School Holdings Pty Ltd v Dayroll Pty Ltd

CATCHWORDS : CORPORATIONS - voluntary administration - application by administrators to adjourn proceedings for winding up - court's inherent jurisdiction and jurisdiction under s 467 to adjourn winding up application - relevant considerations

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 44A, 467

CASES CITED : Lemery Holdings Pty Limited v Reliance Financial Services Pty Limited [2008] NSWSC 548 TCS Management Pty Limited v CTTI Solutions Pty Limited [2001] NSWSC 830

School Holdings Pty Ltd (Plaintiff/First Respondent) PARTIES : Dayroll Pty Ltd (admins apptd)(Defendant/Applicant) Commissioner of Taxation (Supporting Creditor/Second Respondent)

COUNSEL : G Carolan (Plaintiff/First Respondent) T Russell (Solicitor)(Defendant/Applicant)

Slater & Gordon (Plaintiff/First Respondent) SOLICITORS : ERA Legal (Defendant/Applicant) T V Le (Solicitor)(Supporting Creditor/Second Respondent)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2710/08 SCHOOL HOLDINGS PTY LTD V DAYROLL PTY LTD (ADMINS APPTD) JUDGMENT (Ex tempore; revised 1 July 2008) 1 HIS HONOUR: By an originating process filed on 9 May 2008 the plaintiff seeks an order that the defendant be wound up in insolvency. The plaintiff claims that a statutory demand was served on the defendant for an amount in excess of $162,000 relating to a judgment in the District Court and that that amount remains unpaid. 2 An administrator, Mr Mitchell Ball, was appointed to the defendant on 29 May 2008, before any winding up order was made. The winding up proceedings came before the court on the 10 June 2008 and were adjourned until today, on the application of the administrator of the defendant. The administrator has circulated his s 439A report to creditors dated 25 June 2008, and the meeting of creditors is due to take place on Thursday 3 July 2008. 3 In his report the administrator notes that he has received a verbal proposal for a deed of company arrangement, but even so, he recommends that the best interests of creditors would be served by adjourning the meeting for up to 45 business days. He says so because in his view, there does not appear to be any immediately identifiable detriment to creditors and the adjournment will enable the administration to continue and for further investigations to take place. His view is that at present he does not have sufficient information to recommend that creditors accept the deed of company arrangement proposal that has been made; nor does he have sufficient information to enable him to assure creditors it would be in their best interests that the company be wound up immediately. 4 The application for an adjournment for a further period of 45 days is based upon s 440A(2) of the Corporations Act, and on the court's inherent jurisdiction and s 467(1)(b) of the Act. Section 440A (2) states that: "The court is to adjourn the hearing of an application for a 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 The inherent jurisdiction of the court was recently considered by Palmer J in Lemery Holdings Pty Limited v Reliance Financial Services Pty Limited [2008] NSWSC 548. In that case his Honour approved some observations by Hamilton J in TCS Management Pty Limited v CTTI Solutions Pty Limited [2001] NSWSC 830 as follows: "Where there are advantages [in either liquidation or continuation of an administration] in general terms it may well be the proper course to give such adjournment as would allow the creditors themselves to vote upon the proposal and determine which course they prefer." 6 Those cases indicate that there may be circumstances, particularly where a matter is finely balanced, when the court is able to grant an adjournment in the exercise of its inherent jurisdiction even though it has not been established that it is in the interests of the creditors that the administration continue - indeed, the case for an adjournment may be precisely because sufficient information is not yet to hand to permit that assessment to be made. 7 I have had the benefit of written submissions on behalf of the defendant, canvassing other authorities concerning the inherent jurisdiction and s 440A(2). It is unnecessary in this case to review the case law because, in my opinion, the position is relatively plain. 8 In this case it is not submitted on behalf of the administrator that the court should be satisfied that it is in the interests of the creditors that the administration continue. Rather, the submission is that this is an appropriate case to allow the administrator to pursue his own inclination to make further investigations, without any belief at this stage that the deed proposal is satisfactory or can be made satisfactory. Although the administrator holds this view, the evidence does not, it seems to me, provide any real support for the belief that further investigations by the administrator will produce a satisfactory outcome for creditors. The real problem in this case is that there has been a very obvious failure, on the part of the director of the company and others concerned with it, to assist the administrator by providing basic information that the administrator is entitled to have. 9 Let me illustrate that proposition. First, I note that in his s 439A report the administrator observes (page 10 of Exhibit A1) that the company is trustee of three trusts but that he has sighted only one of the trust deeds. He also says in his report, at page 13 of the Exhibit, that he was provided with separate reports as to affairs in relation to the trusts and the company "with negligible information". He says on the same page that he has made inquiries about where the rental income generated by the premises is directed and his inquiries "suggest" that the rental income has been used to reduce the amount of the facility secured by the mortgage. It seems to me worthy of note that the most he can say is that his inquiries "suggest" that this is so. 10 The administrator has issued notices under s 438C(3) directed to the company's Director, Marialina Cassaniti, the company's accounting firm, CAP Accounting, the company's accountant, David Cassaniti, and Sam Cassaniti, who appears to have had a role in the company at least at an earlier stage. 