Selim v McGrath

REASONS FOR JUDGMENT 1 The applicant is the voluntary administrator of Tucker‑Barlow‑Gerrard Pty Ltd ("the company"), appointed pursuant to Pt 5.3A of the Corporations Act 2001 (Cth) ("the Act"). The administrator was appointed pursuant to s 436A of the Act on 24 July 2003, as a result of a resolution of the directors of the company made on that day. 2 The directors resolved to appoint a voluntary administrator to the company after the company's banker, the Australia and New Zealand Banking Group Ltd ("the bank"), served a demand on the company, calling up the company's finance facilities which the company was unable to pay. At that time the bank was owed $613,771, which was secured pursuant to a fixed and floating charge over the company's assets. 3 The company carries on the business of a 60‑bed health care facility, called the Radford Private Nursing Home in Radford Road, Reservoir, in Victoria. The company has a lease over the premises on which the nursing home operates, and the administrator has continued to operate the nursing home business since his appointment. The company is owned by two groups of interests, each holding 30 shares in the capital of the company. 4 The administrator carried out an initial investigation into the financial affairs of the company and concluded that, provided he could achieve a sale of the nursing home as a going concern, having regard to the approximate market value of bed licences, he was of the opinion that the creditors of the company might be paid out in full, with a likely surplus to shareholders. He wished to carry out a sale campaign and, in order to undertake that, he applied to the Court and obtained an extension of time for the convening and holding of the second meeting of creditors. At the time that order was sought, he was not in a position to provide the opinion which he was required to give pursuant to s 439A(4)(b) of the Act. 5 The administrator conducted the sale campaign with a view to selling the private nursing home business as a going concern. The administrator received 85 expressions of interest with respect to the purchase and sent out 44 information packages, but as a result of the distribution of the information packages he only received two offers. One of the offers was from Gerrard D'Souza Pty Ltd ("Gerrard"), a company associated with one of the directors and shareholders of the company, Margeruite Teresa Gerrard, and the other offer was made by Jordel Pty Ltd ("Jordel"). 6 The offer from Jordel was an offer for the business of the company in exchange for a payment of $600,000, less any amount representing employee entitlements and costs required for upgrading the facilities, plant and equipment at the location where the business is operated, in order to comply with all relevant statutory standards for registrations and accreditations. The offer from Gerrard was in a different form. It was essentially an offer to refinance the debts of the company and acquire the 30 ordinary shares held by the other shareholder group in the company, the group representing the interests of Guy Clement Barlow and June Elizabeth Barlow. 7 The administrator has taken the view that the offer from Gerrard provides the greatest possibility for the unsecured creditors of the company receiving any payment in respect of their claims. He proposes to recommend to the creditors of the company that they resolve at the second meeting of creditors, to be held pursuant to s 439A of the Act, that the administration end to enable that offer to be implemented. 8 The Gerrard offer includes the following components: · the payment of $55,000 to the Barlows for the purchase of their shares and in satisfaction of any debts or claims they may have against the company with respect to employee entitlements and loan accounts; · the refinancing of the bank's debt, which at the date of the administrator's appointment was $613,771 and is currently of the order of $638,000; · the payment of the debts and claims of the three unsecured and non‑priority creditors of the company, the Australian Tax Office, the State Revenue Office and the company's accountant Spadaro and Associates, within 30 days of the creditors resolving to end the administration of the company. 9 The Gerrard offer is expressed to be conditional upon a transfer of the Barlow shares to Gerrard occurring during the administration of the company. The reason for this condition is that a precipitating event for the appointment of the administrator and a crystallisation of the bank's debt was a dispute between the two groups of interests, which culminated in proceedings being issued in the Supreme Court, not otherwise relevant for present purposes. 10 The agreement by Gerrard to refinance the bank debt and pay the claims of the unsecured creditors is dependent upon the administration of the company ending and the company not entering into a deed of company arrangement. The bank is not prepared to fund the payments to be made by Gerrard, unless the company is not in administration and not subject to a deed of company arrangement. 