Re Echuca Insured Housing Loans Pty Ltd (Administrator Appointed) v Lumsden,... [2003] FCA 598 | Case summary

FACTS 8 Pan is a publicly listed company. It has been manufacturing pharmaceutical products for various "sponsors" for approximately 29 years. Generally, the products were manufactured by Pan pursuant to written contracts with the sponsors, which supplied the products to distributors or retailers who offered them for sale to the public. 9 Pan is the primary trading vehicle of the group. The fate of each of the four subsidiaries is inextricably linked to the fate of Pan. 10 On 30 - 31 January 2003 the Therapeutic Goods Administration ("TGA") conducted an unannounced Good Manufacturing Practices ("GMP") audit on Pan to investigate possible causes of recalls of "Travacalm", a travel sickness product manufactured by Pan, due to allegations of a series of adverse consumer reactions to the product. The purpose of the audit was to assess Pan's compliance with manufacturing standards and with the conditions set out in its manufacturing licence. 11 Further audits were carried out by the TGA in February and April 2003, and an audit report was issued on 27 April 2003. The TGA concluded that the issues identified during the January audit were not restricted to the one product; that corrective actions taken by Pan in response to previous TGA audits had been unsatisfactory; and that there were "critical GMP deficiencies" and instances of non-compliance with the conditions of Pan's licence to manufacture therapeutic goods. 12 By letters dated 28 April 2003 from the TGA, Pan was informed that the products listed in schedules to the letters would be removed from the Australian Register of Therapeutic Goods and that Pan was required to take immediate steps to recover all such products manufactured and supplied since 1 May 2002. This product recall was to be conducted to consumer level and extended to all products manufactured by Pan. 13 By a further letter from the TGA dated 28 April 2003 Pan was advised that its licence to manufacturer therapeutic goods had been suspended for six months. 14 Mr McGrath, one of the Administrators, states that he understands the product recall to be the largest product recall ever to be conducted in Australia. 15 Pan has received over 30 letters to date from or on behalf of sponsors for which Pan has manufactured products, stating that they will be seeking compensation from Pan in relation to losses incurred as a result of the actions of the TGA. Pan has also received more than 20 letters from members of the public or their legal representatives claiming compensation for losses alleged to have been suffered as a result of the ill effects of Pan products (principally Travacalm). 16 According to Mr McGrath's affidavit, since their appointment on 22 and 23 May 2003, the Administrators have: "(a) convened meetings of creditors of each of the VA companies under section 436A of the Corporations Act which were held on 29 May 2003; (b) convened a meeting of the committee of creditors which is to be held on Thursday 12 June 2003; (c) requested the directors of each of the VA companies to provide a report as to affairs pursuant to section 438A of the Corporations Act, and allowed the directors an extension to provide that report until 13 June 2003; (d) met with various major creditors to discuss the nature and implications of the appointment of the Administrators; (e) managed the product recall; (f) reviewed the contingent claims made or threatened to be made against the company with a view to forming an opinion about the value of those claims, and developed a protocol for dealing with them; (g) met with representatives of the Therapeutic Goods Administration to discuss the reinstatement of Pan's manufacturing licence; (h) overseen a major review of the company processes and in particular its computer systems to address deficiencies identified; (i) gathered various documents and information in relation to the businesses; (j) reviewed financial reports prepared by the management of the VA companies as at 30 December 2002; (k) reviewed financial forecasts and estimates prepared by management with the assistance of Deloitte Touche Tohmatsu during May 2003 relating to the solvency issues of the VA companies; (l) held discussions and issued instructions to legal advisors relating to various matters relevant to the administration of each of the VA companies including proceedings recently issued against the VA companies; (m) liaised with the Australian Workers Union who represent a proportion of the workforce concerning the efforts to obtain reinstatement of the manufacturing licence, offering the business for sale and securing employee entitlements; (n) reviewed financial models prepared by the company management detailing the costs associated with the recall, the necessary work required to satisfy the TGA to reinstate the licence and ascertained the costs involved with maintaining an appropriate level of workforce to enable manufacture to begin if the licence suspension is lifted; (o) dealt with numerous retention of title claims; (p) dealt with forensic accountants (Deloitte Touche Tohmatsu) and lawyers to establish guidelines for the assessment of claims by sponsors for reimbursement of legal costs and for loss of profits; and (q) dealt with numerous telephone queries from creditors." 17 Mr McGrath has practised in insolvency for 19 years and has been a registered liquidator since 1993, an official liquidator of the Supreme Court of the Australian Capital Territory since 1996 and an official liquidator of the Supreme Court of New South Wales since 1999. His co-plaintiff, Mr Honey, has practised in insolvency for 13 years, was a licensed insolvency practitioner in the United Kingdom from 1992 to 1999, and has been a registered liquidator in Australia since 2002. 