SGB Raffia v Gammacon [2007] NSWSC 1510 | Case summary

3 The administration commenced on 2 November 2007 by an appointment pursuant to a resolution of the director of Gammacon on that date in accordance with s 436A of the Corporations Act. The first meeting of creditors was held on 9 November 2007. The second meeting of creditors is proposed to take place tomorrow. 4 There have been earlier applications for adjournment pursuant to s 440A(2). One of those came before me on 21 July 2007 by way of an application to review the decision of a registrar. The registrar had heard an application for adjournment on 16 November 2007, had decided that he had power to grant an adjournment, and had granted an adjournment although not for the length sought. I held that the registrar was acting within power and that his exercise of discretion was not flawed. 5 The matter came back before the registrar on 23 November 2007. The application for adjournment was renewed. For reasons that are unclear the registrar did not deal with it but remitted it to the Corporations List Judge. It came from the Corporations List Judge to me, sitting in the Equity duty list. 6 It is clear that the person seeking an order for adjournment under s 440A(2) bears the onus of satisfying the Court that it is in the interests of creditors for the company to continue under administration rather than be wound up. In my reasons for decision given on 21 November 2007 (when I decided the application to review the registrar's decision) I concluded that the relevant test was one to be considered having regard in the first instance to the wording of the statute. I said that because I was faced with the decision of the Queensland Court of Appeal in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456. In that case, McPherson JA (with whom Pincus and Davies JJA agreed) said that if the court were to be satisfied of the matter referred to under s 440A(2): "One would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors". 7 If the application for adjournment were to be decided by reference to the test stated by McPherson JA in Creevey then it would have to fail. That is because there is no evidence, let alone persuasive evidence, of the kind to which his Honour referred. There is no basis on the evidence as it stands before me from which the Court could conclude, on the balance of probabilities, that one form of administration rather than the other would be more beneficial either in amount or in time. 8 However, as I said in my earlier reasons, the matter has to be decided by reference to the test laid down in the subsection. McPherson JA was not purporting to reframe the statutory test but, rather, to state its application firstly in the case before the Court and secondly by reference to more general considerations. 9 I am pleased to find that the approach that I took in my earlier reasons is one that Campbell J took a few years ago in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377 at 380 [18]. His Honour said that the question was one of persuading the court, and that the sorts of proof that could produce the requisite persuasion might vary according to the time when the application for adjournment was made: [18] Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase. 10 As I have said, the administration commenced on 2 November 2007: a little less than four weeks ago. The administrators' report to creditors sets out the financial position of Gammacon. It is clear that unless certain inter-company loans can be recovered, there will be a very substantial shortfall, and no return to unsecured creditors. 11 The likelihood of recovery from those related corporations is a matter that the administrators are unable to address. They do give some information. They point out that the principal creditor has assets that, as valued, appear to exceed its secured claims by a substantial margin. Further, according to the administrators, the amount available for unsecured creditors (on the basis of the figures that they have been "advised") exceeds Gammacon's claim by a substantial amount. 12 If the scenario painted in the report is carried through into reality, then Gammacon will recover the debts owed to it by the related corporations and will be relieved of its contingent liabilities to the secured creditors of those related corporations. 13 However, as I have said, the administrators express no view as to whether the figures that they have been given are realistic and are likely to reflect actual recoveries. Indeed, they give some information that might suggest to the contrary. They said on advice from the director of Gammacon that its failure can be attributed to delays associated with receiving payment from the related corporation to which I have referred and that those delays reflected delays experienced by that related corporation in disposing of its assets. 14 The administrators also point to a proposed scheme of arrangement. Under that scheme, a related person is to contribute $100,000 to the scheme fund and related parties to Gammacon are not to participate in any distribution from the fund. The claims of those related parties are said to amount to a little over $206,000. 