Background
6 Crimson Fresh operated a produce growing and export business in and around Mildura in Victoria. However, as is revealed by the evidence, it held few assets of its own and owned no real property. Rather, it conducted its fruit growing business on land leased from other entities. Any assets that it did own, such as farming machinery and the like, were apparently subject to securities which it had granted in favour of various entities.
7 It is not insignificant that Crimson Fresh ceased to trade prior to the appointment of the administrators. Mr Padia, the company's director, informed the Court that the company is neither trading nor carrying on any business. There is nothing to indicate that there is any intention for it to trade in the future.
8 The administrators were appointed to Crimson Fresh on 4 November 2022 by a resolution of Mr Padia, as the company's sole director.
9 On 2 December 2022, the administrators delivered to creditors their "Voluntary Administrators' Report" in relation to the company's affairs. It conveyed a bleak picture of Crimson Fresh, in that it indicated that:
(a) it appeared that the company had been insolvent from at least 30 June 2020;
(b) the company had ceased to trade before it was put into administration;
(c) any return to unsecured creditors was unlikely; and
(d) there was no proposed deed of company arrangement, such that winding up was recommended.
10 The summary of the company's financial position was also bleak. In contrast to the director's report as to the company's affairs and property, prepared by Mr Padia, the administrators indicated that there was an excess of liabilities over assets of approximately $5.8 million; that the financial position of the company was, in part, due to poor management; that, importantly, the company had been trading at a loss since 1 July 2018; that there were 21 creditors that the administrators identified as having received possible preferential payments; that unreasonable director-related transactions totalling $139,100 may have been entered into; that there was a potential claim against Mr Padia for insolvent trading worth approximately $1.8 million; and that there was an estimated return to unsecured creditors in a best-case scenario of 53.63 cents in the dollar. In relation to that final conclusion, it should be observed that an arithmetical error appeared to have occurred in the report and, on the figures provided, the best-case scenario for unsecured creditors would, in fact, be a return of 100 cents in the dollar to unsecured creditors.
11 The notice of the second meeting of creditors was due to be held on 9 December 2022. However, a few days prior to that meeting, Mr Padia advised the administrators that he intended to propose a DOCA, and that proposal was received shortly thereafter. The meeting of 9 December was ultimately adjourned until 10 February 2023, so as to allow the creditors time to consider the proposal.
12 In summary, the substance of the proposed DOCA was that Mr Padia would make a contribution of $200,000 to constitute a "Deed Fund". That contribution was referred to as the "Director's Contribution". However, in reality the money to constitute the fund was to be sourced from the company's assets and not from Mr Padia himself. In particular, it was to be derived from the net proceeds received from the sale of certain crops, then under cultivation. Those crops were growing on land owned by other companies controlled by Mr Padia and there existed a very real question as to whether the company would recover $200,000 in net proceeds from those crops or, indeed, anything. In effect, any recovery under the DOCA was contingent upon the outcome of that farming venture.
13 Pursuant to the proposed DOCA, once the Deed Fund was constituted, the money would first be used to meet the expenses of the administration, including the administrators' remuneration and other costs. A consequence of that was that, the amount of money that might be available to meet the company's indebtedness to creditors would be minimal and estimated to be around 2.35 cents in the dollar.
14 Sometime after their receipt of the proposed DOCA, the administrators issued a "Supplementary Report" to the creditors for the purposes of the reconvened second meeting. In it they indicated that they believed the company was insolvent and had been for some time, and they recommended that it be placed into liquidation. They further identified that Mr Padia and his company, Mallee Citrus Pty Ltd, had breached a licence agreement entered into with the administrators, by which Mr Padia and his company were permitted to use certain plant and equipment in order to maintain the value of the farmland and crops. The administrators also expressed doubt as to whether there would be sufficient surplus from the crops that Crimson Fresh was then growing to provide an amount of cash sufficient to constitute a Deed Fund of $200,000. Finally, they identified that the company did not intend to keep trading.
