The Commonwealth of Australia v ABC2 Group Pty Ltd [2009] NSWSC 1442 | Case summary

6272/08 THE COMMONWEALTH OF AUSTRALIA REPRESENTED BY THE DEPARTMENT OF EDUCATION, EMPLOYMENT & WORKPLACE RELATIONS V ABC2 GROUP PTY LTD (CT-APPTD RECS & MGRS APPTD) JUDGMENT 1 HIS HONOUR: By an interlocutory process filed on 30 November 2009, the plaintiff seeks orders to bring to an end a court-appointed receivership and to wind up the defendant company. 2 ABC Learning Centres Ltd ("ABC") was the listed holding company of a group that operated some 1,045 child care centres in Australia. When ABC went into voluntary administration and its lenders appointed receivers ("the bank-appointed receivers"), the future of those centres became problematic. The Commonwealth Government, in pursuance of policy objectives relating to high-quality, sustainable child care and early learning opportunities for Australian children, had a particular interest in the impact of ABC's financial difficulties on the continuing provision of child care facilities. It endeavoured to create conditions for the continuation in operation of as many of the child care centres as were thought viable. To that end, after the problems of ABC emerged it appointed Stephen Parbery and Daniel Bryant, insolvency practitioners, to provide advisory services on the ramifications of the failure of ABC and its associated companies. 3 The bank-appointed receivers reviewed ABC's child care centres and identified some 229 that were said to be not trading profitably ("unprofitable centres"). Negotiations involving the Commonwealth, the bank-appointed receivers and Mr Parbery and Mr Bryant led to the idea that all except one of the unprofitable centres (more precisely, the goodwill of the centres) should be transferred for a nominal consideration to a clean-skin company within the ABC group, under the control of receivers to be appointed by the court. Then the Commonwealth would provide financial assistance to fund a program of assessment and rationalisation under which the centres could be improved and sold to third parties, perhaps after suitable mergers of centres to produce economies, but in such a way as to minimise the impact on the employees who worked at the centres and the parents and children who used them. The Commonwealth and the bank-appointed receivers entered into a conditional contract to implement that proposal on 16 December 2008, which subsequently led to an Operation Deed dated 31 December 2008. 4 The company selected to receive the unprofitable centres was the defendant company ("ABC2"), a wholly owned subsidiary of ABC which was not then in external administration and was, according to a representation made by the bank-appointed receivers to Mr Parbery and subsequently warranties in the Operation Deed, a dormant company that had never traded. One of the terms of the initial contract was that its substantive provisions would not become binding unless and until the Commonwealth obtained from this Court orders appointing Mr Parbery and Mr Bryant to be receivers of the assets and undertaking of ABC2. On 19 December 2008, this Court made an order, on the application of the Commonwealth, for the appointment of Mr Parbery and Mr Bryant as receivers and managers accordingly ("court-appointed receivers"): The Commonwealth of Australia v ABC2 Group Pty Ltd [2008] NSWSC 1383. 5 Reviewing the proposal reflected in the contract of 16 December 2008, Barrett J said (at [16]): "The practical effect of the proposal as a whole is to relieve such pressure as there is for the bank-appointed receivers simply to close down or realise the unprofitable centres in what might be a summary way (I do not say that in any pejorative sense) and to allow the court-appointed receivers to work with the Commonwealth in an attempt to find a more constructive solution for those centres from the point of view of both the users of child-care centres and the financial interests of the Commonwealth and ABC's other creditors." 6 Barrett J identified two sources of power for the Court, on an application made by a creditor of a parent company, to appoint receivers and managers to the assets and undertaking of a wholly-owned subsidiary. The first is s 447B(2) of the Corporations Act 2001 (Cth), which authorises the Court, on the application of a creditor of a company (that is, the parent), to make such order as it thinks necessary to protect the creditor's interests while the company is under administration (at [19]-[24]). The second is what his Honour described (at [25]) as the "more general basis" upon which the court may appoint a receiver in a wide variety of circumstances, when the interests of justice warrant it. I take it his Honour had in mind the power conferred on the Court by s 67 of the Supreme Court Act 1970 (NSW), which was expressly invoked in the originating process (see, generally, J O'Donovan, Company Receivers and Administrators, LBC looseleaf, [19.60]). 