15 The administrators do not attempt to project the outcome of the scheme of arrangement, or to compare it with the outcome of the liquidation. That is why, as I have said, there is no evidence that could persuade me of what I might call the Creevey test has been met. 16 Mr Foreman of counsel for Gammacon submitted that the effect of appointing liquidators to Gammacon would be to trigger the appointment of receivers to the related corporations, and thus to lead to a fire sale of their assets. If this were to happen, he submitted, there would be no possibility that those related corporations would be able to meet their obligations to Gammacon and thus the return to Gammacon's creditors would be very greatly prejudiced. However, when one looks at the figures set out in the report, the surplus available to the related corporation for payment of its unsecured creditors is projected to be $6.1 million. The amount required to meet that corporation's liabilities to Gammacon is said to be $3.34 million. It would need to be a fire sale of some savagery to destroy what on the face of the report is a substantial surplus of assets over liabilities. There is no evidence to suggest that some $3 million or so of value would be destroyed through the process of receivership, assuming that that process were to take place and taking into account the likely expenses. 17 The proposed scheme of arrangement is hypothetical, in the sense that the administrators are not satisfied of the ability of the person who is to make that payment in fact to contribute those funds. Thus, they recommend that the second meeting to be held tomorrow be adjourned so that there is some more time for the proposed deed of company arrangement to be considered. They suggest an adjournment for a period of up to 60 days. 18 If the question were only one of adjourning the present application for a day or so to enable the second meeting to take place, and to enable creditors to express their views, then I would be inclined to grant it. In terms of the test posed by Campbell J in Keeling, to which I have referred, the amount of proof required to persuade the Court to grant such a short adjournment would not be great. But the reality is that if the creditors decide to pursue the possibility of a scheme of arrangement then there will be a further adjournment, likely to be for a period of two months. There is not much point in granting an adjournment for two days and refusing an adjournment for two months. Accordingly, I think, I need to assess the application under s 440A(2) on the basis that in reality it will be for a period of about two months. 19 When one looks at the matter in that way, then the amount of proof required to justify the adjournment - to persuade the Court that it is in the interest of creditors that the adjournment should be granted - becomes much more substantial. In my view, having regard to the reality of the situation, the gloss or test proposed by McPherson JA in Creevey becomes far more relevant. 20 The considerations to which I have referred seem to me to lead to the conclusion that the Court ought not be satisfied that it is in the interest of creditors for the adjournment to be granted. However, there are other matters to be looked at. One is the purpose underlying Pt 5.3A of the Corporations Act. This is something that I dealt with in my reasons of 21 November 2007. The other, and countervailing matter, is the purpose underlying Pt 5.4 of the Corporations Act. It is clearly desirable that the creditors should be allowed to consider realistic proposals for schemes of arrangement. On the other hand, it is also desirable that insolvent corporations should be wound up by independent liquidators and that all proper matters should be investigated. 21 In the latter context, SGB has said that if the liquidators nominated by it in its winding up process are appointed, it will be prepared to fund some investigation of Gammacon's affairs, but if the present administrators become liquidators (for example, because the creditor so resolve tomorrow) then they would not. It is also appropriate to record that the report notes that a liquidator should examine the arrangements made between Gammacon and its related corporations which have resulted in the present parlous financial state of Gammacon. It may also be that there are matters (such as insolvent trading) that would require investigation. 22 In all the circumstances, I do not regard the other considerations to which I have referred, or the others referred to in submissions, as deflecting the conclusions that I have indicated. 23 In short, I am not satisfied, in terms of s 440A(2), that it is in the interests of creditors that Gammacon should continue under administration rather than be wound up. 24 The parties agreed that if I came to that view then I should proceed to hear the application to wind up. I am satisfied on the basis of the originating process and the affidavit evidence in support that Gammacon is insolvent and that all the necessary prerequisites to the making of a winding up order have been met. Indeed, no submission was put to the contrary. 25 I am also satisfied that it is appropriate to appoint as liquidators Messrs Deryk Rowan Andrew and Ozem Kassem, who have given consents to act as liquidator. 26 Accordingly, I make orders in accordance with paras 1 and 2 of the originating process filed on 18 October 2007. Further, I order pursuant to s 447A of the Corporations Act that the administration of the defendant should terminate forthwith. I order the defendant to pay the plaintiff's costs of the proceedings without, however, disturbing any specific order as to costs hitherto made.

SGB Raffia v Gammacon

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (13 paragraphs)

Parties

Cited By (4)