Schwarz, in the matter of Gordon Smith Marketing Pty Ltd (Administrator... [2016] FCA 1378 | Case summary

Interim Orders

The interlocutory process be made returnable instanter.
Pursuant to s 436B(2)(g) of the Corporations Act 2001 (Cth) (the Act), the Court hereby grants leave for the plaintiff to appoint himself as voluntary administrator of each of the companies listed in the originating application (the Companies). Administration
Further, pursuant to s 447A of the Act, the operation of Part 5.3A of the Act as it affects the administration of the Companies pursuant to the leave granted in order 2 (Administration) above be altered as follows: (a) the first meeting of creditors required to be held in the Administration under s 436E of the Act be dispensed with; (b) the committee of creditors which may be appointed at the first meeting of creditors pursuant to s 436E of the Act be deemed to have been appointed and constituted by the following persons: (i) Alex Tyler, an informal representative of the employees of the Companies; (ii) Annie Redden, an informal representative of the employees of the Companies; (iii) Ms Lily Hong, a creditor; (iv) SSH Textiles Co Limited, represented by its solicitors, Minter Ellison; (v) YQ & LZ, represented by its solicitor, Mr John Boyle; (vi) Sainty International Co Ltd, Shanghai Establishing Textile International Limited and Comely Creations Ltd, each represented by Mr Sze Wye Yee; (vii) Shanghai Qixin Import Export Co Ltd, represented by Mr Runqin Tao; and (viii) Birmingham Distribution Centres Pty Ltd (in liquidation), represented by its liquidator, Mr Adam Lysle. (c) notwithstanding s 439A(2) of the Act, the plaintiff may convene the meeting under s 439A of the Act (which would ordinarily be the second meeting) during the convening period (Second Meeting), at the earliest convenient date, as long as the period of notice stipulated in s 439A(3) of the Act is complied with; and (d) notwithstanding s 439A(3) of the Act, the plaintiff may convene the Second Meeting by: (i) giving a notice electronically by email sent to the email address of any creditor (including persons claiming to be creditors) of the Companies for whom or which the plaintiff holds an email address; or (ii) sending a notice to the postal address or facsimile number, or otherwise as provided for by the Act or the Corporations Regulations 2001 (Cth), to any creditors not being a creditor referred to in sub-paragraph (a); and (iii) causing such notice to me made available on the website maintained by the plaintiff's firm at:

