Owen, in the matter of Rivercity Motorway Pty Limited (Administrators... [2011] FCA 295 | Case summary

REASONS FOR JUDGMENT 1 Mr Michael Andrew Owen and his colleagues, Mr Stephen Parbery and Mr Christopher Hill, each official liquidators and members of the firm PPB Advisory, were appointed on 25 February 2011 as the joint and several administrators of the following companies: 1. RiverCity Motorway RE Holdings Pty Limited; 2. RiverCity Motorway Management Limited; 3. RiverCity Motorway Asset Nominee Pty Limited; 4. RiverCity Motorway Asset Nominee 2 Pty Limited; 5. RiverCity Motorway Services Pty Limited; 6. RiverCity Motorway Finance Pty Limited; 7. RiverCity Motorway Pty Limited; 8. RiverCity Motorway Construction Pty Limited; 9. Flow Tolling Pty Limited; and 10. RiverCity Motorway Holdings Pty Limited. I shall refer to those companies collectively as "the RiverCity Motorway Group". 2 In their capacity as administrators they apply, pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (Corporations Act), that the period within which they, as administrators, must convene the second meeting of the creditors of each of the companies in the RiverCity Motorway Group be extended up to and including 18 December 2012. 3 They further apply, pursuant to s 447A(1) of the Corporations Act, that the second meeting of the creditors of each of those companies required by s 439A of the Corporations Act may be held together or separately, and at any time during or within five business days after the end of the convening period, as extended by the Court, notwithstanding the provisions of s 439A(2) of the Corporations Act. They seek ancillary orders in respect of the notification of creditors of companies within the RiverCity Motorway Group and the Australian Securities & Investments Commission. In addition, they seek an order which would confer upon all other interested parties liberty to apply on not less than three business days notice. 4 In Australian Securities & Investments Commission v Storm Financial Ltd (2009) 71 ACSR 81 at [1] to [3], I made the following observations in respect of Pt 5.3A of ch 5 of the Corporations Act: Part 5.3A of ch 5 of the Corporations Act 2001 (Cth) (the Act) makes provision for inter alia, the administration of a company's affairs with a view to the execution of a deed of company arrangement after its approval at a meeting of creditors. Its origins may be traced to amendments made to the Act's predecessor, the Corporations Law (repealed), by the Corporate Law Reform Act 1992 (Cth) (Corporate Law Reform Act). 5 In the Explanatory Memorandum circulated by the then Attorney-General when introducing the bill which became the Corporate Law Reform Act, it was noted (paras 14, 15 and 21) that the proposed Pt 5.3A would implement recommendations made in the Law Reform Commission's Report No 45 in respect of the Commission's General Insolvency Inquiry, popularly known as "the Harmer Report". 6 In the Harmer Report (Vol 1, para 52 and para 53), the following observations are made in relation to the then state of Australia's corporations law: Conservative Legislation 52. The Commission is also concerned that, apart from conclusions that might be suggested by statistical evidence, the legislative approach to corporate insolvency in Australia is most conservative. There is very little emphasis upon or encouragement of a constructive approach to corporate insolvency by, for example, focussing on the possibility of saving a business (as distinct from the company itself) and preserving employment prospects. Creative alternatives to insolvency 53. Constructive or creative insolvency is not a myth. However, it requires suitable procedures that encourage and offer a reasonable prospect of achieving that result. A constructive approach to corporate insolvency requires the preservation, if practical and possible, of the property and business of the company in the brief period before creditors are in a position to make an informed decision. 7 This present application raises in a very particular way the question of the extent to which the reforms made to Australia's corporations law by Pt 5.3A of the Corporations Act can or should be given practical voice. That is because the extension of the convening period that is sought, some 21 months, might, at first blush, be considered to be so long as to be inconsistent with the prima facie short duration prescribed by Parliament in respect of the calling of creditors' meetings after a company has been placed in administration. It is important though to recall that, short though these prima facie periods may be, Parliament has reposed in courts having jurisdiction under the Corporations Act a discretion. Further, trite though that observation might be, each case must be considered on its own particular merits, and this present application arises out of very singular circumstances indeed. 8 The companies which comprise the RiverCity Motorway Group operate businesses associated with a tunnel which has come to be known in Brisbane as the "CLEM7 Tunnel". The business comprises, in terms of its principal components, the following: (a) the tunnel itself, which is a toll road of some 6.8 kilometres, including in that length twin two-lane 4.8 kilometres tunnels. The tunnel is leased from the Brisbane City Council. (b) related facilities for the collection of tolls paid by motorists for the use of the tunnel, and also a noteworthy addition to Brisbane's road infrastructure, the "Go Between Bridge". 9 The toll collection operations for the Clem7 Tunnel and the Go Between Bridge are conducted through the use of, materially, a call centre. That call centre is located in premises at Cannon Hill in Brisbane. Those premises are leased by one of the companies in the group from Mirvac Capital Proprietary Limited, hereafter "Mirvac". Also at the Cannon Hill premises is the head office of the RiverCity Motorway Group. 10 Apart from being placed in administration, the companies in the RiverCity Motorway Group are also subject to an appointment of receivers and managers. The receivers and managers were appointed on 25 February 2011. Mr Martin Madden and Mr David Merryweather, each partners of the accounting firm KordaMentha and each chartered accountants, are the receivers and managers so appointed. They were appointed by the National Australia Bank Limited. 