Portfolio Projects Pty Ltd v Oakes Building Co Pty Ltd

FARRELL J: 1 These are reasons for orders which I made on 17 July 2017. Unless otherwise indicated, all statutory provisions referred to in these reasons are provisions of the Corporations Act 2001 (Cth). 2 The plaintiffs, Mr Iannuzzi and Mr Naidenov, were appointed as joint and several voluntary administrators of Josa Constructions Pty Ltd (administrators appointed) and Equipment Hire Pty Ltd (administrators appointed) (Companies) on 22 June 2017 by resolution of the Companies' sole director, Ms Thelma Apokis. 3 The first meetings of creditors of the Companies were held concurrently on 4 July 2017. No resolution was passed to appoint a committee of creditors or to replace the administrators.

Application 4 Section 439A(1) requires the administrators of a company to convene a meeting (often referred to as the "second meeting") of the company's creditors within the convening period fixed by s 439A(5) or as extended under s 439A(6). Relevantly to this matter, s 439A(5)(b)(i) defines the convening period to be 20 business days beginning on the day after the administrators' appointment, that is, 20 July 2017. The Court may extend the convening period on an application made within the convening period: s 439A(6). By an application lodged on 13 July 2017, the administrators sought an extension of the convening period to 3 November 2017, a period of approximately 3.5 months. The administrators also sought an order under s 447A(1) that the meeting of creditors of the Companies may be held at any time during the convening period as extended or within five business days after it. 5 By letter dated 11 July 2017, Mr Iannuzzi advised known creditors of the Companies of the administrators' intention to make the application and advised in the following terms (as written): Background … At the first meeting of creditors held on 4 July 2017 … amongst other matters, I informed the Creditors present that: • Josa [Constructions] has one main asset and source of income, that being a contract with Penrith City Council (the Contract); • Based on my investigations to date, the Contract is profitable and due for completion within approximately three months; • In addition to the estimated profit and unbilled variations from the Contract (once completed on 3 November 2017), an additional amount of $130,720 in respect of retention payments under the Contract will be released upon practical completion or in the alternative a discounted amount could be paid in advance by a related company in exchange for the full right to receive the retention payments when they become due; • The Contract requires the support of related parties to the Companies to be completed • Current subcontractors servicing the Contract continue to undertake services as contracted; • Assets subject to finance will be maintained by the Companies and/or related parties. The Companies and related parties will meet the finance payments in respect of the equipment leased by [Equipment Hire] necessary to complete the Contract; and • A return to participating creditors for Josa [Constructions] could be in the range of 40 and 50 cents in dollar, subject to the Contract being completed, outstanding debtors being settled and remaining retentions collected. Extension of Convening Period … I have determined that it is in the best interests of the creditors of the Companies to apply to the Court to extend the period in which I must convene the second meeting of creditors of the Companies. In my view, the convening should be extended until 3 November 2017 to allow the Companies to complete the Contract as this will maximise the return to the creditors of the Companies. I have considered whether it is more appropriate and cost effective to convene the second meeting of creditors of the Companies by 19 July 2017 and recommend that creditors, at the second meeting, adjourn those meetings for a maximum of forty-five (45) business days, but that will not provide sufficient time to complete the Contract unless a DOCA is accepted by creditors which allows the Companies to trade to complete the Contract. Thus far no DOCA proposal has been forthcoming and as I understand, will not happen unless the Contract is completed. The other concern I have is that related parties of the Companies continue to support the Companies in completing the Contract but that support will be withdrawn if the Companies are placed into liquidation (which is an option open to creditors). In my view, the premature liquidation of the Companies will result in the termination of the Contract or the inability of the Companies to complete the Contracts and thus not presently be in the interests of creditors. Effect of Extension of the Convening Period If the convening period is extended, the general moratorium on the claims of creditors of the Companies will continue. This will prevent any unsecured creditor enforcing payment and will generally prevent secured creditors (subject to some exceptions) from recovering their security. Administrators' Recommendation It is my recommendation to creditors of the Companies that an application to the Court be made to extend the convening period until 3 November 2017 as this will allow completion of the Contract taking into account unforeseen delays (such as bad weather) and will provide an enhanced return to unsecured creditors of Josa [Constructions] of between 40 and 50 cents in the dollar in comparison to immediate liquidation that realistically provides for a nil return to ordinary unsecured creditors. An extension of the convening period will also entice a proposal for DOCA furthering securing a higher return for creditors as compared to a liquidation. 6 As at the time that the application was heard on Monday, 17 July 2017 at 10:15 am, no creditor had advised the administrators that it objected to the extension of the convening period and none appeared at the hearing.

