Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (Administrators Appointed) [2011] FCA 1493

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 1463 of 2011

IN THE MATTER OF FLETCHER JONES AND STAFF PTY LTD (ADMINISTRATORS APPOINTED) (ACN 004 257 774) BRUNO ANTHONY ROBERT SECATORE, DANIEL PETER JURATOWITCH AND GLENN JOHN SPOONER IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF FLETCHER JONES AND STAFF PTY LTD (ADMINISTRATORS APPOINTED) (ACN 004 257 774)

JUDGE: GORDON J DATE: 20 DECEMBER 2011 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 This is an application under ss 447A and 447D of the Corporations Act 2001 (Cth) (the Act) for an Order to modify the liabilities of Bruno Anthony Robert Secatore, Daniel Peter Juratowitch and Glenn John Spooner (the Plaintiffs) in their capacity as joint and several administrators of Fletcher Jones and Staff Pty Ltd (Administrators Appointed) (ACN 004 257 774) (the Company) under s 443A of the Act for a loan made to the Company during the administration of the Company. 2 The Plaintiffs seek Orders under s 447A(1) of the Act that: 1. the liabilities of the Plaintiffs, in their capacities as joint and several administrators of the Company, pursuant to the terms of the funding deed between the Plaintiffs, the Company and Leslie Francis and Associates Australia Pty Ltd (ACN 004 895 952) (LFAA) (the Funding Deed) be limited in the manner provided for by the Funding Deed; 2. the operation of s 443A(2) of the Act is modified, so far as it applies to the liabilities of the Plaintiffs in their capacities as the joint and several administrators of the Company pursuant to the Funding Deed, so as to permit the liabilities of the Plaintiffs to be limited in the manner provided for by the Funding Deed; 3. the operation of s 443A(1) of the Act is modified, so far as it applies to the liabilities of the Plaintiffs in their capacities as the joint and several administrators of the Company pursuant to the Funding Deed, so that the Plaintiffs will not be personally liable under s 443A(1)(d)-(f) of the Act or otherwise, for, or in connection with, the funds provided pursuant to the Funding Deed (including, without limitation, repayment of the money borrowed, interests thereon and borrowing costs) otherwise than in accordance with the terms of the Funding Deed. 3 The Plaintiffs also seek a direction under s 447D(1) of the Act that the Plaintiffs are justified, and would otherwise be acting reasonably, in causing the Company to enter into the Funding Deed. 4 The Australian Securities and Investments Commission (ASIC) and LFAA have been notified of the application. Late yesterday, the Plaintiffs provided the Court with a proposed amended Originating Process and a further affidavit in support. I would grant the Plaintiffs leave to amend the Originating Process in the terms of the proposed amended Originating Process and dispense with service of that amended Originating Process. The amendments do not affect the substance of the application. I would also grant the Plaintiffs leave to rely upon the further affidavit of Bruno Anthony Robert Secatore (Mr Secatore). It helpfully provides an update of the state of the administration.

BACKGROUND 5 On 7 December 2011 (the Appointment Date), the Plaintiffs were appointed as joint and several administrators of the Company under s 436A of the Act. 6 The Company has carried on business as a fashion and apparel retailer in all states of Australia under the trading name "Fletcher Jones" (the Business). The Company has been operating the Business since its incorporation on 16 December 1947. The Company's shareholders are LFAA and Francis Apparel Pty Ltd (ACN 063 486 701). 7 On the Appointment Date, the Company: 1. had cash at bank of $328,967, which has been used by the Plaintiffs to continue to operate and trade the Business; 2. operated the Business from 45 retail stores; 3. occupied office and warehouse premises in Maribyrnong for the purpose of managing and administering the Business; and 4. employed a total of 238 employees. 8 Since the Appointment Date, the Plaintiffs have continued to operate the Business with a view to offering the Business for sale and maximising the return to the Company's creditors. 9 The Plaintiffs have conducted an initial review of the Business. On 14 December 2011, following that initial review, the Plaintiffs terminated the employment of 61 employees (the Terminated Employees) and closed 15 retail stores (collectively, the Closed Stores). 10 The amounts owing to the Terminated Employees in respect of accrued wages, leave of absence, long service leave and retrenchment payments is $624,278.70, and in respect of superannuation entitlements is $8,478.15 (collectively, the Accrued Entitlements). The payroll tax that is payable with respect to the Accrued Entitlements is $24,430.45 (the Payroll Tax). 11 As at the date of filing this application, the Company: 1. operates the Business from 30 retail stores; 2. occupies office and warehouse premises in Maribyrnong for the purpose of managing and administering the Business; and 3. employs a total of 177 employees (the Remaining Employees). 12 As at the date of filing this application, the Plaintiffs also intend to continue to trade the Business as they believe that that course of action will maximise the chances of procuring a sale of the Business.