7 The sources of the Court's power are of some significance because the power conferred by s 67 is expressed to be interlocutory, and an order appointing a receiver under s 447B(2) is analogous to an interlocutory order because it is to protect the creditor's interest while the company is under administration. Barrett J made the nature of the order clear by stipulating that the appointment would be until further order (at [35]). The application to appoint receivers was combined, in the originating process, with other relief of a final nature, including directions in the nature of judicial advice - thus avoiding the pitfall that one sometimes encounters in Equity Division proceedings, that the interlocutory relief is regarded as so important that the plaintiff omits to seek a final order. 8 As to the merits of the application, his Honour decided that the best course for ABC's creditors would be one that would involve a constructive way forward for both the profitable and the unprofitable centres. The proposal reflected in the agreement of 16 December 2008 would involve, he said, at least a real possibility of saving and deriving some financial benefit from the unprofitable centres, being a benefit that could not be achieved in the absence of the proposal (at [26]). It was in the interests of ABC's creditors generally, and therefore in the interests of the Commonwealth as a creditor of ABC, that the proposal be implemented. 9 I turn to consider what has happened since the appointment was made. I have reviewed Mr Parbery's report dated 20 March 2009 and his affidavits of 17 December 2008, 15 May 2009 and 26 June 2009, but the primary and most up-to-date source of information for the purposes of the present application is his report to the court dated 30 November 2009 ("the November Report"), which is in evidence as a confidential exhibit. 10 Upon their appointment the court-appointed receivers assumed control of 228 unprofitable centres from the bank-appointed receivers. In addition, they acquired control of 21 centres leased on premises owned by the Department of Defence, and a further 13 "unviable" ABC-branded child-care centres that had been under the control of the liquidators of another company. The total number of centres that therefore came under their day-to-day management and control was 262 ("the ABC2 centres"). Over 2000 staff were employed at those centres, and over 18,000 children were enrolled in them. 11 According to the November Report, the strategic objectives of the court-appointed receivers were, broadly, to ensure continuity of child-care facilities for, with minimum disruption to, children, having regard to the: impact on affected parents; impact on staff at affected centres; long-term sustainability of centre operations; and desire to introduce an element of diversity as regards centre operators in the child-care industry. 12 Having regard to those objectives, the court-appointed receivers embarked upon a process, funded by the Commonwealth, split broadly into three phrases: (i) to make information on the ABC2 centres available to interested parties, in order to facilitate sales; (ii) to collect data and information on interested parties and negotiate terms of sale with a range of parties; and (iii) to arrange for the orderly transition of centres to successful purchasers, or in the event that sale of a particular centre was not possible, to explore alternative child-care options for children and alternative employment options for staff (where possible). 13 The court-appointed receivers established a website to assist communications, and implemented an "expression of interest" process to facilitate sales. That process commenced in January 2009, with Australia wide advertisements. A data room was established and extensively used by interested parties. There were negotiations amongst numerous parties including prospective purchasers, landlords, licensing authorities, the Commonwealth Department of Education, Employment and Workplace Relations ("DEEWR"), the bank-appointed receivers and various others. The scale of the operation was quite massive. For example, some 1,241 expressions of interest were received, and 517 non-binding offers were submitted to the court-appointed receivers. 14 In the result, 215 centres, 82.1% of the total number of ABC2 centres under the control of the court-appointed receivers, were sold, in some cases to "for-profit" operators and in some cases to "non-profit" operators, and in most cases to operators with current or recent child-care experience. A total purchase price of some millions of dollars was realised. Of the total purchase price, approximately $2.4 million was attributable to the sale of plant and equipment owned by ABC, thus realising assets for ABC that might otherwise have been very difficult to realise. A contract for operation of the 21 Department of Defence centres was awarded by the Department of Defence to one purchaser. Consequently, in all 236 (about 90%) of the ABC2 centres were placed in the hands of new operators. 