agreements entered into with those third-party companies did not materialise, although some assets have found their way into their control. 18 The evidence of the administrators is to the effect that the businesses remain owned by the Companies, although at present they are being operated by the third-party entities. How that circumstance came about is not entirely clear. However that may be, Mr Heenan has deposed that Westpac has appointed receivers and managers to certain of those third-party companies.

The course of the administrations 19 In December 2022, the administrators made the first application to extend the time for convening the second meeting of creditors of the Companies. On 19 December 2022, Downes J made orders to that effect, allowing the businesses to continue to trade with the intention that their doing so would facilitate their sale by the receivers, and would afford the administrators time to properly investigate the Companies' affairs as well as to prepare a report to the creditors. 20 In the intervening period between the making of those orders and the current application, the focus of the administrators has essentially been on the sale process engaged in by the receivers and attending to their statutory obligations in the Companies' administrations. 21 For the purpose of progressing the sale of the Companies' assets, the receivers have sought expressions of interest and, through that process, have identified a preferred purchaser. That purchaser has submitted a non-binding terms sheet and negotiations with it have progressed. It is deposed to by Mr Heenan that the execution of a business sale agreement, together with ancillary agreements, is imminent. 22 Mr Heenan also deposed that the outcome of the proposed sale to the preferred purchaser should be known by mid-May 2023. It can be added that the evidence reveals that the preferred purchaser appears to be serious about the acquisition, and has contributed a substantial amount of money to ensuring the continued operation of the businesses. 23 As mentioned, the purpose of this present application is to allow the receivers time to complete the sale. In the alternative, if the sale does not complete, the length of the extension sought will allow the receivers to pursue substitute methods of disposing of the assets, including through an alternate going concern sale process or an in situ sale.

Principles relating to the extension of time 24 The principles on which this Court acts in relation to a second application for the extension of the convening period were set out in the careful and thoughtful written submissions of Mr Psaltis, Counsel for the plaintiffs. Without complete repetition of Mr Psaltis' work, they are as follows. 25 Section 439A(2) of the Corporations Act 2001 (Cth) (the Act) requires the second meeting of creditors be held within 5 business days before, or within 5 business days after, the end of the convening period. By s 439A(6), the Court is empowered to extend the convening period identified in s 439A(5). That section does not permit a further extension to the convening period. However, s 447A(1) of the Act confers on the court the power to make an order granting a further extension: see Owen v Madden (No 4) (2012) 92 ACSR 255, 261 [31]; Mentha, in the matter of The Griffin Coal Mining Company Pty Ltd (administrators appointed) (ACN 008 667 285) (No 2) [2010] FCA 499, [36]. 26 In Park, in the matter of Collection House Ltd (administrators appointed) [2022] FCA 1083, it was at paragraph [9] observed that: There is no doubt that this Court is empowered to grant a further extension of the convening period. That was made clear by Middleton J in … [Re] Virgin Australia Holdings Ltd (administrators appointed) (No 7) [2020] FCA 1182 … and it is a power that has been exercised on numerous occasions. It is also not doubted that, in the exercise of the Court's power to grant the further extension, it should adopt the same principles as it does on a first application to extend the period. 27 In Diamond Press Australia Pty Ltd [2001] NSWSC 313, Barrett J (as his Honour then was) explained at paragraph [10]: 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 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 towards maximising the return for creditors and any return for shareholders. 28 See also Re ABC Learning Centres Ltd; Application by Walker (No 8) (2009) 73 ACSR 478, 490 [52]; Algeri; Re Colorado Group Ltd [2011] VSC 260, [24]; Owen, in the matter of Rivercity Motorway Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) v Madden [2011] FCA 295, [18]. 29 The above approach resonates with the object of Part 5.3A, stated in s 435A of the Act as follows: 435A Object of Part The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 30 As Young J (as his Honour then was) observed in Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611, 612, when considering whether to exercise the power to extend the convening period, that object should be kept "firmly in view". 31 In Re Riviera Group Pty Ltd (2009) 72 ACSR 352, 355 [13] - [14] (Re Riviera Group), Austin J listed various reasons given in previous cases for extending that period. They included, relevantly, "the size and scope of the business", "large number of employees with complex entitlements", "the time needed to execute an orderly process of disposal of assets", "where the extension will allow the sale of the business as a going concern" and "more generally, that additional time is likely to enhance the return for unsecured creditors". 32 In Re Strawbridge (No 2) (2020) 144 ACSR 347, 370 [66], Middleton J identified two "well-recognised examples of situations where the Court has extended the convening period", one of which was the facilitation of "the sale of the business of the company as a going concern, so as to maximise the value of the company's assets". 33 That was accepted in Kirk, in the matter of RL Adams Pty Ltd (Administrators Appointed) [2017] FCA 1111 [23], where it was observed that the administrator's ability to conduct a going concern sale was "the most significant" of the factors identified in that case in support of an extension to the convening period, even where there were "hurdles [to] overcome in order to achieve [a sale] …". 34 The attitude of creditors is also relevant; as is whether any creditor is likely to be prejudiced by the extension. The attitude of the Australian Securities and Investments Commission should also be taken into account on such an application. 35 Finally, in deciding an application under s 439A(6), and, by extension, s 447A(1) the opinion of the administrator as to the time required for the extension should be afforded weight. As Austin J said in Re Riviera Group at 355 [14]: The cases show that where a substantial issue in any of [the categories identified above] is established (and a fotiori, where the facts fit into more than one category), the court tends to grant an extension, and the extension tends to be for the time sought by the administrator provided that the evidentiary case has been properly prepared, there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and the court is satisfied that the administrator's estimate of time has a reasonable basis.