11 In so doing, the National Australia Bank was acting in its capacity as the security trustee of the North South Bypass Tunnel Security Trust. In turn, the beneficiaries of that trust are a syndicate of lenders which have, in effect, provided debt finance for the construction of the tunnel. 12 RiverCity Motorway RE Holdings Pty Limited and RiverCity Motorway Management Limited are associated with a managed investment scheme involving the issue and sale to the public of what might be termed "stapled securities". These stapled securities comprise stapled units in the RiverCity Motorway Investment Trust and the RiverCity Motorway Holdings Trust. The assets of those trusts in essence comprise: (a) cash; (b) debts owed by other companies in the RiverCity Motorway Group; and (c) shareholdings and unit holdings in the operating entities of that group. 13 One can see from the foregoing that the affairs of those two trusts are interlinked with those of the operating entities. That is because those trusts depend upon the operating entities repaying their loans or generating and distributing profit through their units or shares to meet their cash flow requirements. The managed investment scheme entities are under administration but do not have receivers and managers appointed to them. 14 The present position is that the receivers and managers control all of the significant assets which are available within the RiverCity Motorway Group. It is the receivers and managers who have been operating the tunnel business since their appointment. The sum owed to the secured creditors is very large, some $1.388 billion. 15 The evidence before me today does not go to the present value of the tunnel business. There is a reason for that which, at least as presently advised, I regard as an acceptable reason and indeed, one closely interrelated with the rationale for the length of the extension of the convening period which is sought. That reason is because the receivers and managers, at least as a matter of reasonable apprehension at the moment, will want to engage in a process that leads to sale of the tunnel business. A disclosure at present of the worth of the business in the opinion of the receivers and managers or for that matter, at the moment, of the administrators may, for obvious reasons, jeopardise the maximising of the worth of that business on sale. 16 I do, though, have evidence which establishes the following: (a) the initial modelling and forecasts for the tunnel business suggested that the average daily traffic which flowed through the tunnel in or around December 2010 would have been around 90,000 vehicles per day, whereas the actual traffic flow in that month was around 25,000 vehicles per day; and (b) the value of the tunnel business was written down in the report of the RiverCity Motorway Group for the financial year ended 30 June 2010 to $258 million. 17 It was put to me on behalf of both the administrators as well as the receivers and managers that there was a direct relationship between the worth of the business and the cash flow it was able to generate via the passage of vehicles through the assets within or managed within the tunnel business. Such a submission may readily be accepted. 18 Over time a number of principles have been developed in relation to whether or not to extend a convening period. In Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10], Barrett J observed that, even in the context of an application for an extension of time, the need is: …to strike an appropriate balance between, on the one hand, the expectation that an 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. To that observation one might add, in the context of this case, "maximising, if possible, the return to those who have interests in the stapled securities". So much, in terms of underlying philosophy is evident from the object of Pt 5.3A as set out in s 435A. 19 Considerations which have proved relevant were summarised, in a non-exhaustive way, by Austin J in Re Riviera Group Pty Ltd (2009) 72 ACSR 352 at 355, [13] to [14]. At para 13, his Honour noted that the reasons given for an extension in cases can be grouped into the following broad categories (I omit reference to the supporting authority cited by his Honour): (a) the size and scope of the business; (b) substantial offshore activities; (c) large number of employees with complex entitlements; (d) complex corporate group structure and intercompany loans; (e) complex transactions entered into by the company (for example securities lending or derivatives transactions); (f) complex prospects of recovery proceedings; (g) lack of access to corporate financial records; (h) the time needed to execute an orderly process of disposal of assets; (i) the time needed for thorough assessment of a proposal for a deed of company arrangement; (j) where the extension will allow sale of the business as a going concern; (k) more generally, that additional time is likely to enhance the return for unsecured creditors. 20 His Honour then added at [14]: The cases show that where a substantial issue in any of these categories is established (and a fortiori, 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. 21 In this case a number of the considerations listed by Austin J are present. There is a complex corporate group structure with intercompany dealings. There is evidence that an extension will allow a sale of the business as a going concern in a way likely to maximise the worth of that business, and in so doing, maximise the potential return, if any, for persons other than the secured creditors. One must of course as to the latter, given the catastrophic over-estimate as hindsight teaches, of the volume of traffic, be guarded in relation to the prospects of wider returns. Nonetheless, a course which would, as would seem likely in the context of liquidation, as the evidence presently stands, lead to a fire sale is a prospect to be avoided, if possible. 22 Here, I have the benefit of a considered value judgment of the administrators that an extension should be granted. That value judgment is based on the following facts. 