Mighty River International Limited v Hughes

BUTTON J: 1 The first plaintiffs (the Administrators) are the joint and several administrators of the second plaintiff, Melbourne Rebels Rugby Union Pty Ltd (the Company). 2 Orders have been sought under s 439A(6) of the Corporations Act 2001 (Cth) (the Act) extending the convening period to 26 April 2024, which is an extension of 60 days. Orders are also sought under s 447A(1) so that Part 5.3A of the Act will operate in relation to the Company such that, notwithstanding s 439A(2), the second meeting may be convened at any time during the period up to, or within five business days after the end of, the extended convening period (commonly referred to as a "Daisytek order" after Re Daisytek Australia Pty Ltd (Administrators Appointed) (2003) 45 ACSR 446; [2003] FCA 575). Orders are also sought under s 447A of the Act and s 90-15 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Act) in relation to the manner in which notices may be given by the Company. Finally, confidentiality orders have been sought regarding one exhibit to an affidavit filed in support of the application. 3 The orders sought by the Administrators provide for liberty to any person who can demonstrate a sufficient interest to apply to discharge or modify the orders. That is an important provision in circumstances where the creditors were only notified of the application, and today's hearing, yesterday afternoon. It is also important in circumstances where the final proposal has not been presented to the committee of inspection as the committee considered an earlier iteration of the proposal, which would have seen a longer extension of 120 days. 4 I have also been informed from the bar table that the Australian Securities and Investments Commission (ASIC) was notified of the Administrators' application and has this morning acknowledged receipt of the notification, but did not indicate that it sought to be heard. 5 The application was brought before me on an urgent basis as Duty Judge, as the convening period is due to expire on 26 February 2024 if it is not extended. The urgency of the application also emerges from the timing of a proposal by the directors of the Company (Directors) to put forward a deed of company arrangement (DOCA); that proposal only having been raised with the Administrators on Sunday, 18 February 2024. 6 The Administrators rely on two affidavits of Stephen Graham Longley, both dated 21 February 2024. Mr Longley is one of the Administrators. 7 In substance, the extension is sought to allow time for the Directors to put forward a DOCA.