JAGOT J: 1 This is an application which has proceeded ex parte for the liquidator of three companies (the companies) to be granted leave by the Court pursuant to s 436B(2) of the Corporations Act 2001 (Cth) (the Act) to appoint himself as the administrator of the companies, with certain ancillary orders. 2 The background to the matter is not straightforward but is comprehensively summarised in the written submissions for the plaintiff. These submissions reflect the evidence of the liquidator, Mr Schwarz, as set out in his affidavit dated 16 November 2016. 3 Mr Schwarz was appointed as voluntary administrator of the companies pursuant to s 436A of the Act on 27 June 2016. 4 On 21 July 2016, the Court made orders extending the convening period for the meeting of creditors of the companies, as well as consequential orders. At that time, evidence was placed before the Corporations Duty Judge, Yates J, of an objection to the extension of time on behalf of a creditor identified as YQ & LZ International Trading (Australia) Pty Ltd (YQ & LZ). Despite the objection, the orders for the extension were granted, having regard to the evidence of Mr Schwarz and which was otherwise before the Court. 5 Thereafter, a deed of company arrangement (DOCA) was proposed by the director of the companies which was intended to be put to the second meeting of creditors scheduled to be held on 20 September 2016. The creditors voted in favour of the DOCA at the second meeting but implementation of the arrangements pursuant to that deed was subject to various conditions precedent. For a number of reasons, which it is not necessary to identify but which have been fully disclosed in the evidence of Mr Schwarz, the conditions precedent were not satisfied. Accordingly, the deed of company arrangement did not proceed. 6 A further proposal was put by the director, but it required negotiation undertaken by Mr Schwarz with Brands for Us Pty Ltd which was operating the business of the companies and the purchaser under proposed asset and the share sale agreements with Mr Smith, the sole director and shareholder of the companies. These negotiations resulted in a further deed being proposed, identified as the second DOCA proposal in the submissions for the plaintiff and described as follows: Ultimately, Mr Smith put forward a further DOCA proposal on 15 November 2016 (Second DOCA Proposal), which proposes that, during the period 15 December 2016 to 1 May 2018, Mr Smith will make aggregate contributions of $1.4m to a deed fund, which would be available for distribution to creditors of the Companies (excluding related party creditors) on a pooled basis (Schwarz, 16.11.16, [54]). Whilst this is $50,000 less than the DOCA proposal made on 2 November 2016, and $300,000 less than the first DOCA proposal (as the price payable to Mr Smith under the varied SSA has been considerably reduced), as Mr Schwarz explains it still represents a net increase of personal contributions by Mr Smith of $100,000 (Schwarz, 16.11.16, [54]). 7 This proposal is conditional on approval by the Court or the creditors and the companies as well as completion of the asset and share sale agreements. 8 For the contemplated deed of settlement to be completed and the revised DOCA to be implemented, it is necessary that an administrator be appointed to the companies. 9 The present application is necessary because of s 436B of the Act which provides that: (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 leave of the Court. 10 The principles in relation to the exercise of discretion involved in the grant of leave pursuant to s 436B(2)(g) of the Act are also set out in the plaintiff's written submissions. I accept, in particular, the submission that regard must be had to the fact that the grant of leave is for the appointment of an administrator, as the liquidator is empowered to appoint an administrator pursuant to s 436B(1). The subject of the grant of leave, if one is to be made, is leave for the person liquidator to appoint himself or herself as the administrator. 11 As such, I accept that the essential question is whether it is appropriate that the liquidator be appointed as the administrator of the companies. In answering this question it is necessary to consider whether there is any matter such as a conflict of interest, a threat to independence, or anything else offensive to commercial morality in such an appointment (see Palmer and Collis and Terraplanet Limited (in liquidation), in the matter of Terraplanet Limited (in liquidation) [2007] FCA 92 at [22]). 12 Mr Schwarz convened a telephone conference with a number of former creditor's committee members on 9 November 2016 to update them about the proposed arrangements including, specifically, Mr Schwarz's intention to apply to the Court to seek leave to appoint himself as administrator of the companies, and for orders that no first meeting of creditors would be required to be held in the administration. According to Mr Schwarz, other than the representative of YQ & LZ, the committee of creditors raised no objection to the making of this application. The objection by YQ & LZ was made orally. The evidence discloses ongoing communications from the solicitor for YQ & LZ making a range of complaints, in effect, about the entire course of the first administration and the liquidation. 13 A further affidavit from the solicitor for the plaintiff discloses that yesterday at 6.11pm notice of this application, together with the interlocutory process and Mr Schwarz's supporting affidavit, was forwarded to the solicitor of YQ & LZ. The notice said that the application would be heard today, 17 November 2016, at 2.15 pm. At the beginning of the hearing today the matter was called and there was no appearance by any person other than the plaintiff. 14 It is apparent that YQ & LZ are dissatisfied with numerous aspects of the administration and liquidation of the companies, but it must be taken that they have chosen not to appear today to raise these matters. In these circumstances, the objection that was communicated to Mr Schwarz on or around 9 November 2016 is not a matter to which I give material weight. 15 In summary, I accept the submissions set out in paragraph 32 of the plaintiff's submissions which I adopt for the purposes of these reasons, namely: In particular: a. Mr Schwarz has been in control of the Companies (first as administrator, and presently, as liquidator) since 27 June 2016 (Schwarz, 16.11.16, [64(a)]); b. During that period, Mr Schwarz and his staff have gained an in-depth working knowledge of the Companies' business and affairs, and has overseen the continued operation of the Companies' business (Schwarz, 16.11.16, [64(a)]); c. Mr Schwarz and his staff have gained an in-depth working knowledge of the Companies' business and affairs, with the effect that his appointment as administrator would be more cost-effective than were any other person appointed. Appointing Mr Schwarz as administrator of the Companies would likely reduce duplication and the costs associated with that (Schwarz, 16.11.16, [64(b) and (d)]); d. Having regard to Mr Schwarz's ongoing negotiations both with Mr Smith (in respect of the various iterations of DOCA proposed) and BFU (in respect of the ASA and SSA, and the Deed of Settlement), Mr Schwarz submits that it would be wasteful and time consuming for a third party to take Mr Schwarz's place in those negotiations. This is particularly so given the complexity of those arrangements (Schwarz, 16.11.16, [64(c)]) - Mr Schwarz's appointment as administrator would ensure continuity in respect of those relationships and negotiations; e. Mr Schwarz was instrumental in negotiating the Deed of Settlement, without which there could be no possibility of any DOCA being proposed (and, as Mr Schwarz opines, any return to creditors would likely be de minimis). Mr Schwarz submits that, when one has regard to the history of the negotiations between the parties, it would appear unwise to introduce a third party at this late stage (here, see generally the observations of Yates J in Pavlakis at [21]): (Schwarz, 16.11.16, [64(c)]); and f. Mr Schwarz enjoys positive working relationships not only with the Companies' employees and landlords, but also with BFU, and this will assist Mr Schwarz in seeking to give effect to the Deed of Settlement and the Second DOCA Proposal (Schwarz, 16.11.16, [64(e)]). 16 Accordingly, I am satisfied that there is no reason why Mr Schwarz ought not be appointed as administrator and it follows that I am satisfied that it is appropriate that leave be granted. 17 The next issue is the ancillary orders which are sought pursuant to s 447A of the Act. In particular, Mr Schwarz seeks orders dispensing with the requirement to hold the first meeting of creditors. His reasons are that the members of the now dissolved committee of creditors from the first administration have been informed of the present application and there has been no objection, save for one creditor, a matter to which I will return. Mr Schwarz intends to convene a meeting of creditors promptly after the grant of any leave, at which time the creditors will be able to decide whether or not the administration ought to continue. Further, creditors have already had extensive opportunities to familiarise themselves with the affairs of the companies. Finally, holding a first meeting would be an administrative burden costing in the order of $13,000 to $16,000. 18 For these reasons, I accept that it is appropriate to make the ancillary orders which are sought as well as certain orders modifying various service and notice requirements which are intended to reduce the costs associated with the convening of any second meeting of creditors. 19 Accordingly, I am content to make the orders sought, with an additional order granting leave to the plaintiff to restore the matter before me on 48 hours' notice in respect of any application to terminate the liquidation. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.

Schwarz, in the matter of Gordon Smith Marketing Pty Ltd (Administrator Appointed) [2016] FCA 1378

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