Should a second extension be granted in this case? 36 In the circumstances of this somewhat unusual case, the indicia in support of and against the granting of an extension are perhaps more finely balanced than they might otherwise ordinarily be. 37 The importance of the fact that the receivers have expended significant time, effort and money in their attempt to sell the Companies' businesses, and that process is substantially advanced, cannot be understated. The process has reached a stage where there is a preferred purchaser and the terms of a sale agreement are being finalised. There is no reason not to accept the evidence of Mr Heenan that he believes that the execution of a sale agreement is imminent. 38 On the other hand, as the sale is being conducted by the receivers and not by the administrators in the context of potentially entering into a deed of company arrangement, the factor is not as weighty. The impact on the receivers of the liquidation of the Companies would not be as detrimental as it would be if the administrators were attempting to arrange a sale of the Companies' businesses through a deed of company arrangement. The receivers would be largely unaffected by the liquidations, given that the assets in their hands are not available to a liquidator to use for the benefit of unsecured creditors. However, a perhaps more ethereal consequence of liquidation may be its reputational impact upon the Companies, which may diminish the value of their businesses and assets, or the prices that others would be prepared to pay for them. Mr Psaltis also astutely submitted that, if the administrations were to come to an end, so too would the moratoria imposed by s 440B of the Act, with the consequence that lessors of premises demised to any of the Companies would be likely to take action to recover possession, necessitating the removal of the plant and equipment. As mentioned earlier, this would likely reduce the prices which might be obtained for those assets. 39 The extension sought is not for an overly long period, given the intricacy of the Companies' several business operations. Whilst it is always necessary to keep steadily in mind that administrations are to occur as expeditiously as possible, and in the majority of cases that happens, the infinite complexities of company arrangements necessarily require a flexible approach. That is required all the more where the relevant businesses are operated by groups of companies. Although there has already been an extension of three months in the present case, a further extension of slightly more than three months would be far from inappropriate if other circumstances were to warrant it. The evidence indicates that the receivers anticipate that the finalisation of the sale with the preferred purchaser will be completed within the extended period and, at least, probably by mid-May. If that does not occur, there are other options which might be pursued within the remainder of the period up to 30 June 2023. 40 Perhaps the most pressing concern is that the administrators and the receivers assert that it is their belief that the best interests of the creditors will be served by the continuation of the administrations. In substance, they thereby advance the proposition that it will be advantageous to Westpac, the secured creditor, for the sale process to proceed. The advantage arises, in particular, from the moratoria provided for by s 440B of the Act. This, so it is said, will result in a higher price for the businesses of the Companies, with the consequence that the Companies' overall indebtedness will be reduced as much as is possible, as will the debt owed to the secured creditor. 41 The difficulty here is that, subsequent to the receivers' sale, there will be no physical assets of the Companies remaining in the receivers' hands, yet there will be some residual debt owing to the secured creditor. In other words, the success of the sale process will not result in any payment to the unsecured creditors and, after it is completed, the remaining secured indebtedness to Westpac will continue to take priority over the claims of the unsecured creditors. It follows that, on one view, the proposed extension of time sought by the administrators does not result in any apparent benefit to unsecured creditors. 42 Initially, that observation appeared to be fatal to the application. However, Mr Psaltis ultimately convinced me otherwise. He submitted that the unsecured creditors have the benefit of potential recoveries consequent upon a future liquidator pursuing certain actions against the director of the Companies. In particular, he identified that a liquidator might seek to recover the amount of the losses sustained by the Companies for breaches by the sole director of each of them, Mr Scott Dwan, of the obligation to prevent insolvent trading as required by s 588G of the Act. If such claims were to bear fruit and provide funds in the liquidation, the proceeds may, thereupon, ultimately be distributed to the unsecured creditors. Whilst that point is technically good, it might not carry great weight in many circumstances. That is particularly so given that the potential causes of action which might result in some recovery are only vaguely identified at this stage. 43 In response to that observation, Mr Psaltis submitted that it was necessary to keep in mind that the only real unsecured creditor, the Commissioner of Taxation, who is owed approximately $16 million, supports the administrators' application. It may well be that he and his officers perceive that an unhindered sale process will reap the highest return for Westpac, and that he may then fund the pursuit of the director with an increased likelihood of a return. As was submitted, the Australian Taxation Office and the Commissioner have the experience and understanding of the particular circumstances necessary to make such determinations in their own interests, and it is appropriate for the Court to accord their views appropriate weight. That submission should be accepted. 44 The other issue of concern was the position of other entities, such as the landlords of the premises used by several of the Companies. In this case those entities will not be prejudiced by the extension because the receivers are continuing to pay the rent on behalf of the Companies whilst they remain in occupation of those premises. One might also perceive that the landlords will benefit from an orderly sale of the businesses to a third party, since that might enable the third party to take over the leases of premises presently demised to any of the Companies. 45 As was very appropriately identified by Mr Psaltis, the administrators were appointed to the ninth plaintiff company later than the second to eighth plaintiff companies, with the result that the same issues do not necessarily apply to it. However, it is the administrators' opinion that all of the Companies should remain on the same timetable because their doing so may result in an overall cost saving for the creditors. It is for this reasons that an extension of the convening period to 30 June 2023 has been sought in respect of all of the Companies. That is no doubt appropriate. 46 Support for the application, unsurprisingly, also comes from the receivers appointed by Westpac. Although the benefit to secured creditors may be a relevant consideration on an application under s 447A(1) of the Act, it might be supposed that the interest of obtaining a better outcome for unsecured creditors would usually be given higher priority. Nevertheless, as the major unsecured creditor, the Commissioner of Taxation, also supports the application, this ranking of priorities is of little relevance. 47 The Australian Securities and Investments Commission was informed of the application. In accordance with their policy, they made no comment on it. 48 Although other, minor creditors have not been notified of the application, they will be notified of the order and may apply to the Court for a variation of them, if they are so moved.

