Strawbridge, in the matter of Custom Coaches (Sales) Pty Ltd (Administrators Appointed) [2014] FCA 683

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 635 of 2014

In the matter of Custom Coaches (Sales) Pty Ltd (Administrators Appointed) ACN 000 237 678 BETWEEN: VAUGHAN NEIL STRAWBRIDGE AND TIMOTHY BRYCE NORMAN

CUSTOM COACHES (SALES) PTY LTD (ADMINISTRATORS APPOINTED) ACN 000 237 678

CUSTOM COACHES PTY LTD (ADMINISTRATORS APPOINTED) ACN 111 744 560

JUDGE: JACOBSON J DATE: 25 JUNE 2014 PLACE: SYDNEY

Introduction 1 This is an application under ss 439A and 447A of the Corporations Act 2001 (Cth) to extend the convening period for the second meeting of creditors of the second and third plaintiffs for a period of up to 90 days. 2 The primary basis of the application is that the extension will permit the completion of the business sale process which has been commenced by the administrators in circumstances in which the administrators believe that the sale of the business as a going concern will maximise the recovery prospects for unsecured creditors. The convening period currently expires on 30 June 2014 and an extension of 90 days is sought so that the convening period will then expire on 29 September 2014. 3 The administrators rely on the affidavit of Mr Vaughan Neil Strawbridge, sworn 24 June 2014, which sets out in considerable detail the matters relied upon in support of the application. I have been provided with comprehensive written submissions which enable me to deal with the background facts and the principles within a fairly short compass. 4 Mr Strawbridge and Mr Timothy Norman were appointed as joint and several administrators of the companies on 30 May 2014. 5 A company known as Alexander Dennis (Australia) Pty Limited holds all of the shares on issue in the third plaintiff (Custom Coaches) which in turn holds all of the issued shares in the second plaintiff (Custom Sales). 6 Custom Sales owns and operates a bus and coach design, manufacture, supply, maintenance and repair business which is referred to in these reasons as the business. The business is conducted from premises in Villawood, New South Wales; Royal Park, South Australia and Demand Avenue, Arundel, Queensland. The design, manufacture and supply of buses occurs at the New South Wales and South Australian premises. The facilities are custom fitted to meet the requirements of the business. Maintenance and repairs are carried out at all three premises. 7 Custom Sales occupies the New South Wales and Queensland premises under leases from landlords who are not related parties to either Custom Sales or Custom Coaches. 8 In the South Australian premises, Custom Coaches is the lessee under a lease with an unrelated third party landlord. But the evidence suggests that Custom Sales occupies those premises under an informal licence arrangement with Custom Coaches. 9 Custom Coaches does not otherwise trade. The business traded unprofitably for the last two and a half years and has incurred operating losses in the order of $24 million. The operating losses have been funded by unsecured loans from Alexander Dennis Limited which is a substantial creditor. 10 Custom Sales has the following classes of creditor: 1. National Australia Bank (NAB) as a secured creditor has a debt of $4.46 million; 2. Employee entitlements of $3.5 million including redundancy entitlements of approximately 50 employees whose employment was terminated by the administrators. That figure increases to $11,374,478.36 if notice under redundancy obligations are included; 3. Lessors of the three business premises referred to above; 4. Unsecured trade creditors with approximately $4.4 million owing; 5. Plant and equipment leasors with an amount in the order of $13,700 owing to equipment leasors at the date of the administrators' appointment and $1.1 million owed to the NAB pursuant to equipment lease finance arrangements; and 6. Alexander Dennis Limited, as a related party creditor, to whom a sum of $55.2 million appears to be owing. 11 NAB and the landlord of the South Australian premises are the only current creditors of Custom Coaches. 12 The assets of the business comprise, principally, the business stock, work in progress, finished goods and trade debtors. The records of the companies record the value of the stock, work in progress and finished goods of $14.7 million. Notices of 20 retention of title claims apparently exist in respect of those items and those notices have been received by the administrators. The notices have an estimated total claim value of $1.6 million.

First meeting of creditors 13 The first meetings of creditors were held on 11 June 2014. There was a quorum for Custom Sales. The appointment of administrators was confirmed and the creditors committee was appointed which included employee representatives. The meeting was notified that the administrators might apply for an extension of the convening period. 14 In respect of Custom Coaches, there was no quorum. The meeting was adjourned to 18 June 2014. No creditors attended the adjourned meeting. Accordingly, that meeting is taken to have lapsed. 15 I will refer later to a first committee of creditors meeting which is of significance in relation to this afternoon's application. 16 Since their appointment the administrators have undertaken the usual steps expected of administrators. Those steps are sufficiently described in paragraph 20 of Mr Strawbridge's affidavit. The administrators have given notice of termination to 50 employees and one employee has resigned. Custom Sales continues to employ 231 staff. As I said earlier, if the employment of the balance of the employees were to be terminated, those employees would be owed approximately $11.4 million in entitlements. 17 The administrators have formed the view that the continued trading of the business as a going concern during the administration period will yield the best results for stakeholders. On that basis, they have continued to conduct the business as a going concern, including paying employee wages and rent under the leases of the three premises referred to above. The directors have not yet provided reports as to affairs. No proposal for a deed of company arrangement has yet been received. 18 What underlies this application is that the administrators, as I have said, have formed the opinion that the sale of the business as a going concern is in the best interests of the companies' stakeholders. This will permit the customised premises to be retained through assignments or renewals of the third party leases and will maximise the chances of continued employment for the employees. Importantly, upon their appointment, the administrators commenced a "fast track" process for the sale of the business as a going concern. The steps that have been taken by the administrators are fully set out in Mr Strawbridge's affidavit. 19 Expressions of interest were due by 13 June 2014 and nine expressions of interests were received. Some of them related to the whole of the business as a going concern while others related to parts of the business only. The parties who have submitted expressions of interest have been granted access to the data room and some have commenced due diligence. 20 The administrators have put in place a timetable for the balance of completion of the sale process. The timetable calls for the issue of a draft business sale agreement on 28 June 2014, indicative offers by 4 July 2014, notification of a shortlist by 7 July 2014, due diligence to be completed by 25 July 2014 and final offers to be due on 31 July 2014. 21 Finalisation of the sale agreement and exchange of contracts is hoped to be achieved in mid-August 2014. Subject to the requirements of the purchaser, completion of an anticipated sale agreement would occur between mid-August and mid-September 2014.