18 Mr McGrath states that in the Administrators' experience it is of primary importance that the Administrators' reports contain sufficient information to enable creditors to be as fully informed as possible about matters relevant to their decision whether or not to vote in favour of a resolution that: (a) a deed of company arrangement be executed, if there is a proposal for one; or (b) the voluntary administration end; or (c) there be a winding up. Mr McGrath states that the Administrators will not be in a position prior to 11 June 2003 (in the case of Pan) or 12 June 2003 (in the case of the other VA companies) to prepare an Administrators' report which is adequate for the purpose of enabling them or the creditors to form a considered opinion about whether it would be in the interests of creditors to vote for one of the three courses mentioned. 19 Mr McGrath states that if the application for extension of the convening period is not granted, the Administrators will, at the meetings of creditors, recommend that the meetings be adjourned for 60 days to enable the Administrators to prepare an adequate report. If the creditors resolve in favour of an adjournment there would have been a wastage of time and money. Although Mr McGrath's affidavit did not estimate the amount of money wasted, senior counsel for the Administrators informed me on the hearing, without objection from counsel for Mr Selim, that the "hard costs" (the cost of preparing the report, addressing the envelopes, postage and other similar expenditures) would be of the order of $5,000, and that the cost of the professional services involved would be of the order of $80,000-$100,000. 20 Mr McGrath's affidavit describes the complexity of the businesses operated by the VA companies. He states that at the time of the appointment of the Administrators the VA companies: "(a) employed approximately 250 staff, including casuals, and continue to employ 125 staff; (b) prior to the suspension of their manufacturing licence on 28 April 2003, had over 4,500 formulations; (c) supplied products to approximately 700 sponsors; (d) exported thirty-seven per cent of total manufacturing to sponsors in thirty-nine foreign countries; (e) other than related party creditors, on the advice of the management of the VA companies, have trade creditors with claims estimated by the directors of the VA companies, to total approximately A$27,000,000.00 in value; and (f) were parties to approximately 1,000 contracts concerning the operation of the businesses." 21 Mr McGrath states that in his view the value to creditors will be maximised if Pan is able to secure full or partial reinstatement of its suspended manufacturing licence. There is really no dispute about this: whether there is to be a sale of Pan's business or, as Mr Selim wishes, the business is to be carried on under the terms of a deed of company arrangement, renewal of the manufacturing licence is essential. 22 To this end, the Administrators have been having discussions with the TGA, the purpose of which is to procure the licence to be partially or fully reinstated. 23 Mr McGrath's preliminary view is that it will be found to be in the best interests of creditors to offer Pan or its business for sale "as licensed", by public tender as soon as practicable. As noted below, Mr Selim disagrees with this view. 24 Mr McGrath states that realisation by way of sale would require the Administrators to address a number of complex issues, including: "(a) the identification of all assets as well as, a determination of their utility and potential realisation value. This task is made more difficult because Pan has an incomplete asset register; (b) the identification of all relevant intellectual property and a determination of its potential value; (c) a detailed valuation of the potential market for Pan products, both domestic and international (d) an evaluation of Pan's future personnel requirements; (e) the identification and evaluation of material supplier and customer contracts; (g) a determination of the working capital required to achieve partial or total licence reinstatement; and (h) consideration of the best and most efficient available sale structure and processes." 25 Mr McGrath states that it will take approximately two months for these issues to be properly addressed and resolved and for an effective tender process, open to all interested parties, to be conducted, after which a further two weeks will be required to prepare the report to creditors in accordance with statutory requirements. Mr McGrath's affidavit states as follows: "31. Any proposal for the sale of the business or the entry into a deed of company arrangement will be conditional upon acceptance by creditors at the second meeting of creditors to be held in accordance with the Corporations Act. 32. I anticipate that potential purchasers may seek to purchase the business of Pan by means of a deed of company arrangement, as they are in my view likely to desire to obtain the company shell (including its public status and its manufacturing licence). I therefore consider that the ultimate result of the sales process being considered at present might well be a deed of company arrangement proposal(s) by the successful tender party (or tender parties, if there are a number with viable proposals). 33. In addition, any recommencement of manufacturing will require approval from the TGA. Whilst my discussions with representatives from the TGA have been positive in relation to this issue to date, I do not have a firm commitment from the TGA as to whether Pan may be permitted to recommence manufacturing products at some time in the near future. 34. If the TGA refuses to allow Pan to manufacture goods before the expiry of the suspension of its manufacturing licence, liquidation may be the only option for the VA Companies. 35. I anticipate that it will be a number of weeks before a decision from the TGA as to the reinstatement of the manufacturing licence, will be made. That time will be after the period in which the administrators are presented required to convene the second meetings of creditors of the VA Companies." 