background and evidence 8 The Company operated the Melbourne Rebels, a rugby team competing in the Super Rugby Pacific League. The Company is wholly owned by Victorian Rugby Union Inc and is governed by a board with seven directors. The Administrators consider the Directors persons of means able to support a viable DOCA proposal. The Directors have made financial commitments to meet the reasonable costs of the Administrators during the extended convening period, thus avoiding prejudice to creditors by the extension increasing the costs of the administration. 9 The investigations of the Administrators show that the Company had as at the date of the appointment of the Administrators: (a) only very limited cash at bank of some $17,000; (b) equipment of an approximate value of $122,000; and (c) some other assets in the nature of equipment, training apparel and memorabilia of a value that is yet to be determined. 10 The company has significant liabilities. Of significance in the present context, 35 employees are owed approximately $1.156 million in accrued and outstanding priority entitlements and 55 players are owed approximately $161,856 in unpaid superannuation. Overall, the Company has unsecured creditors whose claims total over $22 million, of whom 90 are unrelated creditors with a total value of $16 million. The unsecured creditors also include the Australian Taxation Office (ATO) as the Company has outstanding tax liabilities of $11.6 million. 11 The principal assets of the Company are the claims that it may, based on information received from the Directors, have against Rugby Australia Ltd. The Administrators have also identified potential voidable transaction claims and potential insolvent trading claims against the Directors, as well as claims for breaches of other directors' duties. 12 Following their appointment, the Administrators received interim funding from Rugby Australia to enable the Company to operate on a "business-as-usual" basis, which it did until 14 February, but that funding was not extended. After the funding expired, the lease of the premises from which the Company operated at AAMI Park was novated to Rugby Australia on 18 February 2024. The contracts of employment with the Company's employees were terminated on 14 February 2024. 13 Following their appointment, the Administrators have engaged in extensive work, as one would expect. The activities undertaken by the Administrators are detailed in the first affidavit of Mr Longley and there is no need to set them out in detail here, save to say that I am satisfied the Administrators have been active and diligent in the pursuit of their duties and that the present application does not reflect any dilatory conduct on their part. 14 The Directors are represented by Maddocks. The prospect of the Directors proposing a DOCA was raised in an email from Maddocks to the Administrators' solicitors on 18 February 2024. The Administrators have, following that email, received $100,000 into the trust account of their solicitors to meet the costs of this application. 15 The Directors then sent a further communication to the Administrators (via their solicitors) on 20 February 2024, detailing the Directors' view that an extension of the convening period would be in the interests of creditors. The points that the Directors raised in that regard were that: (a) the Directors intend to submit a proposal for a DOCA if the convening period is extended by 60 days; (b) a significant debt is allegedly owed to the ATO and the ATO has issued director penalty notices in relation to the tax debt to the Directors; (c) the Directors maintain that Rugby Australia is liable for the tax debt, at least jointly and severally; (d) the Company has other claims against Rugby Australia which, if made out, would have the effect of significantly reducing its liabilities; and (e) there are issues concerning whether Rugby Australia has correctly assumed the employee entitlements of its employees, which have been allegedly transferred to Rugby Australia. 16 The Directors explained that they had not yet been able to propose a DOCA because: (a) the ATO had not indicated its position concerning the tax debt; and (b) they were obtaining legal advice in respect of the potential claims against Rugby Australia. 17 The Directors suggested in their letter of 20 February 2024 that it would be more beneficial to extend the convening period, rather than have the Company go into liquidation, because: (a) the DOCA proposal would offer a significantly better return to creditors than an immediate winding up; (b) any negotiations of the tax debt may significantly decrease the pool of the debts, thus improving the return to creditors; and (c) any Rugby Australia contribution would increase the deed fund in the DOCA so that creditors would receive a better return. 18 Prior to the hearing, the Administrators continued to negotiate with the Directors regarding the terms on which the administration would be funded by the Directors during the period of the proposed extension, and related matters. Those negotiations culminated in an agreement which was reached last night, the terms of which are set out in the second affidavit of Mr Longley and are as follows: (a) the Directors will meet the reasonable costs of the administration for the period of the extension with such reasonable costs to be provided to the Administrators within 72 hours of a cost estimate (or updated cost estimate) being provided to the Directors; (b) details of the proposed DOCA must be submitted by close of business on 22 March 2024 (including confirmation that key stakeholders required to participate in, or agree to, the DOCA are supportive of the DOCA) or a later date if the Administrators consent; (c) if there is a proposed DOCA, then there will be a period of 21 days for the Directors to negotiate with the Administrators and finalise the draft DOCA for inclusion in the report to creditors ahead of the second meeting; (d) but if the Administrators form the view at any point that the proposed DOCA is no longer a viable option, they will convene the second meeting of creditors after providing 72 hours' notice to the Directors; and (e) the Administrators will act reasonably and work with the Directors to formulate a suitable DOCA for the benefit of all creditors. 19 The Administrators made enquiries with the Department of Employment and Workplace Relations in relation to the Fair Entitlements Guarantee (FEG). Those enquiries reveal that early access to FEG could only be approved by the Minister if the Company were expected to be placed into liquidation and, further, that the Department would be unlikely to take any action in relation to FEG entitlements until the Company was placed into liquidation. The Administrators also note that the Department's website states that the Department aims to process FEG claims within 16 weeks of an effective claim being made. The Administrators accept that if there is no successful DOCA and the Company does go into liquidation, the extension of the convening period will have resulted in some delay to FEG claims being initiated and finalised. 20 A committee of inspection was formed at the first meeting of creditors. The Administrators convened a meeting of that committee on 19 February 2024, in which they updated the committee members on the potential for a DOCA to be proposed by the Directors and an application being made to extend the convening period. The extension discussed by the committee of inspection was 120 days, not the 60-day period that is now sought. Views of the committee of inspection were not unanimous. Two members were supportive, two were opposed and three abstained. 21 The Administrators have detailed in the first affidavit of Mr Longley, and in their written submissions, the reasons why they consider an extension is in the best interests of creditors. The Administrators make it plain that they do not know what terms the anticipated DOCA will propose and so cannot say definitively that creditors will be better off. However, they are mindful that the Directors are persons of means with financial capacity to finance a viable proposal. The Administrators consider it important that creditors will not be prejudiced materially by the extension sought. That is because the Company is no longer trading and the Directors have not only met the costs of this application, but have undertaken to pay the Administrators' reasonable costs during the period of the extension. It follows that, if the Company does go into liquidation, its assets will not have been depleted by the extension of the convening period. 22 The point of most substance concerns the position of creditors who are former employees. As mentioned, the initiation of FEG claims will be delayed by the period of the extension if the Company does ultimately go into liquidation. However, against this, the Administrators note that the FEG scheme will not pay superannuation entitlements and that the FEG scheme may not cover in full certain other employee priority entitlements, including entitlements which exceed the maximum amounts claimable. The Administrators note that the indications from the Directors are that the potential DOCA proposal will offer a better return for employee creditors than a winding up, as well as meeting superannuation entitlements. 23 The Administrators have considered, as an alternative option, convening, but then adjourning, the second meeting. They do not embrace that course, as it would run up costs, given they would need to prepare a report to creditors, but then prepare a supplementary report if a DOCA were proposed. 24 Mr Longley has deposed that, on balance, the Administrators consider it in the best interests of creditors to extend the convening period in order to retain the possibility that a potential DOCA proposal is advanced, which results in better outcomes for creditors than a liquidation. He has also deposed that the Administrators see value for creditors through keeping open the option of a potentially superior and/or more certain return through a potential DOCA, noting that were the Company to go into liquidation, the potential return to creditors would depend on the quantum and recoverability of various claims, which are uncertain as matters stand. The Administrators also emphasise that if a DOCA is proposed that they consider incapable of being recommended, or if it becomes apparent that no potentially acceptable DOCA will be proposed, the second meeting can be convened sooner (pursuant to the Daisytek order sought). In other words, the entire extension may not be utilised. 25 Finally, I note that no notice has been received from any creditor opposing the extension, although, as stated, notice was issued only recently. However, given that the orders that are proposed provide interested persons the ability to approach the court and seek a variation of the orders, I do not regard the short notice of creditors to be a significant matter in this context.

