Pavlakis v Equmen Pty Ltd

INTRODUCTION 1 The Second Plaintiffs are currently the liquidators of the First Plaintiff, C.A.R.E. Employment & Training Services Pty Ltd. They seek to be appointed as administrators of the First Plaintiff and to dispense with the ordinary first meeting of creditors in its administration. 2 The application is supported by an affidavit sworn by one of the liquidators, Mr Jeremy Nipps. Mr Nipps explains: 7. As set out in the second report to creditors, a dividend is not expected to be declared to any class of creditor, but this is contingent upon the potential realisation of the First Plaintiffs New South Wales Employee Collective Agreement and Victorian Employee Collective Agreement (Employee Collective Agreements). Annexed… This position remains accurate as at the date of this affidavit. 8. Mr Wight and I have been liaising with Mr Paul Simmons, sole director of PSG Security Pty Ltd (Proponent), an interested party in relation to the prospective acquisition of the Employee Collective Agreements, since around July 2019. Some years ago, Mr Simmons was a director of the First Plaintiff. However, he has not been a director of the First Plaintiff since 1 March 2005 and is not to my knowledge related to the current sole director and sole shareholder of the First Plaintiff. The Proponent has indicated it is likely to be prepared to enter into the transaction described in paragraph 9 below for the effective acquisition of the Employee Collective Agreements. The Proponent has already advanced $84,150.91 to my firm's trust account to cover some of the likely costs incurred in respect of this application. 9. Due to the nature of the Employee Collective Agreements, the First Plaintiffs interest in them is not able to be sold and assigned in the ordinary sense. Instead, for the Proponent to undertake an effective acquisition of the assets, a deed of company arrangement would need to be entered into, which provided for the payment of funds (possibly into a creditors' trust, unless a deed of company arrangements can be effectuated quickly), extinguishment of the liabilities of the First Plaintiff in the ordinary course, and the transfer of shareholding in the First Plaintiff under s 444GA of the Corporations Act 2001 (Cth) (Act) (the Transaction). 10. On 1 November 2019 I submitted a report on company activities and property. Annexed ... 11. Based on my investigations and inquiries the Transaction, if it eventuates, will provide a better return to the First Plaintiffs creditors than continuing with the winding up process as it will guarantee 5 cents in the dollar to the First Plaintiffs unsecured creditors. 12. A meeting of the First Plaintiffs creditors has not been convened as no resolutions were required. However, I have written to the known creditors of the First Plaintiff to provide notice of these proceedings and seek any views from creditors in respect of them. Annexed ... On 24 February 2020, Ms Molly Nash, an accountant at my firm, confirmed to me and I believe that Ms Sabrina Trehern of the Office of State Revenue indicated to Ms Nash that the WA Commissioner of State Revenue would have no objections with the Transaction. As at the date of swearing this affidavit, I have not had any response from the Commonwealth Commissioner. 13. The Proponent has agreed to fund Mr Wight and I in these proceedings. Annexed ... I do not believe that the funding will compromise the liquidators' independence or impartiality. Dispensing with first creditors' meeting 14. As at the date of swearing this affidavit, the First Plaintiff has two creditors, being the Commonwealth Commissioner for Taxation for the amount of $1,518.90 and the WA Commissioner of State Revenue for the amount of $181,499.32. Annexed ... 15. I estimate that the cost of convening a first creditors' meeting for the administration of the First Plaintiff would be $5,000. 16. Based on my inquiries, the First Plaintiffs creditors in the voluntary administration would remain substantially the same as those who lodged proofs of debt in the liquidation. That is in part because I consider that the relation back day to be calculated under section 91 of the Act. 3 For reasons set out below, orders to the effect sought, subject to further order of the Court and subject to affected persons having leave to apply, will be made.