26 As noted earlier, there are more than 20 claims for compensation made by or on behalf of persons who allege that they have suffered personal injury as a result of consuming Pan products which were subsequently recalled. Most of these claims have not yet been quantified and the Administrators have referred them to their solicitors. In order to advise the creditors properly in relation to these claims, the Administrators have to ascertain the likelihood of their success, their estimated value, and the estimated total volume of consumer claims. The Administrators consider that there is insufficient time by 11 June 2003 (in the case of Pan) and 12 June 2003 (in the case of the other VA companies) to make these assessments. 27 Similarly, there is the question of the more than 30 claims made by or on behalf of sponsors. Mr McGrath is uncertain as to the number of sponsors with which Pan currently has manufacturing contracts. The amount of the claims made are generally unspecified, but F H Faulding & Co Ltd has filed a proof of debt claiming that it is owed in excess of $43 million. The Administrators think that further claims by sponsors will be notified. The more than 30 notified to date are from sponsors located in Australia, Singapore, Malaysia and New Zealand. 28 F H Faulding & Co Ltd has already commenced a proceeding in the Supreme Court of Victoria against Pan for unliquidated damages arising from the alleged breach by Pan of a supply agreement. 29 In order to advise creditors in relation to claims by sponsors, the Administrators need to ascertain: "(a) each of the sponsor supply agreements and the terms of each; (b) which contracts, if any, may give rise to a claim by the sponsor against Pan; (c) which sponsors claim, or are likely to claim, against Pan in respect of alleged breaches of the supply agreement; (d) the estimated total value of claims from sponsors against Pan; and (e) the likelihood of success of the claims which have been received or notified." 30 Mr McGrath states that the claims by consumers and sponsors will have a substantial impact on the total quantum of creditors' claims. Based on initial estimates, he states that the total amount of claims made is likely to be in the order of $100 million. If the Administrators are unable to provide in their report a reasonable estimate of the total amount of contingent creditors' claims, and of the likely amounts for which those claims ought to be admitted for proof, the Administrators will not be able to determine whether the amount, if any, put forward to be paid to creditors in any proposed deed of company arrangement is sufficient to justify the Administrators' recommendation that creditors support it. Similarly, creditors will not be able to assess whether the amount put forward to be paid to them in any proposal for a deed of company arrangement is reasonable. 31 On or around 27 May 2003 Mr Selim's solicitors advised Mr McGrath that Mr Selim intends to put forward a proposal for a deed of company arrangement. There has been correspondence between Mr Selim's solicitors and the Administrators in relation to Mr Selim's proposal. But Mr McGrath opines that it would be premature to put this proposal to creditors for consideration at present. In addition, he observes that Mr Selim's proposal would need to be refined before it could be measured against other options and is too generalised to attract the Administrators' support at present. 32 Mr McGrath observes that pursuant to subs 438B(2) of the Act, the directors of the VA companies were required within seven days of the commencement of the administration, or such further period as the Administrators might allow, to give to the Administrators a administrators a report about each VA company's business, property, affairs and financial circumstances. The directors requested an extension of time and the Administrators granted an extension until 13 June 2003 - a date which will itself be outside the period in which the Administrators are presently required to convene the second meetings of creditors. 33 The committee of creditors comprises 25 members. The Administrators or their staff have telephoned persons representing the creditors to whom the largest amounts are owed to advise them of the present application. Mr McGrath says that he is advised that the following creditors, which represent approximately 62 percent in value (by proofs of debt lodged) of creditors on, or represented on, the committee of creditors, do not object to the proposed extension of 75 days: (a) F H Faulding & Co Ltd; (b) Pathway International Pty Ltd; (c) R & T Australia Pty Ltd; (d) Australian Pharmaceuticals Industries Limited; and (e) Roche Vitamins Australia Pty Limited.

REASONING 38 Section 439A occurs within Part 5.3A of the Act, which is headed "Administration of the Company's Affairs with a view to Executing a Deed of Company Arrangement". The opening section in Part 5.3A is s 435A, which is as follows: "The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company." 39 Section 439C states what the creditors may resolve at a meeting of creditors convened under s 439A. They may resolve: "(a) that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or (b) that the administration should end; or (c) that the company be wound up." 40 These three possibilities are reflected in the nature of the report and statements referred to in subs 439A(4) as documents which must accompany the notice of meeting to be given to creditors. That subsection requires that the notice of the meeting 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 his or her reasons for those opinions; and (c) of a deed of company arrangement is proposed - a statement setting out details of the proposed deed" 41 Clearly, s 439C and subs 439A(4) show that an application by the administrators for an extension of time under subss 439A((1) and (6) is to be assessed by reference to whether an extension is necessary to enable the administrators to provide the report and statements and, in particular, to arrive at the opinion, referred to in subs 439A(4), in order to inform creditors adequately so that they will be in a position to choose one of the three courses identified in s 439C.

Re Echuca Insured Housing Loans Pty Ltd (Administrator Appointed) v Lumsden, unreported, Supreme Court of Victoria, Harper J, 4 February 1994 cited

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