23 Mr Owen points to the complexity of the corporate group to which he and his fellow administrator have been appointed. He refers to the intertwining of the affairs of the group and to numerous intercompany transactions and loans. Against that background, he expresses the view that investigations may be required to determine if there have been any uncommercial or director related transactions, and that these investigations, in themselves, will take some time, even for the administrators to express the initial opinion required of them. That is certainly a factor to consider, but not in itself decisive in terms of the length of extension that is sought. More persuasive are other factors highlighted by the administrators. 24 They are, first, that the continuation of the administration maximises the chances of the tunnel business continuing in existence. I have already referred to the nature of the business and to that being, at present, in the hands of the receivers and managers. Mirvac has given notice of default in respect of the lease of the Cannon Hill premises. It has not, though, yet indicated whether or not it intends to terminate the lease. Mirvac has been given notice of today's application. It is significant that there is no appearance by or on behalf of Mirvac, if only to highlight an insufficiency of time, as that company apprehends it, to form a view as to the merits of the application the administrators now make. Thus, while Mirvac has not yet indicated whether or not it intends to terminate the lease, the administrators quite rightly put forward that there is some danger that it will do so if the administration ends and the moratorium which is created by s 440C of the Corporations Act is lifted. 25 The administrators also highlight that the toll collection arm is the primary source of revenue for the tunnel business. The continuing operation of the call centre is, they depose, of critical importance to the toll collection process. Indeed, it is a specific requirement of the Brisbane City Council under the project deed which appears to govern the obligations of the operator of the tunnel business to the council. Here too, notice of the application has been given to the Brisbane City Council. Again, I regard the fact that there is no appearance today by or on behalf of the Council, if only to indicate an insufficiency of time to consider the present application, as significant. 26 Were the lease of the Cannon Hill premises to be terminated, then, given the centrality of the call centre's importance to the tunnel business, it would be necessary to establish another call centre. The administrators have conducted some investigations as to what might be entailed in this. It would require: 1. Around 40 days to install a new "dark fibre" connection between the new premises and the data centre used by the tunnel business. This would cost up to $350,000. 2. Depending upon whether it was possible to relocate the present call centre to another site within Cannon Hill's general area, loss or replacement of staff would probably occur, in the sense that the reasonable proximity of staff to their place of work would be lost. 3. About 12 weeks might pass in terms of delay in locating a suitable replacement call centre site, with a further period of delay then for the installation of appropriate fit-out. This would be no small task. It would entail some 60 work stations and computer terminals, related IT requirements, security and so on. 4. Overall, taking relocation considerations into account, a likely delay of between half a year and perhaps even a year would be entailed, with an approximate total cost of between $600,000 and $700,000. 27 One sees from this that there is a compelling reason, in terms of preservation of the existing business and the minimisation of interruption to maintain, if possible, the existing call centre and an existing trained workforce. The interests of that workforce in continuing employment are, of course, another factor to consider. 28 Next, the administrators point to the continuance of the administration as likely to facilitate a sale of the tunnel business at the most opportune time. In particular, they highlight that the value of the tunnel business is likely to be determined by financial modelling based on traffic volumes and toll charges. I have already referred to this as a reasonable basis upon which one might expect the worth of the business would be assessed. The administrators expressed the opinion that a prospective purchaser will probably discount this value to allow to any uncertainties in the forecasting of traffic volume. Thus, as the accuracy of traffic forecasts improves, the discount is likely to reduce. Events to date are eloquent as to the applicability of this opinion which the administrators voice. 29 The administrators then state that the first 18 months of any urban tunnel is likely to be treated as a "ramp-up" period during which usage patterns develop and tolling is introduced. The tunnel commenced operation in March 2010. It operated free of tolls until April 2010. Charges have then been $2.95 per car until 30 June 2010, $2 per car until 4 November 2010, and $3 per car since 15 November 2010. It is intended the toll charges will be further increased during 2011. The administrators presume that this will have some effect on the volume using the tunnel. Events to date in relation to the difference between the initial forecasts and those which proved to be the case with tunnel daily usage highlight the difficulties which can attend forecasting relationships between tunnel volume and price, and well establish, for the purpose of this application, in my opinion, the uncertainties that lie behind that term "ramp-up" period so far as the forecasting of reasonably reliable cash flow is concerned. 30 In addition, the administrators refer to the ramp-up pattern having been impacted upon by the recent flooding in Brisbane. No Brisbane resident needs reminding as to that impact and of the relevance of the observation which the administrators make as to the impact of the flooding on traffic-flow patterns. 