Consideration 22 The statutory and legal framework is well-known. The principles have been stated in a number of authorities. The essential principle is that the Court attempts to strike a balance between the expectation that the administration be conducted relatively quickly and the need to ensure that the speed with which it is dealt does not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders. That principle was stated by Barrett J in Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] and has been cited on numerous occasions in decisions of this Court and in the Supreme Court of New South Wales. 23 The matters which courts have tended to take into account in deciding whether to exercise the discretion under the Act have been usefully stated by Austin J in Re Riviera Group Pty Ltd (2009) 72 ACSR 352 at [13]. It is unnecessary to repeat his Honour's summation of the relevant categories which inform the exercise of the power to grant an extension of time. The principles have been referred to recently by Farrell J in Re Harrison's Pharmacy Pty Limited [2013] FCA 458 at [11] and by me in Re CMA Corporation Ltd [2013] FCA 875 at [21]. Those authorities also make it clear that the length of the extension is one in respect of which the Court must be satisfied that the extension is reasonable and appropriate in the circumstances. 24 Here, the application for an extension for the convening period falls within, at the very least, categories (j) and (k) identified by Austin J in Re Riviera Group. Whilst, of course, these categories should not be treated as an inflexible statement of the principles which underlie the exercise of the discretion, it seems to me that this is a case in which the circumstances fully justify the submission made on behalf of the administrators that the extension sought is warranted. 25 There have been numerous cases in which extensions to permit a sale of business have been granted. They include the decision of McKerracher J in Re Griffin Coal Mining Company Pty Ltd [2010] FCA 30. 26 It seems to be of particular importance to the present application that a first committee meeting of creditors of Custom Sales was held on 23 June 2014. The meeting was attended by representatives of creditors as well as two representatives of employees and other persons as referred to in the minutes to which I have been taken. Mr Strawbridge was the chair of the meeting. The meeting was called for the express purpose of providing information about the present application and to seek the committee's approval for it. 27 Mr Strawbridge stated that the agenda for the meeting was limited solely to discussion of the extension of the convening period for 90 days and he provided an update on the progress of the sale of the business. He also addressed the question raised at the first meeting of creditors in respect of the financial accounts of the company and advised that accounts since the business was purchased in 2012 had not yet been finalised. Mr Strawbridge presented to the committee a full and detailed statement and explanation of the purpose of the extension and of the status of the sale, including details of the expressions of interest that have been received and of all of the matters which are referred to in his affidavit in support of this application. 28 The resolution that was passed at the committee meeting was that the committee provided its support for the joint administrators application to the Federal Court on Wednesday, 25 June 2014 for an extension for a period of 90 days. That motion was carried unanimously. 29 The secured creditor, NAB, has confirmed that it does not object to the extension. It does so on the basis that the administrators have given their consent under s 440B of the Act to the NAB exercising its rights at any time during the administration. 30 The administrators have continued to pay the rent on the leases of the company's premises. The landlords have been notified of the proposed extension and the landlord of each of the premises has confirmed support for the proposed extension. 31 The position with respect to employees is that if the business is sold as a going concern there is a prospect that at least some of the 231 employees, who are still employed by Custom Sales, will be transferred with the business. The employees, who have been terminated or resigned, will be delayed in the recovery of entitlements under the Fair Entitlements Guarantee Scheme (FEG Scheme). However, against that, is to be balanced the fact that if the business is sold as a going concern and there is a surplus over the secured debt, then there would be a fund available to be applied towards satisfaction of employee entitlements, including superannuation entitlements for which the FEG Scheme does not provide compensation. It is also important to note that the two employee representatives who attended the meeting on 23 June supported the application for an extension. 32 As to trade creditors, it seems true enough from the evidence that suppliers will be likely to benefit from the extension through the purchase of new stock and materials. The administrators have continued to pay suppliers in the ordinary course of business and have continued to purchase stock. 33 It is also important to note that all known creditors have been notified and there have been no objections and the creditors committee has, as I have said, unanimously resolved to support the application. In particular, I was taken to a circular which was sent to all presently known creditors which sets out in considerable detail all of the matters which are relied upon in support of the present application. 34 The related party, Alexander Dennis Limited, has confirmed that it has no objection to the extension application. ASIC has been notified and I am satisfied that it has been given sufficient notice of today's application. However, to date, no response has been received. 35 The extension of the convening period which is sought is based upon the timetable for the sale of the business which has been set by the administrators. An extension of 90 days falls well within the period which has been approved in other authorities. 36 I do not consider that it is appropriate to extend the convening period for a shorter period than 90 days so as to thereby require a staged application, as has been done in some instances. If the sale process completes or the administrators form the view that a sale will not go ahead, the administrators intend to convene the second meeting of creditors as soon as possible in order to minimise the period during which the statutory moratorium is in force.

Conclusion 37 For the reasons set out above, I am satisfied that it is appropriate to make orders in terms of the draft orders which have been submitted to me by counsel for the administrators and I will therefore make those orders. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.