Background 7 The following material derives from the affidavit of Mr Iannuzzi sworn on 13 July 2017 and the submissions by the administrators' legal representative, Mr Joseph Scarcella, in support of the application dated 14 July 2017.

Companies' businesses 8 The business of the Companies was established in 1982. They operate within a group of related companies (Group) which provide construction and civil works services across New South Wales. None of the other companies in the Group is under external administration. 9 Josa Constructions usually operates as head contractor in relation to construction projects and subcontracts works flowing from contracts it enters into to other companies in the Group. About two years before the administrators' appointment, Josa Constructions employed about 30 staff. It no longer employs staff, as that function has been taken over by another member of the Group. 10 Equipment Hire is the trustee of the Equipment Hire Trust. The Trust's business is acquiring equipment (usually on finance) which it provides to other members of the Group. The Trust has no employees.

Circumstances leading to appointment of administrators and financial condition 11 Due to disputes with counterparties (Amarino Pty Ltd, Vesta Homes Pty Ltd, Orange City Council and Sydney Water Corporation), the Group suffered heavy trading losses, its cash flow was affected and its capacity to pay suppliers and financiers was impaired. 12 Creditors issued statutory demands to each of the Companies resulting in winding up applications being brought on 14 December 2016 (against Josa Constructions) and on 13 February 2017 (against Equipment Hire) (Winding Up Proceedings). The Companies paid out the petitioning creditors, however, Australia and New Zealand Banking Group Limited (ANZ) sought to be substituted as plaintiff in both matters. Equipment Hire had entered into various hire purchase and chattel mortgage agreements with ANZ (financing agreements) under which Josa Constructions is a guarantor of Equipment Hire's obligations. Those applications have been adjourned to early August 2017 (see below). 13 Mr Iannuzzi says that the administrators have received the Companies' books and records and in his opinion they appear to meet the requirements of s 286. In addition, the administrators received: financial accounts for the financial years ended 30 June 2014-2016; draft management accounts dated 26 June 2017; an aged payables report; bank statements from December 2013 to May 2017 and images and reports for the Companies' accounting software. 14 Josa Constructions' balance sheet as at 26 June 2017 indicates that it has total assets to a value of $2,278,471.37 and total liabilities of $4,848,911.33. Its operating loss for the financial year to 26 June 2017 was $162,642.67 and its net loss was $184,726.74. Its only outstanding employee entitlement is a superannuation guarantee charge in the amount of $159,944. 15 As trustee of the Trust, Equipment Hire's balance sheet as at 26 June 2017 indicates that it has total assets of $8,459,429.06 (including fixed assets of $7,468,549.18), and total liabilities of $7,269,172.97, leaving net assets of $1,190,256.09. Its profit and loss statement for the financial year to 26 June 2017 indicates a net loss of $1,948,698.30. There are no outstanding employee entitlements. 16 Mr Iannuzzi deposed to the fact that the Companies' balance sheets and profit and loss statements had been obtained from management accounts and are subject to many adjustments. For example, many of the debts are subject to substantial dispute and are unlikely to be fully collected; the carrying value of equipment and assets does not reflect the recoverable value (in Mr Iannuzzi's opinion); intra-Group loans to the Companies would not be considered recoverable; and payout figures which Mr Iannuzzi has obtained in respect of the claims of secured creditors as against Equipment Hire (and in some cases as against Josa Constructions as guarantor) are: • ANZ $1,119,835.15 • Capital Finance $84,050.41 • De Lage Laden $308,420.69 • Leasewise Australia $22,598.64 • Macquarie Leasing $132,935.92 • Westpac $335,905.90

17 Based on the administrators' examination of the books and records of the Companies and investigations to date, the main assets of Josa Constructions are its debtors and income from its contract with Penrith City Council referred to below.

