Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative

Waste.26May1999 - 28 May, 1999: Waste Recycling and Processing Service of NSW (t/as Waste Service NSW) v Local government Recycling Co-operative Limited 9 REVISED - 28 May, 1999

IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY

WASTE RECYCLING AND PROCESSING SERVICES OF NEW SOUTH WALES (t/as Waste Service NSW) Plaintiff

LOCAL GOVERNMENT RECYCLING CO-OPERATIVE LIMITED Defendant

1 I propose to indicate the conclusion I have reached in the matter before me, with brief reasons, in view of the urgency of the matter. 2 The matter presently before me is an application on behalf of the Defendant company Local Government Recycling co-operative Limited ("LGRC") or more precisely its administrator appointed on 26 May 1999 that this Court adjourn the hearing of the Plaintiff's application for an order to wind up LGRC. The Plaintiff is Waste Recycling and Processing Service of New South Wales (t/as Waste Service NSW) "Waste Service" and claims to be a creditor in an amount of not less than $809,388.54 of LGRC. That Waste Services is a creditor in that amount or at all is disputed by LGRC at this point, though it is fair to say that the newly appointed administrator Mr Palmer, who is independent of the Plaintiff, Defendant and so far as is known principal creditors, has yet to form a view on the matter. I should record that Mr Palmer was appointed this morning following the resignation yesterday of Mr Star who had been appointed yesterday as Administrator. 3 The particular provision relevant to to-day's application is contained in s440(2) and is in the following terms: "The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up." 4 I should also, for completeness, quote s440A(3) in the following terms: " 440A(3) [Provisional liquidator] The Court is not to appoint a provisional liquidator of a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed."

5 These provisions are contained in Pt 5.3A of the Corporations Law, the objects of which so far as they pertain to administration of the Company's affairs with a view to executing a deed of company arrangement, are set out in s435A quoted below " 435A 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." 6 Whether adjournment is as required by s440A(2) "in the interests of the company's creditors" must be affected by the length of adjournment envisaged, where the adjournment is only for a limited time. It is also affected by the envisaged purpose and likely consequences of such adjournment. This must frequently be judged in circumstances where outcomes are not susceptible of certain prediction, with the onus nonetheless remaining with the administrator. A short adjournment may in some cases permit a greater level of assurance of salvageability or otherwise to be assessed in the interests of creditors by an independent administrator, without adverse countervailing consequences from such a short delay. On the one hand to grant such an adjournment there must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors; see Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1998) 15 ACLC 48. On that question, views may legitimately differ. Often to be weighed is the certainty of adverse consequence for creditors if liquidation ensues as against the prospect of a better outcome, but no certainty, under administration, provided a deed of company arrangement can be successfully negotiated with creditors to underpin that outcome. To be taken into account, along with level of uncertainty of outcome, are any consequences of delay for even a short time. Thus for example in the case of any potential preferences, the six month relation back period will be deferred by the difference between the date the winding up application was made and the date of administration - here but a matter of six weeks (15 October 1998 compared to 25 November 1998). However, no submission was put that this factor should matter here to any significant degree. The shortness of the adjournment and its purpose are thus relevant factors in the application of my discretion. 7 The Plaintiff's position is that it considers that there is no prospect of the Defendant under administration or otherwise being in a position to continue to trade and that the Defendant's financial position is such that the only proper course is to wind-up the Defendant or at the least appoint a provisional liquidator. 8 SMS Municipal Services Limited ("SMS") as the next largest claimant creditor, has taken a relatively neutral position throughout these proceedings. It claims to be a creditor in the amount of $377,716 (though this debt is disputed at this stage). It takes the position that it does not put any submission one way or the other as to whether an adjournment should be granted. It can be inferred that it would benefit from an independent assessment, as would indeed other creditors. 9 When the application under s444A(2) was made for the first time yesterday, it followed the appointment of Mr Star as administrator that day. At that point the Plaintiff had completed its evidence whilst the Defendant's evidence was substantially completed. That evidence was in relation to an application from the Plaintiff to wind-up the Defendant in circumstances where to that point, the Defendant had contended that it was solvent. 10 A crucial underpinning to that contention was expressed by Mr Star in his second report of 24 May 1999 in these terms: "I have formed the view that, provided adequate financing facilities are made available LGRC has reasonable prospects of success." However, it has since transpired as of the day Mr Star was appointed administrator that the only financier approached, National Australia Bank, declined to lend. That underpinning also included fulfilment of the assumptions contained in Mr Star's earlier report dated 4 May 1999 set out in Annexure D to Mr Star's affidavit of 5 May 1999. I set these out below: " ASSUMPTIONS