APPOINTMENT OF LIQUIDATORS AS VOLUNTARY ADMINISTRATORS AND DEED OF COMPANY ARRANGEMENT ADMINISTRATORS 4 The Second Plaintiffs seek orders pursuant to s 436B(2) of the Corporations Act 2001 (Cth) that: (1) Leave be granted for the Second Plaintiffs to appoint themselves as voluntary administrators of the First Plaintiff; and (2) Leave be granted for the Second Plaintiffs to be appointed as administrators of any deed of company arrangement entered into by the First Plaintiff. 5 Section 436B of the Act provides: 436B Liquidator may appoint administrator (1) A liquidator or provisional liquidator of a company may by writing appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time. (2) A liquidator or provisional liquidator of a company must not appoint any of the following persons under subsection (1): (a) himself or herself; (b) if he or she is a partner of a partnership - a partner or employee of the partnership; (c) if he or she is an employee - his or her employer; (d) if he or she is an employer - his or her employee; (e) if he or she is a director, secretary, employee or senior manager of a corporation - a director, secretary, employee or senior manager of the corporation; unless: (f) at a meeting of the company's creditors, the company's creditors pass a resolution approving the appointment; or (g) the appointment is made with the leave of the Court. 6 The Court is not unduly constrained in the way it exercises the discretion conferred by s 436B(2): Taylor, in the matter of Origin Internet Solutions Pty Ltd (in liquidation) [2004] FCA 382 per Finkelstein J (at [6]). However it is clear from the case law that the main question to be considered upon an application under s 436B(2) is whether the liquidator is an appropriate person to be administrator and, in due course, a deed administrator if the deed proposal is advanced and approved: Origin Internet; Nardell Coal Corporation Pty Ltd (2003) 47 ACSR 122; and Re Cobar Mines Pty Ltd (In Liq) (1998) 30 ACSR 125. 7 In Origin Internet, Finkelstein J assessed whether a liquidator was an 'appropriate person' having regard to two factors: (a) The first was to ask whether there was a conflict of duty or interest if the liquidator were appointed as administrator. (b) The second was to consider how much work the liquidator had undertaken in connection with the liquidation. 8 Having found that there was no conflict and that the liquidator had undertaken considerable work, his Honour granted the liquidator leave under s 436B(2) of the Act to appoint himself as an administrator, noting that this would save considerable time, trouble and expense in the administration, thereby benefitting all those affected in the administration. 9 In these proceedings, the Plaintiffs are being funded by PSG Security Pty Ltd, the interested party, which is the proponent of the possible deed of company arrangement. It is usual for the proponent of a possible deed of company arrangement to make provision for the payment of the fees incurred by the insolvency practitioner under the deed of company arrangement. 10 A funding arrangement of this kind does not of itself introduce any element of lack of independence or impartiality. This was helpfully explained by Barrett J in Nardell Coal. His Honour said (at [11]-[13]): 11 The funding by Nardell Holdings [the interested party] of the new administration up to the point where the new deed proposal is accepted or rejected by creditors will not of itself introduce any element of lack of independence or impartiality… 12 … Nardell Holdings [the interested party] has an interest in seeing the deed of company arrangement progressed. But I do not see that factor as compromising the ability of administrators funded by Nardell Holdings to perform their duties in a proper way in relation to the administration in general and the deed proposal in particular. 13 This assumes, of course, that the funding arrangement entails no more than a simple and unconditional undertaking by Nardell Holdings to pay the administrators' proper remuneration and expenses, with payment assured regardless of the steps they take, so as to enable them to do no more or less than to perform their duties as they see fit. Austin J commented in Bovis Lend Lease v Wily that it may be material for administrators to disclose funding arrangements to creditors. … 11 The Plaintiffs make clear that the terms of the funding arrangement will be disclosed by the Second Plaintiffs to the First Plaintiff's creditors prior to any creditors' meeting at which a determination is to be made in respect of the proposal. 12 With respect to the second limb, the Second Plaintiffs have undertaken considerable work in connection with the liquidation of the First Plaintiff. As set out in the second report to creditors, the Second Plaintiffs have undertaken the following work: (a) made inquiries regarding the existence of assets and property that might be realised and/or become available for the benefit of creditors; (b) identified two Employee Collective Agreements in the name of the First Plaintiff; (c) liaised with an interested party for the Employee Collective Agreements of the First Plaintiff; (d) made inquiries regarding the legal measures required for the sale of Employee Collective Agreements with the respective states in which they were created; (e) attempted to contact the director, including issuing correspondence to the one known address of the director and calling the two known telephone numbers of the director; (f) written to the Department of Transport and identified a motorcycle licensed in the name of the First Plaintiff; (g) dealt with all external enquiries concerning the status of the liquidation; (h) prepared an initial report to creditors; (i) notified creditors, suppliers and employees of the Second Plaintiffs' appointment, including an initial circular and details of the Second Plaintiffs' proposed remuneration and declaration of independence, relevant relationships and indemnities; (j) attended to all other required statutory notifications and lodgements; (k) written to the party with a security interest registered on the Personal Property Securities Register; and (l) completed all necessary accounting and taxation requirements. 13 This work would at least in part be reproduced by a new administrator. Appointing the un-conflicted Second Plaintiffs as administrators would save time and costs in the administration. On that basis, it is in the interests of the First Plaintiff's creditors that the Second Plaintiffs be appointed as the administrators.