Extant litigation 18 Around 11 and 17 May 2017, ANZ was substituted as plaintiff in the respective Winding Up Proceedings. The Winding Up Proceedings have been adjourned by consent until 2 August 2017. 19 The Companies and their director are named as defendants in proceedings commenced by ANZ in 2016 in the Common Law Division of the Supreme Court of New South Wales (proceedings 2016/00313341) (Statement of Claim Proceedings). ANZ claims that the Companies are in default of payment obligations under the financing agreements and it seeks to enforce its securities. It seeks judgment in the sum of $1,222,892.24 together with interest, costs and delivery up of certain assets the subject of its agreements with Equipment Hire. On about 18 May 2017, ANZ reached an agreement with the defendants that, amongst other things, provided for the entry into a consent judgment that was to be held in escrow pending payments by the defendants to ANZ. Those proceedings have now been adjourned by consent to 1 August 2017. It is the administrators' view that these proceedings are stayed under s 440D. 20 Based on the administrators' investigations, the debt on which ANZ relies in the Winding Up Proceedings is the same debt that is the subject of the Statement of Claim Proceedings. The administrators consider that the Winding Up Proceedings may constitute an abuse of process: see Portfolio Projects Pty Ltd v Oakes Building Co Pty Ltd (1987) 5 ACLC 911 at 913. It is unnecessary in the context of this application to determine whether that view is correct. 21 Included in the Exhibit to Mr Iannuzzi's affidavit is correspondence between Johnson Winter & Slattery (the administrators' lawyers) and Dentons (ANZ's lawyers) concerning this application. On 13 July 2017, Dentons advised that ANZ did not oppose the extension of the convening period to 3 November 2017, subject to some conditions, and that it would seek to have the Winding Up Proceedings and the Statement of Claim Proceedings adjourned to a date shortly after 3 November 2017. On the same day, Johnson Winter & Slattery advised Dentons that the administrators would agree to the conditions, subject to some minor issues of detail. I am satisfied that ANZ was aware of the application to extend the convening period and the time and place at which it would be heard. If ANZ had any concerns about the administrator's response, it has had the opportunity to oppose the application and it has elected not to do so.

Penrith City Council Contract 22 Around 26 July 2016, Josa Constructions entered into a contract with Penrith City Council (Contract) for an upgrade to CBD drainage at Penrith. The total value of the Contract is $3,342,400 plus GST. Two days later, Josa Constructions subcontracted the work to Josa Civil Group Pty Ltd. Mr Iannuzzi says that it will take approximately 16 weeks to complete the Contract. Following their appointment, the Council asked the administrators to show cause why the Contract should not be terminated in accordance with clause 39.11(ii) on the basis that an Insolvency Event had occurred. The administrators were successful in persuading the Council not to terminate the Contract. 23 The administrators believe that if the Contract is completed, it would result in a payment (net of costs) to Josa Constructions of $446,338.45. That includes payment of a bond of $200,000 and a retention amount of $130,720 which are only payable at practical completion. The administrators seek an extension of the convening period to 3 November 2017 to allow the Contract to be completed and the payment of amounts due from Penrith City Council. 24 By a letter dated 30 June 2017, Civil has confirmed that it will perform its obligations under the subcontract and it will meet ongoing finance and lease payments to the financiers to Equipment Hire on the proviso that neither of Josa Constructions or Equipment Hire is wound up. The administrators are satisfied that Civil has the expertise and financial capacity to complete the Contract. On 13 July 2017, Civil entered into a license agreement with Equipment Hire which includes an obligation on Civil to meet financing charges in relation to certain of Equipment Hire's assets and an indemnity for loss associated with the use or licensing of those assets. 25 Based on the information available to Mr Iannuzzi to date, on his calculations, the completion of the Contract would result in a return to ordinary unsecured creditors of Josa Constructions of between 40-50 cents in the dollar. Mr Iannuzzi believes that it is also in the interests of Equipment Hire's creditors that the Contract be completed. While it will have no direct benefit to Equipment Hire, it will not make its creditors' position any worse and it should improve their position. This is because approximately 62% of Equipment Hire's creditors are also creditors of Josa Constructions. Further, payments will continue to be made by Civil to financiers to Equipment Hire during the extended convening period so that completion of the Contract by Josa Constructions is also in the interests of the ordinary unsecured creditors of Equipment Hire.

Actions of the administrators to date and cooperation of director 26 At paragraphs [33]-[34] of his affidavit, Mr Iannuzzi sets out the activities he has undertaken since the administrators were appointed and attests to the co-operation received from the director of the Companies, the other companies in the Group and their directors. 27 I am satisfied that the administrators have actively pursued the administration, including obtaining the necessary cooperation of secured creditors and the Penrith City Council to enable the Companies to continue trading at least to the point of completing the Contract.