The Funding Deed 13 The Plaintiffs lack sufficient cash to pay the Accrued Entitlements when they would ordinarily be due for payment on 21 December 2011 or to meet the costs and expenses associated with continuing to trade the Business. 14 LFAA (one of the Company's shareholders) has offered to advance funding to a limit of $1 million to the Company and to the Plaintiffs to fund the payment of: 1. the Accrued Entitlements; 2. the Payroll Tax; and 3. any further amounts that, as a result of the termination of further employees, become owing during the administration of the Company in respect of, inter alia, wages, leave of absence, long service leave, retrenchment payments, superannuation and any associated taxes, (the LFAA Funding). 15 The terms on which LFAA is prepared to provide the LFAA Funding are set out in the Funding Deed. The Plaintiffs are unwilling to accept personal liability for repayment of the funds advanced under the Funding Deed. 16 The Plaintiffs believe that the Funding Deed is in the best interests of the creditors of the Company as the provision of the LFAA Funding will: 1. ensure that the Terminated Employees are paid their Accrued Entitlements promptly and before the Christmas/New Year period; and 2. maximise the likelihood that the Remaining Employees will remain in the employment of the Company throughout the administration of the Company, which will in turn maximise the chances of the Plaintiffs procuring the sale of the Business. 17 In general terms, the Funding Deed provides that the funding of up to $1 million will be provided in order to "meet the payment of the Terminated Employee Entitlement Liabilities … or any other purpose the Lender agrees to in writing": Item 7; see also Item 4 and cll 1.2(ee) and 3. It also contains provisions which limit the personal liability of the Plaintiffs. The Company is only liable to make repayments to LFAA under the Funding Deed once the Available Assets (as defined in cl 1.2(i) of the Funding Deed) exceed the debts and liabilities of the administration, deed administration and/or liquidation (as the case may be) and the remuneration of the Plaintiffs: cl 8.3 of the Funding Deed. The Plaintiffs are not personally liable for any shortfall: cl 8.4 of the Funding Deed.