Conclusion on the extension of time 49 In the foregoing circumstances, and especially since the largest and, effectively, only unsecured creditor supports the application, it is appropriate to make the orders sought. That said, Courts ought to take care to ensure that extensions of time are not granted for the asking and are only permitted where they will advance the object identified in s 435A of the Act. Here, the plaintiffs have only just succeeded in demonstrating this.

Confidentiality orders 50 The first plaintiffs seek an order that paragraph 14 and annexure TJH-1 of Mr Heenan's affidavit dated 28 March 2023 be redacted and that those parts of his affidavit be kept confidential. The power to make such suppression orders arises pursuant to ss 37AE, 37AF, 37AG, 37AH and 37AJ of the Federal Court of Australia Act 1976 (Cth). 51 The order is sought on the basis that those parts of Mr Heenan's affidavit that are proposed to be excluded from public gaze contain confidential information about the identity of the preferred purchaser and the terms of the funding of the receivership. Those matters are obviously commercially confidential information, but that alone does not warrant the making of suppression orders. However, the sale process is ongoing and that may be prejudiced if the information, including the proposed terms of the intended contractual relationship between the receivers and the prospective purchaser, is made publicly available. 52 In making the order sought, I adopt the approach of Farrell J in Hill, in the matter of Autocare Services Pty Ltd (administrators appointed) [2021] FCA 167 as to the protection of confidential information connected with the terms of sale in circumstances such as the present. There, at paragraph [53], her Honour repeated her earlier comments in Vickers, in the matter of JM Kelly Builders Pty Ltd (in liquidation) (No 2) [2019] FCA 1789 [7] to the following effect: There is a clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors and to that end commercially confidential information should be protected. While it may be that not every part of the material the subject of the confidentiality order is of a commercially confidential and sensitive nature, it would not serve the interests of justice to require the liquidators to spend time and money to identify particular portions of the material that should be the subject of the order. … 53 As was submitted by Mr Psaltis, in this case, great care has been taken to ensure that the redacted information which is sought to be kept confidential is as minimal as the circumstances permit, thereby ensuring that, as best can be achieved, the details of this matter are open to public scrutiny. 54 In those circumstances, the order for the confidentiality of Mr Heenan's affidavit should be made. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.

SCHEDULE OF PARTIES QUD 473 of 2022 Plaintiffs Fourth Plaintiff: OCTEROS CABINETS (QLD) PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) Fifth Plaintiff: OCTEROS CABINETS (VIC) PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 628 576 901 Sixth Plaintiff: SCOOTER FARM PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 126 403 923 Seventh Plaintiff: SCOOTER INVESTMENTS (QLD) PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 126 262 191 Eighth Plaintiff: ULTIMATE SPRAY PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 147 173 153 Ninth Plaintiff: ABC GROUP HOLDINGS PTY LTD (ADMINISTRATORS APPOINTED) ACN 640 682 426