releVANT PRINCIPLES AND AUTHORITIES 26 The principles applicable to applications such as this are well established: see, eg, Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) (2020) 144 ACSR 347; [2020] FCA 717 at [64]-[68] (Middleton J). The Administrators referred in their written submissions to the oft-quoted passage of Nettle and Gordon JJ's reasons in Mighty River International Limited v Hughes (2018) 265 CLR 480; [2018] HCA 38 at [73] in which their Honours (who were in dissent in the result, but not relevantly in this respect) observed: Generally speaking, courts have been disposed to grant substantial extensions in cases where the administration has been complicated by, for example, the size and scope of the business, substantial offshore activities, large numbers of employees with complex entitlements, complex corporate structures and intercompany loans, and complex recovery proceedings, and, more generally, where the additional time is likely to enhance the return to unsecured creditors. Provided the evidentiary case for extension has been properly prepared, there has been no evidence of material prejudice to those affected by the moratorium imposed by the administration, and the administrator's estimate of time has had a reasonable basis, the courts have tended to grant extensions for the periods sought by administrators. 27 The Administrators have also referred to authorities in which it has been said that, on such applications, the views of administrators are regarded as "significant" and, particularly where the administration is complex, should "carry weight": Woodhouse (Administrator), in the matter of Panoramic Resources Limited [2024] FCA 22 at [18] (Banks-Smith J) citing In the matter of Renex Holdings (Dandenong) 1 Pty Ltd (administrators appointed) [2015] NSWSC 2002 at [9] (Black J). 28 In relation to the timeframe of the extension, the Administrators have submitted that the length of the extension sought - here 60 days/two months - is not itself a determinative factor as to whether an extension should be granted, having regard to the statutory time period. Rather, the authorities indicate that courts are generally willing to tailor the timeframe in Pt 5.3A to suit the needs and circumstances of the particular company, having regard to the achievement of the objects of Pt 5.3A: Kaso, in the matter of Speedpanel Australia Ltd (Administrators Appointed) (No 2) [2017] FCA 862 at [21] (Moshinsky J) citing Re ABC Learning Centres (No 8) (2009) 73 ACSR 478; [2009] FCA 994 at [52] (Emmett J). The Administrators also note that, as Farrell J observed almost 11 years ago in In the matter of Harrisons Pharmacy Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458 at [46], "there is a growing number of precedents for extensions in the order of six months".

an extension should be granted 29 Having regard to the evidence of the Administrators and the views of the Administrators that I have set out, I am satisfied that it is in the best interests of creditors that the convening period be extended to 26 April 2024 and that the related Daisytek order be made. The key considerations are that: (a) there is limited or no prejudice to creditors, because the Company is not trading and incurring operating expenses and the Directors are meeting the costs associated with the extended convening period; and (b) there is a significant potential benefit to creditors if an acceptable DOCA is proposed.

Notices 30 In relation to the mode of giving notices, I accept the submissions of the Administrators that it is appropriate in this case to facilitate the giving of notice by email where there is an effective email address available for a creditor, otherwise by post, with backup provision for notices to be given by post where there is an email bounce-back. The Administrators' proposal also provides for notices: (a) to be posted to the website maintained by the Administrators in respect of the administration of the Company; and (b) published on the insolvency notices website hosted by ASIC.

Confidentiality 31 The Administrators also seek an order under s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) in respect of annexure SGL-2 to the affidavit of Stephen Graham Longley sworn on 21 February 2024. That annexure details potential claims that the Company may have against Rugby Australia and was provided to the Administrators on a confidential basis. Mr Longley has deposed in his affidavit that disclosure of the information contained in that document may prejudice pursuit of the potential claims, which is an outcome that is not in the interests of the Company's creditors. 32 The Administrators have referred to the decision of Hird (Liquidator), in the matter of Allmine Group Limited (in liq) [2018] FCA 781, where Gleeson J (then of this Court) referred (at [48]) to the "clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors [as] a relevant consideration in favour of granting an order under s 37AF" in appropriate cases. 33 I am satisfied that it is appropriate to maintain the confidentiality of that annexure on the basis that if it did not remain confidential, the disclosure of that information may prejudice the proper administration of justice: FCA Act s 37AG(1)(a).

Costs 34 In relation to the costs order sought by the Administrators, I have discussed with counsel the need to slightly adjust the order proposed so that it incorporates the cap of $100,000 in respect of this application and refers to the source of funds for the cost of this application being met from the $100,000 that was provided by the Directors to the trust account of the Administrators' solicitors. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button.