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

GLEESON J: 1 On 18 October 2016, I heard an application made by the joint and several voluntary administrators ("administrators") of Hughes Drilling Limited ("HDL") and HDL's thirteen Australian-based subsidiary companies (together "HDL group companies") under ss 439A and 447A of the Corporations Act 2001 (Cth) ("the Act") to extend the convening period for the second meeting of creditors of the HDL group companies to 2 December 2016 (that is, a period of about six weeks), and for consequential orders. 2 The matter was listed before me as Commercial and Corporations duty judge because the convening periods were due to expire on 21 October 2016. After hearing submissions from Mr Hughes of counsel on behalf of the administrator plaintiffs, I was satisfied that the convening periods should be extended. Accordingly, I made orders in the terms sought by the administrators. My reasons for making those orders are as follows. 3 The application was supported by an affidavit of Mr Shaun Fraser, one of the administrators of the HDL group companies, affirmed 17 October 2016. The primary basis of the application was that the extensions would permit the completion of a sale process commenced by the administrators, which has the possibility of allowing the administrators to sell the business of the HDL group companies as a going concern. The administrators had received a number of non-binding offers, and had shortlisted a number of bidders. Of the shortlisted bidders who had been invited to continue to engage in the sales process, certain bidders had made non-binding offers to purchase the assets of the group and others had made non-binding offers involving a deed of company arrangement ("DOCA"). 4 I accepted that the extensions should be granted on the primary basis identified by the administrators. 5 The application was not opposed by the HDL group companies' principal secured creditor, Westpac Banking Corporation ("Westpac"). Mr Fraser's belief was that the proposed extension of the convening periods will not result in any prejudice to unsecured creditors. Mr Fraser was not aware of any group or individual who might have been prejudiced by the proposed extension of the convening periods. These are other factors which led me to conclude that I should grant the fairly short extension sought by the administrators.

Background facts 6 The first plaintiffs are the joint and several voluntary administrators of HDL. They have also been appointed as joint and several voluntary administrators to the other companies that comprise the HDL group companies. In each case, the administrators were appointed on 22 September 2016. 7 On 26 September 2016, Yates J made orders pursuant to s 447A of the Act, modifying the operation of Pt 5.3A of the Act to permit the administrators to enter into a funding arrangement with Westpac without incurring the personal liabilities that would otherwise be imposed by s 443A of the Act: Preston, in the matter of Hughes Drilling Limited (Administrators Appointed) [2016] FCA 1175. In his reasons for judgment, Yates J recorded the following relevant facts: [3] HDL is a public company, incorporated and operating in Australia. It was previously listed on the Australian Securities Exchange. Since 27 June 2016, it has been voluntarily suspended from official quotation. [4] HDL is the ultimate holding company of the thirteen Australian-based subsidiary companies and another company which was incorporated in the United States of America. It is convenient to refer to HDL and its subsidiary companies as, simply, the Group. [5] The Group's principal activities consist of providing drilling services to the mining industry, with a focus on niche services for production, delineation and mining companies that do not have specialised equipment or qualified personnel to perform the necessary work themselves. The Group also supplies manufactured drill rigs and spare parts. [6] The Group's key assets comprise drilling rigs valued at approximately $67.7 million (as at 30 April 2016). Other assets include drill compressors, land and buildings, support vehicles, light vehicles, other plant and equipment and certain intangible assets (intellectual property) with a total value of approximately $18.5 million (as at 30 April 2016). [7] Companies in the Group are also party to approximately 20 service contracts with major mining companies such as BHP Billiton Ltd, Fortescue Metals Group Ltd, Downer EDI Ltd and Yancoal Australia Ltd, servicing mines across the east coast and west coast of Australia. These contracts (the service contracts) together generate approximately $6 million in monthly revenue for the Group. [8] As at 22 September 2016, HDL and the Australian-based subsidiary companies had a drawn overdraft balance of $11,601,145, but with only $49,398 in cash at bank. Westpac was the principal secured creditor. At that time it was owed approximately $47 million under existing debt facilities. Other secured creditors include suppliers with retention of title arrangements and lessors with registrations on the PPSR. The Group has a potential taxation debt of $19 million (including a superannuation guarantee charge of approximately $4.3 million). The Group has approximately 450 trade creditors (approximately $7 million) and accrued employee entitlements (approximately $4.6 million). In this latter connection, the Australian-based subsidiaries together employ over 300 employees, although most of these employees are employed by two companies in the Group which provide drilling and drilling-related services to customers under the service contracts. Some of these employees are paid weekly. Some are paid fortnightly. Others are paid monthly. The next tranche of wages ($715,094 inclusive of superannuation and tax) is due on 28 September 2016. The first plaintiffs' forecast that a total amount of $9.7 million will be payable to employees over the next 13 weeks. 8 On 28 September 2016, the administrators and HDL entered into a funding agreement with Westpac. The same day, the administrators drew down funds from the overdraft facility made available by Westpac under the funding agreement and arranged for wages in the amount of $630,272 (exclusive of superannuation and taxes) to be paid to the employees of the HDL group companies. 9 A first meeting of creditors of each of the HDL group companies was held on 5 October 2016. At those meetings, each chairperson foreshadowed that an application to extend the convening period may be brought by the administrators. 10 On 14 October 2016, the administrators caused an ASX announcement to be released, giving notice of their intention to apply to the Court for an extension of the convening periods. 11 On 17 October 2016, Westpac confirmed to the administrators that it did not object to the proposed extension of the convening periods. 12 The Australian Securities and Investments Commission was informed of the proposed application and did not seek copies of the application and supporting affidavit. 13 The administrators also notified all the landlords of real property currently occupied by the HDL group companies of the proposed application. No notice of any opposition to the application was received from any landlord. 14 Mr Fraser's evidence was that, so far as he was aware, there had not been any statutory demands served on any of the HDL group companies prior to or since the administrators' appointments and no litigation had been commenced or threatened against the HDL group companies.