ANALYSIS 18 The Plaintiffs seek Orders under s 447A(1) of the Act to modify the operation of Pt 5.3A of the Act, and in particular s 443A, in relation to the Company: see [2] above. As discussed at [15]-[16] above, these Orders are sought by the Plaintiffs because, while they believe that the Funding Deed is in the best interests of the Company's creditors, they are not willing to accept personal liability for the repayment of the LFAA Funding. 19 Under s 447A(1) of the Act "the court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company". However, s 447A is not to be viewed as some general source of power. The exercise of power under s 447A must be consistent with the object of Pt 5.3A as found in s 435A of the Act: Re Ansett Australia Ltd (No 1) (2002) 115 FCR 376 at [52]. Importantly, s 447A(1) empowers the court to make Orders which may alter the operation of other provisions of Pt 5.3A of the Act: Re Ansett Australia Ltd (No 1) at [53]. In other words, in an appropriate case, the Court can order that, in respect of a particular company, another provision within Pt 5.3A is to operate "as if" it provided for something other than it does in the ordinary course. 20 Section 443A of the Act is contained in subdiv A of Pt 5.3A of the Act and provides that an administrator of a company is liable for certain debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator. Subsections 443A(1)(d)-(f), which impose personal liability for borrowings, were introduced into the Act in 2007 to legislatively recognise that it is an appropriate part of an administrator's function to borrow funds in the performance of duties: see Carter, in the matter of SFM Australasia Pty Ltd (Administrators Appointed) ACN 105 317 333 [2009] FCA 360 at [19]. 21 Section 443A(2) of the Act provides that liability exists despite any agreement to the contrary, but without prejudice to the administrator's rights against the company or anyone else. Unlike other cases (for example, Re Ansett Australia Ltd (No 1)) where Courts have been asked to make Orders under s 447A in order to bring liabilities under a proposed contract within the provisions of s 443A where they would not otherwise have been covered, and had to consider the ramifications of doing so, the liability under the Funding Deed falls within s 443A(1)(d)-(f) of the Act. That has certain consequences. It means that: 1. the administrators will have a right of indemnity in respect of those liabilities out of the Company's property (s 443D(a)) secured by a lien on the Company's property (s 443F(1)); 2. in a non-liquidation situation, that right of indemnity will take priority over all other unsecured debts (s 443E(1)(a)); 3. in a liquidation scenario, that right of indemnity will rank higher than unsecured debts (s 556(1)(c)); and 4. in a deed of company arrangement scenario, that right of indemnity is likely to rank higher than unsecured debts under the provisions prescribed by s 444A(5) by virtue of the incorporation of s 556 (except if the deed otherwise provides): Re Ansett Australia (No 1) at [27]. 22 Irrespective of any Orders made under s 447A of the Act, the Plaintiffs will have access to the assets of the Company from which to pay the liabilities under the Funding Deed. Their entitlement to do so in priority to unsecured creditors, generally speaking, cannot be removed: Re Ansett Australia (No 1) at [57]-[58]. In the present case, the Orders sought under s 447A seeks to protect the Plaintiffs from personal liability under s 443A(1)(a)-(d) of the Act to pay any amount by which the assets of the Company are insufficient, otherwise than in accordance with the terms of the Funding Deed. 23 Section 447A(1) of the Act empowers the Court, in an appropriate case, to modify the operation of s 443A to exclude personal liability on the part of a voluntary administrator, and to provide that a loan taken by the company via the voluntary administrator is repayable on a limited recourse basis. Orders in similar terms have frequently been made in circumstances where the Court is satisfied that an administrator has entered into a loan agreement or other arrangement to enable the company's business to continue to trade for the benefit of the company's creditors: see, for example, Re Ansett Australia Ltd (No 1) at [49]; Re Spyglass Management Group Pty Ltd (admin apptd) (2004) 51 ACSR 432 at [6]; Sims; Re Huon Corporation Pty Ltd (admins apptd) (2006) 58 ACSR 620 at [12]; Re Malanos [2007] NSWSC 865 at [13]. 24 In Re Mentha (2010) 82 ACSR 142 at [30], Gilmour J stated as follows (citations omitted): The principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A can be summarised as follows: (a) the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Part 5.3A of the Corporations Act: … . (b) typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors: … . (c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement: … . (d) notice has been given to those who may be affected by the order: … . 25 In the current circumstances, I am satisfied that this is an appropriate case in which to exercise the power under s 447A(1) of the Act. First, the reasons for proposing the Funding Deed and the Orders sought are consistent with the operation and objects of Pt 5.3A of the Act in s 435A: Re Ansett Australia (No 1) at [52]. 26 In Re Ansett Australia (No 1), Goldberg J made Orders under s 447A which were designed to ensure that retrenched employees received their entitlements in a timely manner rather than having to wait until assets were realised by the administrators over time. His Honour concluded at [49]: The purpose of the advances is to assist a substantial body of the creditors of the Ansett group who would otherwise suffer great hardship if the advances were not made as soon as is practicable. The administrators consider that it is in the interests of the Ansett group and its creditors that the transaction under the Scheme be entered into, and it does not appear that they have taken into account matters irrelevant in relation to the administration of the Ansett group. I am satisfied that the aims which the administrators are seeking to achieve fall within the object of Pt 5.3A, expressed in s 435A of the Act… 27 In my view, the position here is analogous. Indeed, the Act enshrines the principle that priority is to be given to the payment of employee entitlements and to the repayment of advances made for that purpose: Re Ansett Australia (No 1) at [61]. The use of s 447A to facilitate their timely payment in the present case is consistent with the objects of the Act. 28 Secondly, the Orders sought will not disadvantage or prejudice the Company's unsecured creditors. There is nothing to suggest otherwise. All the Orders seek to do is to relieve the Plaintiffs from personal liability in a limited and particular circumstance. As Finkelstein J said in Re Spyglass Management Group at [6] in relation to this type of Order: As the lenders have agreed to a loan of this kind, there is no reason why the order should not be made. Practically speaking the creditors have no interest in the second order because they cannot be disadvantaged by it. On the other hand, they stand to benefit if the loan goes ahead. That is a sufficient reason to make the second order. See also Carter at [27] and Re Great Southern Infrastructure Pty Ltd [2009] WASC 161 at [14]-[15]. 29 Thirdly, Orders relieving the Plaintiffs from personal liability in respect of the Funding Deed will facilitate the making of the Plaintiffs' commercial decision. It will permit the Plaintiffs to make the commercial decision of what is in the best interests of the Company's creditors uninfluenced by concerns of personal liability. 30 Fourthly, the Funding Deed has been proposed on the basis of the Plaintiffs' view that it forms part of a strategy for maximising the chances of the Business being sold for the benefit of the Company's creditors. It is open for the Plaintiffs to conclude, as they have done, that so far as the Funding Deed facilitates the Plaintiffs procuring a sale of the Business, the Funding Deed is to the overall benefit of the Company and in the interests of the Company's creditors. As noted earlier, the Plaintiffs have already formed the view that it was necessary to terminate the employment of the Terminated Employees as part of continuing to trade the Business in order to maximise the prospects of a sale, with the resultant benefit to creditors. The facilitation of that payment is both necessary and appropriate to achieve those objectives. 31 Fifthly, the making of the Orders sought is not opposed by any relevant party. As a general rule, it is necessary to ensure that notice is given to those affected: Re Great Southern Infrastructure at [12]. In the present case, those who will, in reality, be affected are aware of the application. LFAA is aware and a representative of that entity was present in Court. ASIC has also been notified. The unsecured creditors will not be affected. Yesterday, the first meeting of creditors was held. Fifteen creditors in person and two creditors via telephone attended the meeting. At that meeting, Mr Secatore advised the creditors present of the facts and circumstances giving rise to this application. In the further affidavit filed last evening, Mr Secatore deposed to the fact that he offered the creditors an opportunity to ask questions about, and raise any objections to, this application. No creditor asked any questions or raised any objection. Notwithstanding those matters, and given the urgency of the application, as a matter of caution I will grant liberty to apply to any person who can demonstrate sufficient interest to modify or discharge these Orders on not less than 48 hours' notice to the Plaintiffs. 32 For those reasons, the Orders under s 447A should be made.