11 In response to these notices, Mr Cassaniti contacted the administrator's partner on behalf of all of the recipients of notices and informed him that they were not able to provide any further books and records of the company. The reasons that he gave were essentially that the books and records of dozens if not hundreds of other companies and sole trader businesses were kept in the same offices as the company's books and records, namely the offices of Cassaniti & Associates. Some of these companies were under the control of Mr Sam Cassaniti and the Cassaniti family and some were arms length clients of the firm Cassaniti & Associates with no other connection with the Cassaniti family. The Australian Federal Police have executed search warrants at the offices of Cassaniti & Associates and have uplifted large quantities of books and records including books and records pertaining to the company. Mr Sam Cassaniti was convicted of a criminal offence in 2005 and is currently in custody. Following that conviction and imprisonment, several dozens of archived boxes of documents were returned to Cassaniti & Associates but the documents contained in the boxes have been intermingled and are in no easily ascertainable order. 12 According to David Cassaniti neither he nor anyone else at Cassaniti & Associates is sufficiently familiar with the companies and businesses and clients concerned that they are able to sort through the boxes and restore order to the documents. He says that the only person who is sufficiently familiar with the affairs of the various companies is Sam Cassaniti, and that Sam Cassaniti will become eligible for parole in approximately two weeks. 13 It appears that the only foundation for the administrator to have any hope that the position for creditors will improve is that Mr Sam Cassaniti will be released from custody and will be able to sort through the many boxes of books and records of the companies, identify records relating to this company, clarify the situation regarding the financial position of this company and then presumably a better deed of company arrangement proposal will or may emerge. Given the description in the evidence of the state of financial record keeping of the company, and the fact that the director of the company has done evidently so little to assist the administrator, and having regard to all of the other matters to which I have referred, it seems to me that it is unrealistic to believe that Mr Cassaniti's release from custody, whatever it happens, will lead to any improvement in the position of creditors of this company. 14 That leads me to consider the current proposal for a deed of company arrangement that has been made by the Director, Marialina Cassaniti. The proposal is a verbal proposal according to which she will contribute $150,000 to a deed fund, by an initial payment of $30,000 upon execution of the deed and thereafter monthly instalments of $10,000 each commencing one month after the execution of the deed of company arrangement. The proposal is that the funds so created will be expended in payment of the costs of the administrator and deed administrator and thereafter distributed to all participating creditors. Certain named creditors will be non-participating creditors. The participating creditors will covenant not to sue the company. It is not clear what will happen to the company but presumably it will be returned to the Director and will be allowed to trade. 15 Notwithstanding that the company has been in administration since 29 May, and one would have thought there was ample opportunity in the intervening period to prepare a precise and comprehensive proposal, we have only a verbal proposal summarised by the administrator in his report. Additionally, there are other difficulties with the proposal, such as that nothing is said about how the periodic payments contemplated by the proposed deed will be funded, there is no security for those payments, and there are many aspects of a workable deed that are not addressed in the proposal as set out in the s 439A report. 16 The administrator does not support the proposal, but as I have said, he wishes to have the opportunity to make further investigations and see whether a better proposal emerges. The administrator has also given evidence that he has concerns about the validity of the non-participating creditors' claims and that he does not intend to admit any of them even for voting purposes at the meeting. Whether a deed proposal would be approved by creditors in those circumstances is at least highly doubtful, but the real question is whether there is any case for allowing the administrator to make further investigations so as to clarify the company's financial position and in the hope that some better proposal might emerge. 17 Given the poor quality of the verbal proposal referred to in the s 439A report, the fact that there has been ample time for the director to do better than that, and the lack of cooperation concerning the financial records of the company, it seems to me that the administrator's hopeful view is just not supported by the evidence. 18 In a case like this there are some good reasons for allowing the winding up application to go ahead and, if the ground is established, making a winding up order and appointing a liquidator. A liquidator will be able, subject to funding, to conduct proper examinations as well as other investigations in circumstances where the examinees will be under an obligation under the Corporations Act to produce relevant documents. That process is much more likely to get to the truth of the company's financial position than an additional period of negotiation or discussion by an administrator. An administrator does have powers of examination and investigation, but in practice those powers are more often and more effectively exercised by a liquidator in the context of a winding up. 19 Additionally, a liquidator will be able to investigate the prospects of recovery in respect of insolvent trading and voidable transactions. The s 439A report is not informative on these matters, principally because, as the administrator says fairly frequently in the report, he is unable to form a view about the company's solvency or other relevant matters in the absence of books and records. One hopes that a liquidator will eventually be able to reconstruct the financial position of the company and determine whether it is worthwhile to take any such proceedings. 20 In summary, my view is that there are no grounds for the court to be satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up, and no proper grounds for the court to exercise its discretion in the inherent jurisdiction or under s 467(1)(b) to adjourn the winding up application. **********

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