Conduct of the administration to date 15 The administrators have continued to conduct the business of the HDL group companies while conducting the sales campaign. 16 There have been no material changes to the number of employees since 26 September 2016. 17 As at 17 October 2016, approximately $1.8 million had been drawn from the Westpac overdraft facility. 18 There have been no material changes to the net value of unsecured liabilities since 26 September 2016.

Sales process 19 The administrators' planned sales process is described in Mr Fraser's affidavit. After describing the process, Mr Fraser concluded that: 30. … the Administrators have received a small number of DOCA proposals and purchase offers to acquire assets of the group. The proposals and offers are non-binding and relatively undeveloped, but generally involve payments to secured creditors, employees and unsecured creditors. In contrast, the immediate winding up of the [HDL group companies] will likely result in the termination of the employees' employment and crystallisation of the [HDL group companies] liabilities for employee entitlements (in particular, leave and retrenchment payments, the amounts of which are likely to be significant). In that way, and based only on the information received to date, there appears to be a possibility that the DOCA proposals and the non-binding purchase offers, if adopted, could offer superior returns than liquidation. … 34. I believe that an extension of the convening period will not result in any prejudice to unsecured creditors, as a sale of the [HDL group companies] (as a group and on a going concern basis) may result in a better return to unsecured creditors (including employees). However, other than the matters described at paragraph 30 above, I am not currently in a position to express a view as to: the likely returns to creditors (either in a DOCA scenario or in a liquidation scenario); or which of the 3 outcomes of the administrations is ultimately in the best interest of creditors.