DIRECTION UNDER SECTION 447D 33 Under s 447D of the Act, an administrator may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. As noted at [3] above, the Plaintiffs seek a direction under s 447D of the Act that they may properly and justifiably enter into, and give effect to, the Funding Deed. Such a direction will provide the Plaintiffs with protection against claims that they are acting inappropriately or unreasonably in entering into and performing the Funding Deed. In my view, the Plaintiffs are entitled to such a direction. 34 A direction that an external administrator may properly and justifiably enter into and give effect to a proposed course of conduct is used to signify that it is appropriate that he or she do so. It is implicit in such an Order that the Court is approving the proposed conduct: Re Ansett Australia Ltd (2001) 39 ACSR 355 at [85]. 35 In Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409, Goldberg J stated at [65] that: There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, that decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. Such issues exist with regards to the Order sought approving entry into the Funding Deed. The Order sought is concerned with questions of propriety and reasonableness. 36 I am satisfied that the actions of the Plaintiffs are both reasonable and justified in all the circumstances and that a direction in those terms should be made.

OTHER DIRECTIONS AND ORDERS 37 Finally, I will also direct that by 4:00pm on 23 December 2011, the Plaintiffs: 1. upload a copy of these Orders onto the Cor Cordis website; and 2. send a circular letter to Creditors of the Company (by email in respect of those Creditors who have informed the Plaintiffs that email is their preferred method of communication and by post in respect of all other known Creditors) informing them of the substance of these Orders. 38 The Plaintiffs' costs of the application will be costs in the administration of the Company. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.