Strawbridge (Administrator) v Retail Holdings Pty Ltd

RETAIL ADVENTURE HOLDINGS PTY LTD (ADMINISTRATORS APPOINTED)

JUDGE: JAGOT J DATE OF ORDER: 20 FEBRUARY 2013 WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. The date by which the Plaintiffs are required by section 439A of the Corporations Act 2001 (Cth) (the Act) to convene the second meeting of creditors of Retail Adventures Holdings Pty Limited (Administrators Appointed) ACN 136 178 839 (RAHPL) be extended to 26 August 2013.
2. Pursuant to section 447A(1) of the Act, Part 5.3A of the Act operates in relation to the Defendant such that, notwithstanding section 439A(2) of the Act, the second meeting of creditors of RAHPL may be convened at any time before the end of the convening period (as extended by Order 1), provided that the Plaintiffs give notice of the meeting in accordance with section 439A(3) of the Act.
3. Any person having a sufficient interest may apply to the Court to vary Orders 1 and 2 upon providing at least 5 days' written notice to the Plaintiffs' solicitors.
4. As soon as practicable, the Plaintiffs are to provide notice to the creditors of RAHPL in the terms of these Orders by email, where an email address for the creditors is held, or by way of written correspondence sent to their last known address. Notice of these orders is also to be made available by the Plaintiffs on their website, www.deloitte.com.
5. The costs of this application are costs and expenses in the administration of RAHPL and are to be paid out of its assets Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1681 of 2012

RETAIL ADVENTURE HOLDINGS PTY LTD (ADMINISTRATORS APPOINTED)

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1872 of 2012

RETAIL ADVENTURE HOLDINGS PTY LTD (ADMINISTRATORS APPOINTED)

JUDGE: JAGOT J DATE: 20 FEBRUARY 2013 PLACE: SYDNEY

Introduction 1 I have before me two applications under section 447A(1) of the Corporations Act 2001 (Cth) (the Act) in which two corporations seek to further extend the convening period in respect of the second meeting of creditors for a period of 180 days, being, in other words, six months. I have already granted an extension of time of the convening period for that second meeting pursuant to orders that I made in that regard. The initial period was extended by a period of 90 days or three months to 26 February 2013. The practical consequence of the further extension of six months sought is that the second meeting of creditors is proposed not to be required to be held for a total period of nine months. 2 In respect of the application, there have been two appearances today by counsel instructed by creditors of the entity Retail Adventures Pty Ltd (RAPL), the other entity being the holding company Retail Adventures Holdings Pty Ltd (RAH). Mr Coleman SC appears on behalf of Helenic Pty Ltd in its capacity as a trustee of the Mastrantonis Family Trust, a partner in a partnership formerly trading as Tasty Treats. Tasty Treats is an unsecured creditor of RAPL. 3 Mr Mastrantonis, on his own behalf, objects to the extension of time on the basis that no extension should be granted, or if any extension is granted, it should not be for the period of 180 days. Mr Mastrantonis's evidence includes similar objections from over 30 unsecured creditors. It is the submission of Mr Coleman SC that, while this is not a majority in number or value of creditors, the creditors are in the best position to judge what is in the best interests of the company, being RAPL, and accordingly, the second meeting of creditors should occur without further delay generally in accordance with the policy for swift determination of administration of companies. 4 I accept that all of the objections should be given weight, irrespective of the fact that they were solicited by Mr Mastrantonis and that the information with which the objecting creditors were provided by Mr Mastrantonis in the course of that solicitation was of relatively limited scope. Otherwise, Mr Johnson has appeared on behalf Perpetual Limited, who is one of the lessors of a store or stores which RAPL occupied pursuant to a lease, in circumstances where, in accordance with the licensing arrangements explained by one of the administrators in his affidavits, the secured creditor of RAPL, being an entity known as DSG, has continued to conduct the business and occupy the premises pursuant to license arrangements.