1. The Waste Service account balance before deduction for offsets is $1,116,987.84 as per R. Moran and not the $1,618,367.55 as per B. Hunter $1,116,987.84
2. The claims for offsets for management/marketing fees for part October 1998 to 15 April 1999 are $286,000.00 Being 7/98 to 15/4/99: 437,000.00 Less credited by Waste Service: 151,000.00 The non payment of LGRC customers of accounts for goods processed by Waste Service is acknowledged such that LGRC has no obligation to pay Waste Service's charges in respect to the said sales until LGRC has received payment:- (i) BHP: 27,173.00
3. (ii) Polymer Corp: 117,508.00 $ 373,997.69 (iii) Donmar: 88,916.10 (iv) Visy: 6,575.75 (v) AAFI: 133,824.84
4. The extra charges by Waste Service to LGRC for which the LGRC has no supporting details are withdrawn $ 32,064.30
5. The EPA makes payment to Waste Service forthwith $ 307,599.30
6. Waste Service provides credit of $96,112.00 per R. Moran letter of 6.4.99 upon receipt of auditable evidence $ 96,112.00
7. Gate Prices for Glass offset $ 13,710.00
8. LGRC will owe Waste Service $ 7,504.55 $1,116,987.84

9. The plant and machinery in storage at Waste Service Chullora is not released. There will be a small profit on sale of asset if the $55,000 sale proceeds. The LGRC claim for loss of profit for the delay in obtaining release of the machinery from Waste Service is not included. 10. that the information furnished by LGRC and Mr Campbell's advices are correct. 11. LGRC does not owe S.M.S. Municipal Services Pty Limited $377,716.46 but rather is owed $136.34 from this entity as per the attached correspondence dated 3 May 1999, Annexure "E" hereto. 12. Going concern basis of valuation. 13. Going concern operations are maintained and reasonable profits are generated from same. 14. Distributions of surplus to member Councils have not been accounted for in LGRC's financial statements, Report as to Affairs or Budgets. Mr Campbell has advised that such distributions are not due until such time that LGRC has generated a surplus and agrees to distribute it. 15. Debtors greater than ninety days have been written off or provided for. 16. Trade Creditors continue to provide credit at 60/90 day terms. 17. Debtors are paid or realised within 30 days."

11 It will be apparent that these assumptions importantly include a calculation of the amount said to be owed by LGRC to Waste Service after various strongly contested claims for offsets and on the basis, also contested by the Plaintiff, that non-payment of LGRC customers excuses LGRC in turn from paying Waste Service is to be reduced to $7,504.55. Based on the evidence and argument before me, though recognising that as at present I am dealing with the matter on an interlocutory basis, I am not satisfied that such reduction can properly be made in either case. 12 There were indeed competing contentions between Plaintiff and Defendant as to the nature of the relationship between them. The Plaintiff contends that the relationship was one where it sold product from waste management processing to the Defendant and that the indebtedness therefor was unpaid purchase money now due and owing. The Defendant contends rather that the relationship was one in which it was some kind of commission agent for the Plaintiff to sell such product and that accordingly the relevant calculation could only be made on a balance of account. It is then said that, if so made, the offsets referred to above would be justified. Likewise, the proposition that non-payment of LGRC customers of accounts processed by Waste Service meant that LGRC had no obligation to pay Waste Service's charges in respect of the said sales until LGRC has received payment. These two items total $659,997. 13 But there was no documentation or other convincing evidence which sufficiently established the propositions that the Defendant put in relation to these two items. I am not satisfied that the indebtedness of the Plaintiff should be reduced by those items. Once those items are added back, it is clear that Waste Service is the principal creditor of the Defendant. Other creditors, according to the Defendant, (see Mr Star's second report, Schedule H) total $387,599. It is already noted that SMS would on this calculation be the second largest creditor. It has not indicated at this point its ultimate stance on the alternatives of liquidation versus administration leading to a deed of company arrangement. But it should still follow that even if SMS were to take a contrary view to the Plaintiff, the Plaintiff would be able to block the passing of any creditor's resolution in relation to a deed of company arrangement. Voting for creditors meeting is determined by regulations 5.6.21(2) and (3) which precludes a resolution being passed if a majority in value vote against (though the "and" in 5.6.21(3) might suggest otherwise at first glance). That result of course presupposes that the calculation of the amount owed to the Plaintiff is not to be reduced in the manner contended for by the Defendant. Whilst the conclusions I have reached are in the context of an interlocutory determination of that matter; nonetheless it is fair to note that the Defendant's instructions are at present not to put any further evidence or submissions in relation to that matter or generally. 14 Against that background, I am called to decide whether the administrator has satisfied the onus upon him under s440A(2) "that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up". 15 In Creevey and another v Deputy Commissioner of Taxation (1996) 32 ATR 632, McPherson JA expressed the relevant principle in these terms: "In order to satisfy the court that it is in the creditors' interests to allow the administration to continue, it must be shown, in a practical sense, that the company has assets which, if realised under an administration (as distinct from a winding up), would produce a larger dividend, or at least an accelerated dividend for the creditors." 16 In a more recent decision of the Federal Court of a single judge Parkinson JR Fullview Pty Ltd v WLW Pty Ltd (FCA, Parkinson JR, 17 September 1997, unreported) the test was put in somewhat less stringent terms: "the question to be determined is whether having regard to the interests of the creditors there would result from the continued administration a better return than if the company is wound up …… However …… in view of the continuing concurrent meetings of creditors, I am satisfied that a mere possibility of a return to creditors is sufficient basis for the exercise of the discretion in s440A(2) at this point in time."