DISPENSING WITH THE FIRST CREDITORS' MEETING 14 Section 447A of the Act provides: 447A General power to make orders (1) The Court may make such order as it thinks appropriate about how this Part [5.3A] is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. (3) An order may be made subject to conditions. (4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration - the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or (e) ASIC; or (f) any other interested person. 15 The Plaintiffs seek an order under s 447A(1) of the Act, that the operation of Pt 5.3A as it affects any administration of the First Plaintiff of which the Second Plaintiffs become administrators in exercise of the leave granted by order (1) be altered as follows: (a) the first meeting of creditors in the administration under s 436E be dispensed with; and (b) notwithstanding s 439A(2), the meeting of creditors in the administration under s 439A(1) be convened at any time during the convening period or within 5 business days after the end of the convening period. 16 Section 436E and s 439A of the Act provide: 436E Purpose and timing of first meeting of creditors (1) The administrator of a company under administration must convene a meeting of the company's creditors in order to determine: (a) whether to appoint a committee of inspection; and (b) if so, who are to be the committee's members. (2) The meeting must be held within 8 business days after the administration begins. (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. Note: For electronic notification under paragraph (a), see section 600G. (3A) A notice under paragraph (3)(b) that relates to a company may be combined with a notice under paragraph 450A(1)(b) that relates to the company. (4) At the meeting, the company's creditors may also pass a resolution: (a) removing the administrator from office; and (b) appointing someone else as administrator of the company. … 439A Administrator to convene meeting and inform creditors (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). Note: For body corporate representatives' powers at a meeting of the company's creditors, see section 250D. (2) The meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period. (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. (7) If an application is made under subsection (6) after the period referred to in paragraph (5)(a) or (b), as the case may be, the Court may only extend the convening period if the Court is satisfied that it would be in the best interests of the creditors if the convening period were extended in accordance with the application. (8) If an application is made under subsection (6) after the period referred to in paragraph (5)(a) or (b), as the case may be, then, in making an order about the costs of the application, the Court must have regard to: (a) the fact that the application was made after that period; and (b) any other conduct engaged in by the administrator; and (c) any other relevant matters. 17 Section 447A(1) of the Act enables the court to make "such order as it thinks appropriate about how this Part is to operate in relation to a particular company". 18 The Courts have found it appropriate to make orders of this nature under s 447A(1) where "creditors have already had quite extensive opportunities to become familiar with the company's position and the issues confronting both it and them - including the reality that no return for ordinary unsecured creditors is expected in any winding up" (Nardell Coal (at [15]). 19 In Nardell Coal, the liquidators who sought these orders had originally been appointed administrators of the company. This is distinguishable from the present case where there has not already been an administration. Nevertheless, the creditors of the First Plaintiff have had time and opportunity to become familiar with the First Plaintiff's position through the first and second reports to creditors issued in May and July 2019, the report on company activities and property submitted on 1 November 2019 and the circular to creditors dated 21 February 2020. Importantly, the First Plaintiff's creditors in the administration are likely to remain substantially the same as those who lodged proofs of debt in the liquidation, of which there are only two. 20 In granting such orders under s 447A(1) the Court may take into account the fact that the cost of convening the first meeting would be wasteful: Re Corrimal Leagues Club Ltd (in liq) [2013] FCA 697 per Farrell J (at [26]). In the present case, the cost of convening the first meeting is estimated to be $5,000, a significant amount to the First Plaintiff which is in liquidation and struggling to activate a benefit for creditors. In those circumstances it is efficient and economical for the first meeting of creditors under s 436E to be dispensed with. 21 Regardless, the meeting of creditors under s 439A of the Act can be convened within a short period to consider whether or not to accept the deed of company arrangement proposal. 22 In addition, the creditors are further safeguarded by the fact that: (a) it will still be open for there to be a committee of inspection notwithstanding that the first meeting under s 436E of the Act is dispensed with: Pavlakis v Equmen Pty Ltd (No 2) [2014] FCA 951 (at [28]); and (b) the opportunity to replace the Second Plaintiffs as administrators of the First Plaintiff will remain available to the creditors at the meeting of creditors held under s 439A of the Act: Pavlakis (at [28]). In Pavlakis, the Court made an order requiring the liquidator to draw to the attention of the creditors when convening the meeting held under s 439A, the creditors' ability to replace him as an administrator at that meeting. It is doubtful whether such a requirement is necessary in the circumstances of this insolvency where there are only two key institutional creditors with whom there has been ample communication.

CREDITOR SUPPORT 23 In any event and importantly, in addition to the rights of creditors already outlined, the Second Plaintiffs have written to all known creditors of the First Plaintiff setting out the details of this proposed application and seeking the creditors' views on the proposal. No objection has been raised.

CONCLUSION 24 For the reasons set out above, orders 1, 2 and 3 of the Second Plaintiffs' originating process filed on 25 February 2020 should be made in the terms sought. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.