PACT CONSTRUCTION PTY LTD -v- HBO EMTB WA PROJECTS PTY LTD [2014] WASC 423 (30 October 2014)

(This judgment was delivered extemporaneously on 30 October 2014 and has been edited from the transcript.)

1 The application before me is an application to amend an application to wind up HBO EMTB WA Projects Pty Ltd (HBO), the defendant in the action, by substituting the petitioning creditor, and then for an order to be made to wind up HBO. The action was commenced by originating process filed 17 July 2014 (and amended on 22 July 2014) as an application under Corporations Act 2001 (Cth) (CA) s 459P to wind up HBO on the grounds of insolvency. In particular, there is reliance on a failure to comply with a statutory demand.

2 HBO is currently under external administration. The external administrators have received a proposal for a deed of company arrangement (the DOCA), from the sole director of the defendant, one Kevin Fitzgerald. The DOCA is to be put to a meeting of the creditors of HBO on 3 November 2014. Counsel for the petitioning creditor, Pact Construction Pty Ltd (Pact) and counsel for HBO have submitted that the winding up application should be adjourned until after that meeting takes place. Counsel for each of two of the intervening creditors, being Collins Corporation (NSW) Pty Ltd and Jaystar (NSW) Pty Ltd trading as Stylecraft Australia (Stylecraft), and Innerspace Commercial Interiors Pty Ltd (Innerspace), have submitted that the adjournment should not be granted and I should make orders winding up the company today. Together Stylecraft and Innerspace comprise approximately half of the $780,000 worth of claims against HBO by unrelated unsecured creditors.

3 In terms of the financial position of HBO, the administrators report that they have received known claims of just over $3.3 million. Of those claims $2.37 million are claims from related parties. There is $780,000 in unsecured claims from unrelated parties. There is then an amount of $165,014 from Pact, which is also unsecured, though it appears that Pact has been paid by a third party related to HBO.

4 The relevant legal framework is set out in CA s 440A(2). That section provides:

The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.

5 It seems to me that the onus is on the party seeking the adjournment to move the court to be satisfied that it is in the interests of creditors for the company to continue under administration. If the court is not so satisfied, then the power under CA s 440A does not arise.

6 In order to adjourn a winding up under CA s 440A the court must be satisfied that there will be sufficient possibility as distinct from a mere optimistic speculation that the interests of creditors will be accommodated to a greater degree than would otherwise be the case in winding up: LexisNexis Legislation Services Australian Corporations Legislation (2014 ed) 603 (LexisNexis Butterworths); Creevey v The Deputy Commissioner of Taxation (1996) 19 ACSR 456, 457 (McPherson JA, with whom Pincus & Davies JJA agreed); TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830 [15] (Hamilton J); Australian Securities & Investments Commission v Storm Financial Ltd (Receivers & Managers Appointed) (Administrator Appointed) [2009] FCA 269; (2009) 71 ACSR 81 [25] (Logan J).

7 That in turn requires me to look at the position of creditors under the deed of company arrangement and then to look at the position of creditors under the liquidation scenario.

8 The administrators' report is annexure C to the affidavit of Alexander James Tharby, a solicitor employed by the lawyers acting for Stylecraft. It contains a comparison between the position of creditors under the DOCA and under a liquidation scenario. In the DOCA scenario, the key component is a contribution of $65,000 from Mr Fitzgerald. The other key component is that the related parties do not claim anything. Pact is not paid anything as it has already been paid. In the DOCA scenario, this leaves a return of 1.67 cents in the dollar on the unsecured claims of the unrelated parties. I will return to the liquidation scenario shortly.

9 Another reason advanced by both counsel for Pact and HBO as to why the DOCA would produce a better outcome is that, in addition to the known payment by Mr Fitzgerald, the creditors will get paid within a definite period of time, estimated by the administrators to be within three months of the execution of the DOCA.

10 A disadvantage of the liquidation scenario pointed out by counsel for Pact and for HBO is that any appointment of a liquidator is going to necessarily incur fresh or additional fees, fees which will be taken out of what is apparent to me is a limited pool of funds.

11 The primary reason why it is suggested that the return on a liquidator scenario would be more is that the administrators have formed the view that the payment to Pact of $165,000 by a related entity of HBO may be considered a preference payment in a liquidation scenario. The administrators project that in an optimistic scenario this would be recovered, but at a cost.

12 Both counsel for the intervening creditors (Stylecraft and Innerspace) suggest that this is overstated and does not take into account the prospect of recovery of costs from Pact. I assume for present purposes that Pact is going to defend that claim. In their report to creditors (at page 14), the administrators state that they have sought advice on this issue, and the advice is to the effect that the payment to Pact would be considered an unfair preference in the event of HBO being wound up. However, they go on to note that there will be significant legal costs incurred if further action is commenced to seek recovery of the preference payment in the event that the company is wound up, irrespective of a successful recovery of the full amount being made.