15 In that Supplementary Report, the administrators undertook a further comparison between the positions of the company if it entered into a DOCA on the one hand and if it were wound up on the other. They expressed the view that the creditors could receive 2.35 cents in the dollar in the first scenario, assuming that a Deed Fund was constituted. In relation to the winding up scenario, they substantially downgraded their previous forecasts set out in the Voluntary Administrators' Report in relation to the existence and value of any causes of action concerning voidable transactions or insolvent trading, which might be pursued on liquidation. In the prior report, they had indicated that there were preferential payment claims which might be pursued that totalled $530,000 in value, potential unreasonable director-related transactions worth $139,100, and a potential insolvent trading claim, based on the company being insolvent from 30 June 2020, valued at $1.8 million. However, in the Supplementary Report, the total recoveries were estimated to be much lower with the return from actions in relation to any voidable transactions revised down from $2,469,100 to $650,000. This had the consequence that the best-case scenario on a winding up was a return of 23.72 cents in the dollar to unsecured creditors. Unfortunately, no explanation was provided in the Supplementary Report as to why the potential recoveries from the actions were downgraded so significantly.
16 Subsequently, HopgoodGanim, the solicitors for the plaintiff, made enquiries of the administrators as to why the potential recoveries had been downgraded. It is worthy of comment that no real satisfactory answer was given. It might be inferred that the administrators had recognised some potential difficulties in recovering against Mr Padia, were the actions to be brought. In any event, they still perceived a chance of recovering over 23 cents in the dollar for unsecured creditors, and they recommended that Crimson Fresh be wound up.
17 At the reconvened second meeting of creditors on 10 February 2023, a resolution was put for the winding up of Crimson Fresh. Two creditors, including the plaintiff, voted in favour of it and the value of those votes was approximately $434,000 in total. Seven creditors voted against it, and the value of those creditors' claims totalled approximately $416,000. Therefore, the resolution was lost on the numbers. Subsequently, Mr Padia's DOCA was put to the creditors. Six creditors voted in favour of it and their debts totalled approximately $290,000. Five voted against it and their debts totalled just over $690,000. No poll was called for in relation to the outcome of the voting.
18 As Mr Copley submitted on behalf of the plaintiff, there is very little likelihood of the DOCA progressing in that it is unlikely that the Deed Fund will be constituted. Even if it is, any return to the unsecured creditors is likely to be minimal. Conversely, the administrators have identified the potential for significant recoveries that might be pursued upon liquidation. It is not known why some creditors voted in favour of the DOCA in these circumstances, though it may be that they were averse to being asked to fund litigation.
19 In any event, the DOCA was entered into on 3 March 2023. In its final form, it provided that the "Contribution" constituting the Deed Fund was to be paid by Mr Padia to the administrators by 30 June 2023. It also provided that the costs of the administration of Crimson Fresh be paid first from the Deed Fund, then the administrators' remuneration and other costs incurred in their capacity as administrators of the DOCA second, and the creditors last. Presently, the costs of the administration are around $139,500. The DOCA included a provision that, if the Deed Fund was not constituted, that would amount to an event of default, giving the administrators a right to determine the DOCA. In the usual way, apart from any payments to the creditors under the DOCA, the company's debts would be released on its completion.
20 The financial position of Mr Padia is relevant to this matter, as he is perceived by the administrators to be a target of potential recovery claims. The administrators had ascertained and believed that Mr Padia owned some real property but the plaintiff's solicitors indicated that they had undertaken searches and had not been able to identify any.
21 In the course of his submissions, Mr Padia indicated that he was a trustee of a family trust, such that it may be that any property he owns is held on trust. That, of course, is a possibility, but it needs to be investigated further. From the available evidence, there is reason to believe that the corporate structure, which appeared only vaguely on this application, shows that Mr Padia may have interests in several companies that hold assets, which may provide avenues for recovery. As is not unusual on applications of this nature, the inquiries as to his asset-holding have not yet been completed, and one might not expect that process to conclude until some future time.