15 About 89% of staff of the ABC2 centres have continued in employment, and employee leave entitlements were assumed by the purchasers. Over two-thirds of the children enrolled at ABC2 centres were provided with child-care places with the new ABC2 centre operators. According to Mr Parbery, the reduction in the total number of enrolled children was explained partly by parents relocating their children to alternative child-care due to the uncertainty of the ABC situation, and partly by the closure of some centres and subsequent relocation of children to nearby centres. 16 Twenty-six ABC2 centres were not able to be sold under the "expressions of interest" process. These were "transitioned": that is, the court-appointed receivers and DEEWR worked to relocate as many children and staff to nearby ABC centres and/or competitor centres as possible. 17 The November Report provides an accounting for income and expenditure during the receivership, and particulars of the receivers' remuneration and expenses. It is unnecessary to set out the details here. Suffice it to note that: very substantial funding was provided by the Commonwealth (well in excess of the sale proceeds for the ABC2 centres); and in my view the court-appointed receivers have provided the substance of an accounting for their receivership and remuneration of the kind that the court would otherwise have required as a prerequisite to discharge. 18 Were necessary to do so, I would allow to the court-appointed receivers the remuneration and expenses identified in the November Report, for the purposes of UCPR rule 26.4, and I would treat the tender of the November Report as satisfying the requirements for the filing of accounts under rule 26.5. But I think the cleaner way of dealing with the requirements of the rules is to dispense with compliance with those rules. 19 Mr Parbery has given sworn evidence that to the best of his knowledge and belief, all liabilities have been discharged in full, other than a final funding claim by the bank-appointed receivers and potential claims for reimbursement of deposits by interested purchasers, both of which are addressed below. 20 Now the Commonwealth comes before the court seeking the following principal orders: an order pursuant to s 434B(1) of the Corporations Act, or the Uniform Civil Procedure Rules, or the inherent jurisdiction of the Court, that the appointment of Mr Parbery and Mr Bryant as court-appointed receivers and managers of ABC2 come to an end; and an order that ABC be wound up under the "just and equitable" ground, s 461(1)(k) of the Corporations Act, and that Mr Parbery and Mr Bryant be appointed joint and several official liquidators of ABC2. 21 Ancillary orders are sought relieving the court-appointed receivers from the requirements of rules 26.4 and 26.5 of the UCPR with respect to seeking approval for accounts and remuneration in relation to the receivership, and dispensing with the requirement under s 465A of the Corporations Act and rule 5.6 of the Supreme Court (Corporations) Rules 1999 regarding the publication of a notice of the present application. I should say at once that I am prepared to make these dispensing orders. There is no need to require the court-appointed receivers to file accounts, having regard to the reports they have made during the receivership, and in particular, the report dated 30 November 2009 tendered with the present application. Their remuneration is being attended to by the Commonwealth. 22 There is no need to advertise the present application because it simply involves the transition of ABC2 from being a company under the control of receivers and managers to a company under the control of the same people as liquidators. Mr Parbery has given evidence, based on his long involvement with the affairs of ABC2, that no creditor of that company will be prejudiced by the absence of advertisement, and he noted the potential prejudice that might arise to the bank-appointed receivers' sale process for the profitable centres if a winding up advertisement in respect of an ABC company were to appear. 23 The bank-appointed receivers have consented to the application, and the administrator of ABC does not object to it and will accept the decision of the Court. ASIC has provided a letter acknowledging that it has received the application and saying that it does not propose to intervene or appear in respect of the application. 24 The key questions are whether and on what basis the court should make orders bringing the present position of Mr Parbery and Mr Bryant as court-appointed receivers to an end, winding up ABC2 on the just and equitable ground, and appointing Mr Parbery and Mr Bryant as its liquidators. 25 As noted above, the interlocutory process identifies s 434B(1) as a source of power to make an order bringing the receivership to an end. However, according to s 434B(4), the Court may only make an order under s 434B(1) on the application of a liquidator appointed for the purposes of winding up the corporation in insolvency. It is not proposed that ABC2 be wound up in insolvency, and so the power conferred by s 434B(1) is not available in the present case. 26 There is, nevertheless, ample power for the Court to terminate the receivership. As I have said, Mr Parbery and Mr Bryant had been appointed receivers by interlocutory order, until further order. The Court's power to make a further order bringing the receivership to an end is implied from the terms, and interlocutory nature, of the order for appointment. In exercising that power, the Court will act according to the principles established by the decided cases. 