Balancing test in Part 5.3A of the Act 5 There was no dispute about the relevant principles, although there is some difference of emphasis between the representatives who have appeared today. As set out in the written submissions on behalf of the companies, the question whether or not to order an extension of the convening period for the second meeting of creditors involves the court in a balancing exercise. The court has to have regard to the expectation inherent within the statutory scheme that the administration will proceed in a relatively summary way, against the need to give administrators of companies time to present meaningful choices to the creditors at the second meeting so as to enhance the objectives of s 435A of the Act. 6 On behalf of Mr Mastrantonis, it was put that Pt 5.3A of the Act emphasises the need for prompt action in implementing its provisions and prompt decisions by creditors about the fate of a company to which administrators have been appointed. In addition, it was emphasised that it is necessary for courts to be conscious of the risk of prejudice to unsecured creditors that can arise by reason of substantial extensions of the convening period: Re TPE Kintech Proprietary Limited (2004) 49 ACSR 106; [2004] NSWSC 250 at [8]. In that decision of Austin J, his Honour referred to the reasons of Lindgren J in Re Pan Pharmaceuticals Limited [2003] FCA 598, in which Lindgren J considered the competing considerations which are at play and concluded that the essential issue is whether the extension is necessary to enable the administrators to arrive at an opinion so as to place creditors in the position to choose between the three courses identified in s 439C of the Act. That is, a deed of company arrangement, liquidation or return of the company to its directors. 7 Otherwise, it is clear from the authorities to which my attention has been drawn that there is tension between competing objects of Pt 5.3A of the Act. This was referred to expressly by White J in the matter of Re Global Food Equipment [2007] NSWSC 901 at [15] in which his Honour noted that: The policy behind Pt 5.3A combines elements which cannot always work in harmony. One objective is to maximise the chance that the company or as much as possible of its business continues in existence and the sale of a business will not advance that objective. However, another objective is that if the continuation of the company's business is not possible, returns to creditors should be maximised. 8 This is consistent with the observations of Austin J in Re Riviera Group Pty Ltd (2009) 72 ACSR 352; [2009] NSWSC 585, in which his Honour explained the development of the law against a predisposition not to grant extensions of time, having regard to the need for swift resolution of such matters, in favour of what he described in shorthand as the "balancing test". Austin J identified at [13] a series of circumstances or categories in which courts have granted extensions of time, one of which is particularly relevant in the current matter, namely, whether the extension will allow sale of the business as a going concern. At [16] his Honour identified the nature of the balancing exercise in question, saying that: If the approach is to balance the expectation of speedy administration against the risk of prejudice, there cannot be any predisposition in favour of speedy administration for that would skew the balancing process. Rather, the cases suggest that where the administrator proves a substantial ground in any of the categories set out and there is no specific evidence of prejudice, an extension commensurate with the administrator's task will be granted, notwithstanding that the explanatory memorandum suggested that extensions would not be granted frequently. 9 This approach is also consistent with the statement to which my attention was drawn of Shepparton J, Commissioner of Taxation v Comcorp (1996) 70 FCR 356, in particular, at [364], where his Honour referred to the objects including: …maximisation of the chances of the company or its business continuing in existence, or, if that not be possible, better returns for creditors and members than would result from the immediate winding up of the company…