Complications in the conduct of the administrations 20 Mr Fraser gave evidence that the conduct of the administrations has been complicated by: (1) the remote locations of the sites and mines at which the HDL group companies operate, and the fact that they are scattered across the country; (2) the intermingling of the financial affairs of the companies within the HDL group; (3) the interconnectedness between the business and affairs of the HDL group companies and those of Reichdrill Inc., which business is located in the US and to which the administrators have not been appointed as administrators; (4) the large volume of PPS registrations (lodged by suppliers) and other securities which require review and verification; and (5) the fact that there is no deed of cross-guarantee in place between the companies, even though prior to the administrators' appointment the HDL group companies' financial affairs had been conducted on the basis that such a deed existed, and consolidated financial accounts (including audited accounts) had been prepared and published on that basis for a number of years. The absence of a deed of cross-guarantee means that the administration of each company needs to be conducted separately, and the assets and liabilities of each company must also be accounted for separately.

Statutory framework 21 Section 439A of the Act provides relevantly: (1) The administrator of a company under administration must convene a meeting of the company's creditors within the convening period as fixed by subsection (5) or extended under subsection (6). (2) The meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period. (3) The administrator must convene the meeting by: (a) giving written notice of the meeting to as many of the company's creditors as reasonably practicable; and (b) causing a notice setting out the prescribed information about the meeting to be published in the prescribed manner; at least 5 business days before the meeting. (4) The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of: (a) a report by the administrator about the company's business, property, affairs and financial circumstances; and (b) a statement setting out the administrator's opinion about each of the following matters: (i) whether it would be in the creditors' interests for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors' interests for the administration to end; (iii) whether it would be in the creditors' interests for the company to be wound up; and also setting out: (iv) his or her reasons for those opinions; and (v) such other information known to the administrator as will enable the creditors to make an informed decision about each matter covered by subparagraph (i), (ii) or (iii); and (c) if a deed of company arrangement is proposed - a statement setting out details of the proposed deed. (5) The convening period is: (a) if the day after the administration begins is in December, or is less than 25 business days before Good Friday - the period of 25 business days beginning on: (i) that day; or (ii) if that day is not a business day - the next business day; or (b) otherwise - the period of 20 business days beginning on: (i) the day after the administration begins; or (ii) if that day is not a business day - the next business day. (6) The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires. … 22 By s 447A(1), the Court may make such order as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company. Relevant principles 23 In Strawbridge, in the matter of Custom Coaches (Sales) Pty Ltd (Administrators Appointed) [2014] FCA 683, Jacobson J said: [22] The statutory and legal framework is well-known. The principles have been stated in a number of authorities. The essential principle is that the Court attempts to strike a balance between the expectation that the administration be conducted relatively quickly and the need to ensure that the speed with which it is dealt does not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders. That principle was stated by Barrett J in Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] and has been cited on numerous occasions in decisions of this Court and in the Supreme Court of New South Wales. 24 In In the matter of BCD Resources NL (receivers and managers appointed) (administrators appointed) [2015] NSWSC 777 at [12], Black J considered that relevant factors included the time needed for an assessment of a proposal for a DOCA (which, in that case depended on the proposal being sufficiently developed), and the fact that an extension might allow the value of the business to be maximised by the proposals for a DOCA. His Honour was satisfied that, on balance, the grant of an extension of time was preferable to declining such an extension, where creditors would otherwise be left with no real option other than a winding up. His Honour noted that the court can, and should, also give weight to the considered judgment of the administrator in matters of this kind: cf. Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 4) [2012] FCA 1491; (2012) 92 ACSR 255 at [26].

Reasons for proposed extension 25 The proposed extension was sought because the administrators believed that they would not be able to discharge their statutory duties in relation to the HDL group companies within the statutory timetable on the basis that they would be required to report to creditors when they had not: (1) had an opportunity to consider, compare and form a view on any finalised DOCA or asset/business acquisition proposals, which they expected would be presented at the end of the sale process described in Mr Fraser's affidavit; (2) satisfactorily completed an analysis and formed a concluded view as to the three options available to creditors of each company, which analysis would be necessary for them to give an informed and meaningful recommendation to creditors in accordance with their obligation under s 439A(4) of the Act; and (3) otherwise completed their investigations and formed a concluded view in relation to the historical performance of the HDL group companies (including the causes of their failure), the availability of recovery actions in a liquidation scenario, the estimated sale value of the HDL group companies and/or their assets and the validity and value of claims made against the HDL group companies. 26 Mr Fraser's opinion was that the proposed extension would: (1) enable the sale process to be concluded, allowing for the possibility that the HDL group companies' business could be sold as a going concern and potentially as a group, which outcome would be unlikely in a liquidation; and (2) otherwise enable the administrators to complete their investigations into the HDL group companies' business, property, affairs and financial circumstances and thereafter present the necessary information in the report to creditors required under s 439A of the Act.