31 The administrators also refer to the Brisbane Airport Link Project. This project involves the construction of the motorway, the airport link, which will connect directly with the tunnel. The administrators opine that it is likely also to have a significant positive effect upon traffic volume. They note that the airport link is scheduled for completion in mid-2012 and that prospective purchasers are likely to require months of traffic data following its opening to assess its impact upon traffic volumes in the tunnel. 32 Having regard to such matters, the administrators opine that there is a sound basis for thinking that the sale price for the tunnel business is likely to be maximised by selling some months after mid-2012. In order to maintain the business in existence for this period, it is necessary to ensure the continuing operation of the call centre. They opine, and I agree, that this would be facilitated by the continuation of the administration. 33 The administrators then highlight that there is some prospect, albeit at the moment of the most contingent and general of natures, that the eventual sale might be undertaken by utilising a deed of company arrangement to allow the purchaser to acquire the business and assets of the corporate group. This form of sale might result in a higher price, they opine. They are though, careful to reserve the expression of any more definite view than this but it is another contingency to consider in terms of benefits that might flow from an extension. 34 Next, the administrators point to what they suggest is a lack of prejudice if the administration is continued. First and foremost in this regard, the administrators highlight that the secured creditors of the RiverCity Motorway Group, via the receivers and mangers, support the continuation of the administration. I shall return to that subject in a moment. They then state that, at present, unsecured creditors appear unlikely to receive any dividend from the sale of the tunnel business. Thus, a continuation of the administration does not "degrade their position". Another way of putting that might be that if one is likely to receive nothing, then a continuation of that likelihood would not make it any worse. Nonetheless, it is a factor to take into account that the position of unsecured creditors, so far as the evidence presently takes one, could only be improved potentially by a continuation of the administration. It seems very likely, on the present materials, that were the company to be placed into liquidation, the position of unsecured creditors would be no better, and indeed, very likely worse than were the administration to continue. 35 The administrators then highlight what is, for me, a very significant factor, significant because necessarily the placement of a company into administration highlights that, if not insolvent, it is, to say the least, in particular financial difficulty. The administrators highlight that the receivers and managers are paying all of the trade, lease and employee creditors in the ordinary course of business, and that they intend to continue so doing. That is a fact confirmed by the attendance of the receivers and managers and the evidence presented on their behalf. The administrators particularly highlight in that regard that the lease in respect of the Cannon Hill premises is presently being paid. They also highlight that the receivers and managers are causing the operating entities within the RiverCity Motorway Group to comply with their obligations to the Brisbane City Council under the project deed. 36 The administrators put forward on these grounds that there is an ample basis for an extension of the convening period for the second creditors meeting. I agree. 37 In that regard, it is also significant that the receivers and managers, as I have said, support the present proposal. The receivers and managers appointed at the behest of the National Australia Bank approached the question having regard to their own particular commercial interests. As it happens, the considered value judgment of the receivers and managers accords with that of the administrators. Each approaching the matter separately, but having regard to like considerations in terms of maximising the value of the worth of the tunnel business, have come separately to the view that it is desirable to continue the administration. 38 Another factor which I take into account is that the Australian Securities and Investments Commission, which has a general responsibility in respect of the operation in the community of the Corporations Act, has been given notice of this proceeding. Yet again, the absence of an appearance by or on behalf of the Australian Securities and Investments Commission is eloquent. Even if that appearance were only to submit that there was insufficient time to consider the proposal, it is an appearance that ought to have been made if the Australian Securities and Investments Commission had a particular reservation in relation to this application. I expressly take into account the absence of the Commission in relation to whether or not I should make the orders sought. It is to be expected in respect of matters which have about them an urgency, both in terms of the interests of the community in the infrastructure facility represented by the assets of the RiverCity Motorway Group, unsecured creditors, including particularly employees, if there be any outstanding amounts to employees in current employment and creditors, including the secured creditors, that the Australian Securities & Investments Commission react with all due dispatch to the needs of the community in relation to highlighting any particular policy reservation that might attend an application of the kind made today. 39 The factors highlighted on behalf of the receivers and managers are, indeed, at one with those highlighted by the administrators. Considered collectively, they provide, in my opinion, a good example of just the type of outcome that Parliament intended might be achieved by the enactment of Pt 5.3A of the Corporations Act, including, in that regard, the discretions which repose in the Court in relation to the extension of a convening period. 40 There will be an order in terms of the draft for the reasons that I have stated. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

Owen, in the matter of Rivercity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (1)

Cited By (11)