27 Most of the reported cases dealing with the discharge of court-appointed receivers are, naturally enough, cases where the ground for discharge is some misconduct or disqualification. However, there is a group of cases confirming that court-appointed receivers may be discharged where the object of their appointment has been achieved: see, for example, Braham v Lord Strathmore (1844) 8 Jur 567; Tewart v Lawson (1874) LR 18 Eq 490; Hoskins v Campbell [1869] WN 59; Lane v Phelan (1871) 24 AJR 10 (Vic); see O'Donovan, op. cit., [30.360]. As a general rule, receivers will not be discharged while some relevant claim remains unsatisfied or unresolved (Largan v Bowen (1803) 1 Sch & Lef 296). 28 It seems to me that the main considerations for the court to address, in deciding whether to bring the court-appointed receivership in the present case to an end, are the following: whether to do so will be in the interests of the creditors and contributories of the parent entity, ABC (there being no creditors of ABC2); whether it is in the public interest to terminate the receivership; whether the object of the appointment has been achieved; and whether some relevant claim or some aspect of the receivership is unsatisfied or unresolved. 29 As to the interests of creditors of ABC, essentially the operations of the court-appointed receivers have been neutral in a direct sense, although beneficial indirectly. They have been neutral in a direct sense because the sale proceeds for the ABC2 centres were far exceeded by the costs of the process, and (except for the amount of $2.4 million received for plant and equipment of ABC) are appropriately applied towards those costs, which were funded by the Commonwealth. There is no monetary return for the creditors of ABC through the activities of the court-appointed receivers of ABC2, except in respect of that plant and equipment. 30 However, the removal of the unprofitable centres from the ABC parent entity into a special-purpose vehicle controlled by the court-appointed receivers had the effect of allowing the bank-appointed receivers and the administrators of ABC to concentrate on realising or otherwise dealing with the profitable centres, and that process of facilitation was undoubtedly, in my view, for the benefit of the creditors and contributories of ABC as a whole. As Mr Parbery said, "the success of the rationalisation of the ABC2 child-care centres has, in terms of the goodwill associated therewith, enhanced the prospects of the [bank-appointed receivers] maximising the potential value from profitable ABC centres". 31 The public interest has been served by a process that preserved places for most of the children of the ABC2 centres in the hands of their new operators, and for most of the employees. In the absence of intervention the ABC2 centres would probably have ceased to operate, with consequent unemployment for approximately 1800 staff and with over 12,000 children having to be placed elsewhere in the Australian child-care system. Now that the sale process has come to an end and, according to the evidence, nothing more can usefully be done, it is consistent with the public interest that the court-appointed receivers be discharged and ABC2 placed into liquidation. 32 I am satisfied by the evidence that the object of the appointment of the receivers has been achieved. In the words of Barrett J, quoted above, the appointment was to allow "the court-appointed receivers to work with the Commonwealth in an attempt to find a more constructive solution for those centres from the point of view of both the users of child-care centres and the financial interests of the Commonwealth and ABC's other creditors". That has occurred. In terms of the receivers' own statement of "strategic objectives" set out above, they have ensured, for the most part, continuity of child-care facilities, with minimum disruption to the children, having regard to the impact on affected parents and staff and the long-term sustainability of centre operations (I am not sure about introducing "an element of diversity as regards centre operators", though obviously there are now more centre operators of the ABC2 centres than there were previously). 33 I turn finally to the question whether any relevant claim or aspect of the receivership is unsatisfied or unresolved. There are two matters to be addressed. 