11 The administrator takes the view that the transfer of the shares, which are fully paid, would not affect the creditors of the company negatively, even if the offer was not subsequently completed. However, as will emerge shortly, an executed agreement has been entered into which, subject to two conditions, requires the purchaser to pay the unsecured creditors' debts. 12 The administrator has prepared a comparative analysis of the two offers which have been made, and the return to creditors contemplated by both offers. The administrator takes the view that he is unlikely to entertain the Jordel offer, because if the Gerrard offer did not proceed he would be able to realise a greater amount for creditors in a winding‑up, rather than acceptance of the Jordel offer. If the administrator was to accept an offer similar to the Jordel offer, the bank would not recover any part of its secured debt, although it might have recourse to third party securities. More importantly, the unsecured creditors would receive nothing, the company would proceed into liquidation and the external administration costs would increase. However, under the Gerrard offer the administration would come to an end, the administrator's fees would be paid and the unsecured creditors would be paid in full. 13 There has been placed before the Court an executed copy of a deed made 21 October 2003 between Gerrard, Tucker‑Barlow‑Gerrard Pty Ltd, Mr and Mrs Barlow and the administrator. Essentially, that agreement provides for the sale and transfer of the shares owned by the Barlows, which is conditional upon an order of the court approving the share transfer under s 437F of the Act. Clause 2.2 of the deed is in the following terms: "2.2 Payment of Trading Liabilities The agreement of the Purchaser to satisfy the Trading Liabilities pursuant to clause 8 of this Deed is subject to the condition precedent that the creditors of the Company resolving by no later than 19 November 2003 or such later date as agreed to by the Administrator in his sole and unfettered discretion, at the meeting of creditors convened by the Administrator pursuant to Section 439A(3) of the Act, to end the voluntary administration of the Company ('Resolution Condition') and return the control and management of the Company to the directors of the Company still in office at the time being." 14 The trading liabilities are defined in the agreement as the debts and claims against the company, admitted to proof by the administrator and owed to the Australian Tax Office, the State Revenue Office, Spadaro and Associates and the bank. 15 Clause 8 of the deed is in the following terms: "8. SATISFACTION OF TRADING LIABILITIES 8.1 The Purchaser covenants to provide to the Administrator evidence reasonably acceptable to the Administrator within 7 days before the meeting of creditors is held under Section 439A of the Act, which demonstrates that the Purchaser has sufficient funds to satisfy and discharge the Trading Liabilities within 30 days after the ending of the administration of the Company pursuant to clause 2.2. 8.2 Subject to the satisfaction of the Resolution Condition, the Purchaser hereby covenants to satisfy and discharge the Trading Liabilities with[in] 30 days after the ending of the administration of the Company pursuant to clause 2.2 of this Deed." 16 If I make the order which is sought and the share sale agreement is carried into effect, it is apparent that the unsecured creditors will either be paid in full or will be secured in a manner they would not otherwise be paid or secured if an order was not made for the transfer of the shares. The only conditions precedent to the operation of the sale of shares agreement are the order of the court pursuant to s 437F of the Act and the creditors resolving, at their second meeting pursuant to s 439A of the Act, that the administration terminate. All the creditors have been served with the papers in this proceeding and it is apparent from their non-attendance today that they do not oppose the orders sought. 17 Section 437F of the Act is in the following terms: "The transfer of shares in a company, or an alteration in the status of members of a company, that is made during the administration of the company is void except so far as the court otherwise orders." The discretion given to the Court by the section is obviously very wide and is in a sense unfettered. However, its exercise should be considered by reference to the context of Pt 5.3A of the Act in which it is found. In my view the discretion under s 437F is to be exercised in accordance with and subject to the object of Pt 5.3A of the Act, which is found in s 435A of the Act which is in the following terms: "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." Essentially what is provided for is that the interests of the creditors of the company in an administration, subject to Pt 5.3A of the Act, be a matter of paramount consideration. It seems to me that in exercising the discretion under s 437F, the touchstone by reference to which I should determine whether an order should be made is the interests of creditors. 