13 On the assumption that the amount from Pact is recovered, which in the administrators' view is an optimistic liquidation scenario, the return to the unrelated parties with unsecured claims would only be 1.36 cents in the dollar compared to 1.67 cents in the dollar on the DOCA scenario. The less favourable position in the liquidation scenario is accounted for by the lack of contribution by Mr Fitzgerald (being $65,000) and the additional fees of the liquidator to recover the money from Pact (estimated at $55,000 for liquidation fees and $44,000 for legal fees). It thus appears that in order to pursue Pact, the administrators and the lawyers will spend approximately $100,000 recovering $165,000. In that context it is not surprising that the administrators have doubts as to the commerciality of that approach.

14 The other point noted about the DOCA is that the agreement includes a term that HBO unconditionally release present and past directors and officers of it of any claims it may have against them.

15 In my view, the DOCA proposed is a pragmatic document. The question is whether or not it is too pragmatic.

16 In support of the making of winding up orders today, counsel for Stylecraft made a number of further points. The first is that there is evidence before me in the administrators' report to the effect that the company appears to have been trading while insolvent since its inception.

17 The second point is that, as I have mentioned, it appears that Pact has been paid out in circumstances that would constitute an unfair preference.

18 The third point is, again, as I have mentioned, there are significant related party transactions leading to unsecured claims in the amount of $2.37 million. There is an issue raised in the evidence before me as to whether or not this level of claims is going to be substantiated, that is, whether or not these related party transactions are genuine transactions or mere book entries.

19 The next point made by counsel for Stylecraft is that, again in the administrators' report, there is evidence that Mr Fitzgerald has engaged in breaches of the CA. These breaches are in addition to any potential cause of action against him for insolvent trading.

20 Counsel for Innerspace and counsel for Stylecraft make the submission that their respective clients are unrelated unsecured creditors who, between the two of them, comprise 50% of the total amount of unrelated unsecured creditors. They are of the view that it is preferable in the interests of creditors that the company be placed into immediate liquidation. This would allow the liquidators to carry out a full inquiry of the issues raised by the administrator and which the administrator has, for reasons of pragmatism, decided ought to be compromised in the DOCA.

21 Going back to the power which I am exercising in CA s 440A, it seems to me that the onus is on those seeking the adjournment to persuade the court that it ought to be satisfied that it is in the interests of HBO's creditors for the company to continue under administration rather than be wound up. In the circumstances of the present case, HBO has not discharged that onus. I am not persuaded that it is in the interests of HBO's creditors for the company to continue under administration, and for the DOCA to be put to the creditors as a whole on 3 November.

22 A dominant factor in that analysis is that the meeting to approve the DOCA will inevitably be swayed by the preponderance of related party creditors. Whilst it is true, as counsel for Pact observes, that the unrelated unsecured creditors may have a power under CA s 600A to apply to set aside the resolution approving the DOCA, in my view that is not a full answer to the concerns that are raised. It seems to me that I should place weight on the concerns of the unrelated unsecured creditors to the effect that an administration is not in the best interests of the company's creditors as a whole.

23 I also place weight on the fact that there are a number of issues which have identified the way in which the activities of HBO have been conducted since its inception that raise potential contraventions of the CA. In that scenario it seems to me that it is not only in the interests of the creditors, but in the public interest, that there be some investigation of those potential contraventions.

24 The remaining issue is in relation to the identity of the liquidator. HBO submitted that the current administrators ought to be appointed, and they have, as I understand it, provided their consent to do so.

25 The intervening creditors before me propose a new liquidator, and again have provided a consent.

26 The argument in favour of retaining the current administrators as liquidators is that there are certain cost savings as they have already undertaken a certain degree of work. Whilst that is somewhat supportive, in my view it is appropriate that a fresh set of eyes look over the affairs of the company. The administrators have already formed views as to what is the pragmatic way to resolve the issues identified in their review to date. The unrelated unsecured creditors before me do not agree with that analysis and have, therefore, requested that the matter proceed straight to a winding up.

27 In those circumstances, it seems appropriate for the liquidators suggested by the unsecured unrelated creditors before me to be appointed. I therefore, propose to make orders substantially in terms of the minute of proposed orders handed to me by counsel for Stylecraft. The orders made are:

1. Pact Construction Pty Ltd have leave to withdraw from the proceedings.
2. Collins Corporation (NSW) Pty Ltd and Jaystar (NSW) Pty Ltd be substituted as the plaintiffs (substituted plaintiffs) in these proceedings pursuant to s 465B(1) of the Corporations Act 2001 (Cth).
3. The requirement to publish a notice in accordance with form 10 pursuant to r 5.10 of the Supreme Court (Corporations) (WA) Rules 2004 be dispensed with pursuant to s 467(3)(b) of the Corporations Act.
4. The defendant be wound up in insolvency.
5. Ron Dean‑Willcocks of Insolvency Solutions, Level 2, 32 Martin Place, Sydney in the State of New South Wales be appointed as the liquidator of the defendant.
6. The defendant pay the legal costs of this application of the plaintiffs to be fixed at $3,000 and of the substituted plaintiffs to be fixed at $3,000, in priority to any other legal costs pursuant to s 556(1)(b) of the Corporations Act and there otherwise be no orders as to costs.