Progress of the administration 10 In this context, I have before me the affidavits of Vaughan Strawbridge, who is one of the three joint and several administrators of RAPL and also the holding company, RAH. Mr Strawbridge's affidavit refers to the orders I made on 14 November 2012 extending the convening period to 26 February 2013. His affidavit explains that since those orders, steps that have been taken in the administration include, but are not limited to: conducting a public sale process for the sale of the business of the company, conducting meetings with the committee of creditors on 7 December 2012, 11 January 2013 and most recently, on 13 February 2013, in addition to investigating and assessing potential recovery actions that might be available in respect of possible voidable transactions, breaches of directors' duties and insolvent trading. 11 The latter reference relates, in particular, to a security identified which may be voidable if the company was insolvent on 1 July 2011 when the security was granted. It is relevant in this regard to note that the investigation of possible voidable transactions, breaches of directors' duties and insolvent trading relate to the secured creditor DSG, which is the party that has entered into the sale of business agreement. As Mr Strawbridge discloses, the sale agreement between the company RAPL and DSG as purchaser was executed on 11 February 2013. 12 Although that sale agreement provides for completion on 1 March 2013, there is a condition precedent that the convening period be extended for a period of 180 days. Mr Strawbridge explains the key terms of the sale agreement and on that basis, it is apparent that the period of 180 days was required by DSG in order to enable it to complete negotiations with the various landlords in order to secure leases of premises. Apparently there are 180 landlords in respect of 228 stores. Agreement in principle has been reached with 89 landlords in respect of 98 stores. According to Mr Strawbridge, however, many of the remaining landlords, that is not within the 89, have refused to commence negotiations with DSG until DSG has acquired the company's business, and that the period of 180 days was negotiated with DSG on the basis that it was reasonable, given the number of leases and the logistics involved in negotiating and documenting 231 leases with more than 180 landlords, despite the agreement in principle having been obtained with a number of those landlords. 13 The administrators determined to enter into the sale agreement on the basis that it would enable the sale of the business as a going concern, the consequence of which would be to provide continuing employment for up to 4700 employees, the assumption of responsibility for employee entitlements by DSG and, assuming negotiations result in DSG being able to enter into lease arrangements in respect of 85% of the company's stores together with the head office and distribution centres, either the assignment of lease to DSG by the landlords or entering into new leases by those landlords with DSG. 14 At the same time, there would continue the administrator's investigations into the potential actions in relation to insolvent trading and potential voidable transactions. In this regard, the affidavit of Mr Strawbridge explains that cash currently held by the administrators is not part of the sale agreement. That cash will be set aside so that the administrators have sufficient funds to complete their investigations, including into potential voidable transactions. Part of the sale agreement requires DSG not to appoint a receiver prior to the second meeting of creditors, and DSG is also obliged by the sale agreement to provide continuing access to the books and records of the company to enable the administrators to complete their investigation. 15 Mr Strawbridge also deposes to the fact that, based on his discussions with representatives of DSG, he believes it is likely that a deed of company arrangement will be proposed to creditors at the second meeting if the convening period is extended, and that this may provide creditors with a better and faster return than might otherwise be possible if litigation ensues. Mr Strawbridge expresses the opinion that notwithstanding the statutory moratorium imposed by Pt 5.3A of the Act precluding creditors from enforcing their rights, it is his view that the further extension of time will not unduly prejudice the company's creditors. 16 In terms of the meeting of the committee of creditors, which was held on 13 February 2013, the committee resolved by majority to support this application for an extension of time. According to Mr Strawbridge's affidavit, the meeting was attended by six of the eight committee members; four voted in favour, one abstained, and the remaining member opposed the application. The evidence in respect of the applications also includes a letter dated 20 February 2013 from the Australian Securities & Investments Commission (ASIC), confirming that it does not propose to intervene in the proceedings, and will not be seeking leave of the court to appear at the hearing, and indeed, ASIC did not do so. Objections to extension of time 17 The evidence on behalf of Mr Mastrantonis, as explained in the written submissions for the companies, discloses three concerns. The first is a concern regarding the ability of the creditors of RAPL to engage with the administrators as to the future of the company, and to receive any return in the administration if the orders sought are granted. No doubt the concerns of the creditors can be understood in relation to the further extension of time. However, I have before me the minutes of the meeting of creditors on 13 February 2013. Those minutes are important because they set out, in detail, all of the investigations which the administrators have undertaken to date, and are proposed to continue to undertake. What that information discloses is that the administrators are engaged in what can only be described as a substantial task of reviewing a large amount of information in order to reach an opinion in relation to the matters set out therein, including possible preference payments, insolvent trading, the validity of securities, and certain convertible notes. The information in the minutes also explains why it is that further investigations and legal advice are required to determine issues relating to the validity of security. 18 The same minutes also set out details of the sale of business, including the key terms of the sale which are described in materially the same way as has been put to me in Mr Strawbridge's affidavit. In this regard it is apparent that the evidence establishes that, as put by the administrators, they have properly engaged with the creditors of RAPL through meetings with the committee of creditors who were appointed for that purposes, and that the minutes disclose that the committee has been carefully and properly informed of the progress of the administration and the plaintiffs' investigation. It further establishes that the concern that there will not be any return of the administration if the orders sought in this application are made is not well-founded. 