18 In a recent judgment of the New South Wales Supreme Court, Selim v McGrath [2003] NSWSC 806 Austin J observed at [2]: "It appears to me probable that the legislative purpose in enacting the provision [s 437F] is to protect the creditors of the company and to ensure that the administration can proceed so as to effectuate the objects contained in s 435A of the Act. One of those objects is to maximise the chance that the company will continue in existence." His Honour went on to say that: "One can envisage circumstances in which a transfer of shares might reduce, rather than maximise, that prospect." 19 In that case Austin J took the view that the evidence was sufficient to discharge the onus that the plaintiffs bore, implied in s 437F, of establishing that the transfers of shares proposed were in the interests of the creditors of the company and would not defeat the objects of Pt 5.3A. I adopt with respect his Honour's observations to that extent; that is to say that it is a matter for the party seeking an order under s 437F to satisfy the court that the order is in the interests of the creditors of the company. 20 Austin J noted that counsel's research had not identified any cases on s 437F of the Act. However, prior to his Honour's decision there were in fact two decisions on s 437F, namely Australian Securities and Investments Commission v Australian Rural Group Ltd [2002] NSWSC 1087 and Sellers; In the matter of Beckley Forge Pty Ltd (2003) 21 ACLC 1319. 21 In Australian Securities and Investments Commission v Australian Rural Group Ltd (supra) Barrett J noted at [4] that s 437F was the counterpart, in the administration context, of ss 468(1) and 493 in relation to winding‑up. He noted in relation to s 468 the observation of the Full Federal Court in Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd (1984) 3 FCR 311 at 316: "…the words in the section, 'unless the court otherwise orders', give the court a wide general discretion which is not limited by any attempted classification of those cases which do, and those which do not, fall within them." However, his Honour went on to note at [5], consistently with what I have observed earlier, that the discretion is to be exercised by reference to a guiding principle based on the interests of creditors. 22 In Sellers; In the matter of Beckley Forge Pty Ltd (supra), Finkelstein J was not concerned with a transfer of shares in a company but was rather concerned with the issue of an alteration in the status of members of a company, the issue before him being not a transfer of shares but whether the company had the power to make an issue of shares in the course of administration. His Honour observed that s 437F is concerned with a change in legal rights and not with commercial consequences. That observation may be an accurate analysis of the circumstances which invoke the operation of s 437F but I do not consider that a court is precluded from taking commercial consequences into account in determining whether to make an order under the section. In the present case, commercial consequences loom large in the analysis of a comparison of the outcomes, in determining whether or not an order is made under s 437F. 23 I am satisfied on the material before me that the proposal for the transfer of the shares is in the interests of creditors of the company. If the transfer of the shares is not approved, the administrator is left with the offer by Jordel which would result in a disadvantageous position, certainly for the unsecured creditors, and to a substantial part the bank as a secured creditor. The unsecured creditors would not receive any return in relation to their debts because the sale price of $600,000 would be swallowed up by priority payments and payments required to be made before any consideration could be given to the debts of the unsecured creditors. 24 As against that, the transfer of shares proposal, subject to the administration ending - which is in the hands of the unsecured creditors - puts them in a position of having their debts paid in full, that is to say they will receive 100 cents in the dollar. For all these reasons, I propose to make the following order: 1. Pursuant to s 437F of the Corporations Act 2001 (Cth), the transfer of 15 ordinary shares in Tucker‑Barlow‑Gerrard Pty Ltd (ACN 083 529 257) (administrator appointed) from each of Guy Clement Barlow and June Elizabeth Barlow to Gerrard D'Souza Pty Ltd (ACN 102 678 133) pursuant to the deed of sale of shares, being exhibit AC1 to the affidavit of Angelo Conti sworn 22 October 2003, is not void. 2. The costs of and incidental to this proceeding be costs and expenses of the voluntary administrator of Tucker‑Barlow‑Gerrard Pty Ltd.