34 First, Mr Parbery has given evidence that the bank-appointed receivers have a "final funding claim" which is an expense of the court-appointed receivers. It appears that the claim arises in two ways. First, the bank-appointed receivers have incurred various costs in respect of the conduct of the ABC2 centres, such as taxes, duties and other specific costs incurred by them, which they will charge to ABC2. In addition, the bank-appointed receivers will charge ABC2 for shared services (for example access to employees, child-care licences, resources, systems, brand names, equipment and records and the provision of assistance). In the ordinary course of the court-appointed receivership, previous claims of that kind have been paid from funds provided by the Commonwealth pursuant to its funding agreement with the court-appointed receivers, and not out of the assets of ABC2. 35 In the event that the Court makes orders bringing the receivership to an end, the Commonwealth has agreed, with the consent of the bank-appointed receivers, to assume direct liability for the final funding claim of the bank-appointed receivers, and to "release" the court-appointed receivers from that liability under a novation and release deed. The deed is in evidence, as a confidential exhibit. It seems to me that the substantial effect of these arrangements is that the final funding claim will cease to be a claim against the court-appointed receivers and consequently it is no impediment to the termination of the receivership. 36 Second, Mr Parbery has explained that in the course of the "expressions of interest" process, the court-appointed receivers were paid refundable deposits of $500 by each interested purchaser. They were placed into a bank account. Fifteen of those deposits in a total sum of $7,500 have not been reclaimed: some cannot be traced to a depositor, in some cases confirmation has not been received from potential depositors, and in some cases refund cheques have not been presented for payment. Mr Parbery and Mr Bryant will, as liquidators, retain those funds in a separate trust account to be reclaimed by the depositors if possible, and if they are not claimed, then they will be dealt with under s 544 of the Corporations Act. That seems to me to be a satisfactory approach, and consequently that outstanding matter should not be an impediment to the termination of the receivership. 37 My conclusion is that grounds have been established for the making of orders terminating the receivership and discharging the court-appointed receivers. 38 As to winding up, it is not clear to me that the Commonwealth has a standing under s 462(2) to seek an order under s 461. The issue depends on whether the Commonwealth is a creditor of ABC2, a matter that may be affected by the terms of the release and novation arrangements to which I have referred. But I am satisfied that the court-appointed receivers have the standing to do so, and they have joined in the Commonwealth's application for this relief. The court order appointing them as receivers gave them the power under s 420(2)(u) to make an application for the winding up of the corporation. It is odd that a receiver with that power is not expressly listed in s 462(2), but the effect of s 420(2)(u) is plain. 39 The completion of the sale process leads to the consequence that the substratum or basis of operation of ABC2 has disappeared. Since the parent entity is under external administration, there is no sensible prospect of ABC2 being resuscitated with new directors. The present director does not object to the order. Further, it is desirable that the entity used for the sale process should not be given any other function and should be brought to an end. As Mr Parbery said in evidence, it would be inequitable if ABC2 remained as an asset-less corporate shell with potential contingent liabilities as a consequence of the receivership (though none have been identified), which liabilities would need to be dealt with and administered by the bank-appointed receivers or a liquidator of ABC as a cost of the external administration of ABC. As to funding, the Commonwealth has consented to novate the funding arrangements that Mr Parbery and Mr Bryant had as court-appointed receivers to them in their capacity as liquidators of ABC2. Therefore as liquidators, they will have recourse to a pool of funds which, according to Mr Parbery's evidence, will be sufficient to enable them to perform the winding up of the company. In all the circumstances, the just and equitable ground has been made out. 40 I shall therefore make the orders sought in the interlocutory process. To cater for the theoretical possibility that some potential claim against the court-appointed receivers or the company in receivership might have arisen during or before the appointment of the receivers, my orders will include an order authorising any party or person affected by the orders to apply to the Corporations Judge or the Equity Duty Judge on 24 hours' notice to the liquidators. I expect that order will be extinguished upon application by the liquidators, when the winding up is complete. **********

The Commonwealth of Australia v ABC2 Group Pty Ltd

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Judgment (11 paragraphs)

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