Administrators reasons for seeking the extension 28 As noted in Mr Iannuzzi's letter to creditors dated 11 July 2017 (see [5] above), he considered whether it would be in the interests of creditors of the Companies that a second meeting of creditors be convened and then adjourned for the maximum 45 business days permitted by the Corporations Act but he concluded that that would not be in their best interests. That is because: (1) The Contract would not be complete by that time; (2) If creditors voted in favour of liquidation of the Companies, the result would be that Civil would cease to provide support for the Contract (including ceasing to make payments to Equipment Hire's financiers), Equipment Hire's equipment would be repossessed; and there would be a loss of approximately $350,000 to the creditors of Josa Constructions; (3) The director of the Companies has informed Mr Iannuzzi that a third party intends to propose a deed of company arrangement (DOCA) in relation to the Companies, however that has not yet occurred. Mr Iannuzzi is concerned that if the Contract were in jeopardy, a DOCA proposal may not be received; and (4) Even if a DOCA is proposed, it will not bind any secured creditor who does not vote in favour of it. Such creditors may seek to enforce their claims over the financed assets of Equipment Hire which will prevent completion of the Contract. 29 Extension of the convening period to 3 November 2017 will allow the Contract to be completed. Mr Iannuzzi, who has worked continuously in the insolvency industry since 2001, says that in his experience the administrators are more likely to receive a DOCA proposal that is acceptable to creditors if the full benefit of the Contract is received, as the net proceeds of the Contract will satisfy the obligations of employees' superannuation entitlements and reduce the claims of participating creditors of Josa Constructions. An acceptable DOCA will require less funding than otherwise would be the case if the Contract were not completed. 30 Mr Iannuzzi has formed the view that there will be minimal risks to Josa Constructions and therefore to the creditors of the Companies in completing the Contract because Civil will perform the Contract; Civil will make payments to financiers of Equipment Hire and it has given an indemnity in respect of loss associated with its use or licensing of Equipment Hire's assets; he is satisfied that Civil has the expertise and financial ability to undertake its functions under the subcontract; the Group has undertaken works for Penrith City Council in the past and has been paid; and there is minimal risk that the Council would not have the financial capacity to meet its obligations under the Contract once it is complete. Therefore, it is unlikely that Josa Constructions will incur any losses in performing the Contract. With respect to Equipment Hire, Civil will continue to make payments to Equipment Hire's financiers; there is currently adequate insurance in place in relation to the assets, and the administrators have received an opinion from Slattery Asset Advisory (who they engaged to value the Companies' assets) that the value of Equipment Hire's assets will change little by 3 November 2017. 31 Further, if the Contract is completed earlier than 3 November 2017 and payments are received from the Council before then, Mr Iannuzzi undertakes to call the second meeting of creditors before then. If the Contract is not complete by 3 November 2017, it will be possible for Mr Iannuzzi to convene the second meeting of creditors and, if it is in the interests of creditors, recommend that it be adjourned to allow the Contract to be completed and payments received. It would also be open to Mr Iannuzzi to approach the Court for a further extension of the convening period.

Consideraton 32 In his submissions, Mr Scarcella noted that in this case it would be possible for the administrators to prepare the reports to creditors of the Companies required by s 439A(4). He noted that courts sometimes rely on the fact that administrators need more time to carry out the task imposed on them by s 439A(4) to justify making an order under s 439A(6). While that may be so, I do not consider that the existence of such a difficulty is a necessary precondition to the exercise of the discretion under s 439A(6), which contains no preconditions. 33 It is well settled that the Court is required to strike a balance between the expectation that an administration under Pt 5.3A will be conducted with relative speed and the requirement that "speed not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders": Weston, in the matter of Flush Fitness Pty Ltd (Administrators Appointed) [2017] FCA 172 at [14] per Yates J citing Collective Olive Groves Limited, in the matter of Collective Olive Groves Limited; application by Reidy [2009] FCA 177 at [18]; Diamond Press Australia Pty Limited [2001] NSWSC 313 at [10]. In Re Riviera Group Pty Ltd (administrators appointed) (receivers and managers appointed) (ACN 102 298 279) (2009) 72 ACSR 352; NSWSC 585 at [16], Austin J observed that in balancing the expectation of an expeditious administration against the risk of prejudice, there cannot be any predisposition in favour of a speedy administration because that would skew the balancing process. 34 While an extension of the convening period by 3.5 months is substantial, the administrators' assessment that such an extension will assist in maximising the return to creditors appears to be well founded. It appears that the administrators have been diligent in performing their tasks in the administration and they have received co-operation from the Companies' director and related entities. The administrators have considered the risks to creditors of the Companies and third parties of taking the proposed course and properly weighed the benefits to be derived by creditors of each of the Companies resulting from extending the time for convening the second meeting of creditors. While the Companies currently have no employees, the payment of the superannuation guarantee charge will be facilitated by allowing the Contract to be completed. 35 These considerations serve the object of Pt 5.3A set out in s 435A: to maximise the chance of the company or some part of its business continuing, and if that is not possible, to maximise the return to creditors. Further, the modification to the operation of s 439A(2) pursuant to s 447A(1), which will allow the creditors' meetings to be held earlier than 3 November 2017 if the Contract is completed early and payments are received from the Council before then, is appropriately made. It serves the legislative purpose that creditors be put in a position to determine the fate of the company under administration as promptly as sensibly possible and that the detriment to third parties (including the suspension of rights and remedies of secured creditors, lessors and others) is not prolonged unnecessarily. 36 Last, no known creditor opposed the orders being made, having been informed of the proposed application and the reasons for it. 37 I therefore concluded that it was appropriate to make the orders sought by the administrators. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.