17 Significantly, in that case the administrators, having examined the affairs of the companies in question, had already reported to the creditors recommending that a deed of company arrangement be executed to be conditional upon the outcome of various creditors' meetings. The position in the present case is that the administrator has just embarked upon the administration and could not as yet form even a preliminary view, though can do so very shortly. 18 While the Plaintiff has made a powerful case for there being no further deferral of consideration of its winding-up application and whilst it is clear that the Defendant is either insolvent or may shortly be insolvent, with even Mr Star putting no opposition to the contention that the first proposition was correct, I have concluded that the proper course in all the circumstances is to allow a very brief adjournment. That adjournment is until next Tuesday 1 June 1999 by 12 noon when the administrator has indicated that for the modest expenditure of up to $15,000 he could give the Court the benefit of a preliminary view as to the prospects of the Defendant being able to continue to trade and, relevantly for present purposes, whether in a practical sense such continued trading coupled with any realisation of assets on a going concern basis or otherwise, would produce a larger dividend or at least an accelerated dividend for creditors as against an immediate winding-up. I should add in that context that the appointment of either a provisional liquidator or liquidator would still permit, if circumstances justify that course, the liquidator to retire in favour of an administrator, pursuant to s436B(1) of the Corporations Law and, with the leave of the court, such liquidator may appoint himself. However, the prospects of sale on a going concern basis may well by then have been lost. 19 I reiterate that in considering whether "it is in the interests of the company's creditors for the company to continue under administration rather than be wound up" and recognising that the onus lies on the administrator, a court may, in appropriate circumstances such as these, conclude that for the brief period envisaged, and to allow a more informed appraisal for the longer term though subject to what may then transpire, such an adjournment should be allowed. SMS at this point has decided to remain neutral, so that further information will, it can be inferred assist it, as well as other creditors, even if the Plaintiff at this point feels it already knows enough. It is clear enough from the evidence before me that liquidation would immediately destroy any real hope for realisation of the assets on the higher going concern basis and thus preclude any prospect of a higher or quicker dividend. Whereas it cannot yet be concluded that there is no real possibility of finding the necessary on-going finance, having regard to the support hitherto forthcoming from the Environmental Protection Agency (EPA) from the same or another financier than the National Australia Bank. That alternative had not yet been investigated. All of this can be pursued by the administrator, on a preliminary basis, at least.

ORDERS 20 Accordingly, I order that the hearing of the Plaintiff's application for an order to wind up the Defendant be adjourned until the expiration of 1 June 1999 or to such earlier date as I may order in the event that the matter comes back before me earlier, in order that I may consider a report from the administrator as to the matters earlier noted in my judgment. 21 I further direct that the administrator provide such a report by 12 noon on 1 June 1999 and that the matter come before me at 3.30 pm that day for any further orders. 22 I give liberty to apply at short notice. 23 Finally, I note that in the event that I should conclude on 1 June 1999 or indeed earlier if the matter comes back before me earlier, that the winding-up is not further adjourned, it is understood that the Plaintiff will apply for the administrator to be removed and for a liquidator or provisional liquidator to be appointed, relying upon s447A of the Corporations Law for that purpose.

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