19 As Mr Strawbridge has set out in his affidavit, there are potential benefits to all creditors if the further extension of time is granted in order to enable the sale agreement to be completed. It is true that there has been disclosed a term of the sale agreement whereby DSG is not required to enter into new lease arrangements with any landlords, unless and until it has received agreement in principle from 85% of the stores, together with the head office and distribution centre. As I understand it, if DSG does not receive that 85% agreement then, nevertheless, the agreement will have been completed, in the sense that those dealings are at DSG's own risk. In terms of employees, the agreement otherwise provides for DSG to be responsible for all employee's entitlements, and in addition DSG is bound either to make offers to existing employees prior to the date of the second meeting or to pay those employees termination entitlements. Accordingly, although there is some uncertainty as to exactly what might occur if DSG does not obtain the 85% agreement, other critical matters, including the position of employees, are appropriately dealt with in the sale agreement. 20 In terms of Mr Mastrantonis's other concern in relation to possible insolvent trading, I have already referred to the minutes of the meeting which set out the work which has been done thus far by the administrators in investigating these issues, and the material which indicates that there is substantial work still to do, including finishing reviewing all of the relevant documents and obtaining legal advice as required. Mr Mastrantonis also expressed a concern that the meeting take place to enable the creditors to be fully informed about the administration, and to be consulted about whether RAPL should be placed into liquidation as an alternative to the sale to DSG. 21 As explained in the submissions for the administrators, they have formed the opinion that the placement of RAPL into liquidation at the present time would be contrary to the objects of the Act and to the interests of creditors, because it would prevent the sale of the business as a growing concern, would substantially increase the pool of creditor claims, and likely result in the appointment of receivers, thereby denying the administrators' access to both funding and the books and records of RAPL, and thereby preventing them from completing their investigation, as well as providing a meaningful choice to creditors at the second meeting. 22 In terms of the submissions which have been put on behalf of Mr Mastrantonis, it is fair to say that the focus is on what is said to be the lack of any proper or adequate explanation by Mr Strawbridge into the investigations which have been undertaken, why those investigations have not permitted the administrators to form the required opinion for the purposes of the second meeting of creditors, and why it would take another six months to complete all relevant investigations and form the required opinion to be put to creditors of RAPL. According to these submissions, although Mr Strawbridge has deposed to the fact that he is not in a position to provide the relevant opinion under s 439A(4) of the Act, the point is that the evidence as to why he is not in a position to do so is unsatisfactory and does not amount to more than general assertion, because the work done has not been specified, and the work remaining to be done also has not been specified. I do not find that characterisation of Mr Strawbridge's evidence persuasive. Leaving aside the details in his affidavit, the exhibits to his affidavit include the minutes of the meeting of creditors held on 13 February 2013 and, as I have said, those minutes set out considerable details of the work that has been done and the work that remains to be done. 23 In terms of the 180-day extension, I accept that there is no objective way to determine whether or not that is truly necessary, but the fact is that 180 days is the period which has been referred to in the sale agreement, and I should infer, on the basis of the evidence, that this was negotiated between the parties to the sale agreement properly. I have no reason not to accept that it represents a genuine estimate by the purchaser, DSG, of the time the purchaser will require in order to obtain the relevant lease arrangements with the landlord. It is a long period of time, but I do not think it can be described as an extraordinary period of time, having regard to the number of leases and stores which are involved, and the number of landlords with whom negotiations must take place. It is true that the administrators did not apply for a direction, pursuant to s 447D of the Act, for the inclusion of this term in the sale agreement, but I do not see that as any form of disentitling conduct. 24 It is also true that the secured creditor, DSG, has not appeared before the court today. As I understand it, DSG has not yet agreed to waive the condition precedent, and there is no basis on which it might be inferred that DSG would be willing to do so. That too is not any form of disentitling matter. Accordingly, given that I do not accept that the administrator has failed to provide a proper explanation of why it is that matters are not yet complete and of the further work to be done, it follows that I cannot place too much weigh on the fact that DSG is a related entity of RAPL, having the same sole director. This was emphasised in the submissions for Mr Mastrantonis, including for the reason that DSG is effectively already conducting the business pursuant to licence arrangements, and accordingly, that it would be doubtful that a further six months would be required, given the close relationship between the parties. However I am confronted again by the terms of the sale agreement which provide for the 180-day period. While I accept that the mere inclusion of this provision cannot, of itself, make it a foregone conclusion that an extension of time should be granted, as I have said, there is nothing to indicate that this was not the result of a genuine negotiation based on DSG's perception of what would be reasonably required in the circumstances. 25 It follows, in my view, that the objections which have been raised, once scrutinised, do not carry sufficient weight to displace what I accept to be the opinion of the administrator, based on his knowledge and experience. That opinion is it would not be in the best interests of creditors to allow the second meeting of creditors to occur at this stage, but rather that it would be an appropriate exercise of discretion to extend the convening period. This is particularly so in circumstances where I accept Mr Strawbridge's evidence that, for the reasons explained in his affidavit, the administrators are not in a position to provide the creditors with their opinion, as set out in s 439A(4) of the Act, but on the basis of the material currently available, will be in that position if the further extension is granted. 26 I also give weight to the fact that the majority of creditors at the committee meeting did vote in favour of the extension of time, and as was fairly conceded by Mr Coleman SC, the unsecured creditors, comprising Tasty Treats and the other 30 or so unsecured creditors who responded to Mr Mastrantonis's invitation to advise the court of their objection, do not constitute a majority in number or value of creditors. For these reasons, I accept the administrators' positions that notwithstanding the objections which have been received, it is in the best interests of the company and its creditors that the extension of the convening period for RAPL be granted. It then follows as a matter of course that the extension of the convening period for the holding company, RAH, should also be granted, so that the two operate in tandem. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.