Conclusion 27 I was satisfied that the orders sought were appropriate having regard to the following matters: (1) the proposed extension was for a fairly short period; (2) the extension was necessary to enable the administrators to complete the sales process which may offer superior returns than liquidation; (3) the sales process may produce the result that the business, which presently employs over 300 employees, could be sold as a going concern. In contrast, immediate winding up of the HDL group companies will likely result in the termination of the employees' employment; (4) there is no suggestion that the administrator has delayed in the exercise of his functions. An extension of time will increase the likelihood that the administrator can convey useful information to the creditors and a properly informed opinion as to the options available to the creditors at the second meeting; (5) Mr Fraser's belief was that the proposed extension of the convening periods will not result in any prejudice to unsecured creditors, who include over 300 employees. Mr Fraser was not aware of any group or individual who might have been prejudiced by the proposed extension of the convening periods. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

SCHEDULE OF PARTIES NSD 1640 of 2016 Plaintiffs Fourth Plaintiff: AUSTRALIAN GAS DRILLING PTY LTD ACN 139 242 890 Fifth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF EDMS METALS PTY LTD ACN 146 399 760 Sixth Plaintiff: EDMS METALS PTY LTD ACN 146 399 760 Seventh Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF EVERY DAY MINE SERVICES OPERATIONS PTY LTD ACN 003 949 148 Eighth Plaintiff: EVERY DAY MINE SERVICES OPERATIONS PTY LTD ACN 003 949 148 Ninth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF EXPRESS HYDRAULICS (AUST) PTY LTD ACN 155 845 864 Tenth Plaintiff: EXPRESS HYDRAULICS (AUST) PTY LTD ACN 155 845 864 Eleventh Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF G.O.S. DRILLING PTY LTD ACN 068 520 794 Twelfth Plaintiff: G.O.S. DRILLING PTPY LTD ACN 068 520 794 Thirteenth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HD JSW PTY LTD ACN 165 895 072 Fourteenth Plaintiff: HD JSW PTY LTD ACN 165 895 072 Fifteenth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES DRILLING 1 PTY LTD ACN 011 007 702 Sixteenth Plaintiff: HUGHES DRILLING 1 PTY LTD ACN 011 007 702 Seventeenth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES DRILLING 2 PTY LTD ACN 146 399 902 Eighteenth Plaintiff: HUGHES DRILLING 2 PTY LTD ACN 146 399 902 Nineteenth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES DRILLING CORPORATE PTY LTD ACN 146 398 718 Twentieth Plaintiff: HUGHES DRILLING CORPORATE PTY LTD ACN 146 398 718 Twenty-First Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES EQUIPMENT HIRE PTY LTD ACN 146 398 923 Twenty-Second Plaintiff: HUGHES EQUIPMENT HIRE PTY LTD ACN 146 398 923 Twenty-Third Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HYD-ELEC AUSTRALIA PTY LTD ACN 151 316 611 Twenty-Fourth Plaintiff: HYD-ELEC AUSTRALIA PTY LTD ACN 151 316 611 Twenty-Fifth Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF JSW AUSTRALIA PTY LTD ACN 125 989 791 Twenty-Sixth Plaintiff: JSW AUSTRALIA PTY LTD ACN 125 989 791 Twenty-Seventh Plaintiff: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF REICHDRILL AUSTRALIA PTY LTD ACN 162 841 287 Twenty-Eighth Plaintiff: REICHDRILL AUSTRALIA PTY LTD ACN 162 841 287