Weston, in the matter of 7 Steel Distribution Pty Limited (ACN 131 352... [2010] FCA 593 | Case summary

REASONS FOR JUDGMENT 1 On 1 April 2010, I made orders under section 439A(6) of the Corporations Act 2001 (Cth) ("the Act") extending the convening period for the second meeting of creditors of 7 Steel Distributors Pty Limited (Administrators Appointed)(Receivers and Managers Appointed) ("the company") to 3 June 2010. 2 Application is now made under section 439A(6) or section 447A of the Act for a second extension of time of the convening period. The extension is sought for a period of two more months. 3 The authorities dealing with the power to order a second extension were considered by Barrett J in Lombe re Australian Discount Retail Pty Limited [2009] NSWSC 110 at [25]ff. His Honour referred to the authorities which preceded the amendments to section 439A that were made by the Corporations Amendment (Insolvency) Act 2007 (Cth). 4 Barrett J came to the conclusion at [27] that notwithstanding the amendments, the appropriate course is as it was prior to 31 December 2007, namely, to proceed under section 447A. A similar course was recently adopted by McKerracher J in Mentha, in the matter of The Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 499 at [35] - [36]. 5 The principles which apply to an application of this type are informed by the same principles which underlie the exercise of the discretion to order an extension under section 439A(6). I referred to those principles in my reasons for judgment on the first application in the present matter: Weston, in the matter of 7 Steel Distribution Pty Limited (ACN 131 352 364)(Administrators Appointed)(Receivers and Managers Appointed) [2010] FCA 344 at [11]ff. What is required is the striking of an appropriate balance between the expectation that the administration will be relatively speedy and summary, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions towards maximising the return for creditors. 6 I referred in my earlier judgment to the matters which I took into account in exercising the power to order the extension. It is unnecessary to refer to them. I came to the view at [15] that the evidence was sufficient to establish that there was, at least on the information then available to Mr Weston, the real possibility that if the business could be sold on a going concern basis, there may be funds available to meet the claims of creditors. 7 There were a number of difficulties which stood in the way of the administrators, and I referred to them in my earlier reasons. One of the matters of particular concern was, and remains, the claims of certain retention of title ("ROT") claimants, and I will refer to those again later. The total value of the ROT claims appears to be in the order of $28 million. 8 The present application is supported by an affidavit of Mr Weston sworn on 31 May 2010. Mr Weston exhibits a letter from one of the receivers of the company which sets out the current position in relation to negotiations for the sale of the business or assets of the company. The letter from the receiver also refers in some detail to the position with respect to the ROT claims. 9 After the luncheon adjournment, Ms Barlow, solicitor, appeared on behalf of the receivers and provided me with certain additional information in relation to the status of the negotiations and the position regarding the retention of title claims, which I will refer to shortly. 10 The present position with respect to negotiations for sale is that the negotiations for the Mount Druitt branch appear to be completed and negotiations for the sale of other assets is very advanced. It would be wrong to describe the sales as sales on a going concern basis. But, from the information provided to me today, I am satisfied that there is a real likelihood that, if an extension of time is granted, there will be funds produced which may enure for the benefit of the unsecured creditors. 11 Also, notwithstanding the difficulties with the ROT claims referred to in the letter from the receivers of 28 May 2010, the position that has now been achieved is that the receivers have agreed to retain in a separate trust account 100% of the proceeds of sale of any inventory that is subject to a ROT claim. 12 There are 19 ROT claims of which seven have commenced proceedings in the Supreme Court of New South Wales. Some of the 12 claims that are not the subject of litigation appear to be quite small. Importantly, the agreement which has been reached is that the proceeds of sale will be quarantined not just for the seven claims that have been commenced in the Supreme Court, but for all of the ROT claims. 13 Mr Weston says in his affidavit on information and belief that the company continues to occupy the 10 warehouses which I referred to in my earlier reasons. Also, importantly, he says that the receivers are continuing to make the lease payments to the landlords of those premises. No objection has been raised by any of the landlords to the continued occupation by the company of the warehouses. 14 It appears that some of the employees of the company have chosen to remain with the company and they are still employed and are being paid their usual salaries and entitlements. 15 Mr Weston expresses some concerns as to the position which may arise if the company is placed into liquidation. He observes that the further extension of time, if granted, would allow time for agreements for sale of the Sydney business operations of the company to be concluded along with the sale of stock. 16 I have been told today by Ms Barlow that it appears that the sale price for stock and inventory has been agreed with purchasers at an amount of 60 cents in the dollar for the cost of all inventory. The total sale price cannot be quantified until a stock take is completed and this will take some time to carry out. 17 The receivers state in their letter of 28 May 2010 that it would be advantageous to have the voluntary administration process run in parallel to the sale process and that the receivers would support the present application which would assist them in their task of realising the assets of the company "for the benefit of the various stakeholders." By this expression I understand the receivers to refer, not merely to the secured creditor, but also to include the unsecured creditors. 18 Mr Weston sent an email to the committee of creditors on 28 May 2010 notifying them of his proposed application for a second extension of time. He states in his email that the receivers are continuing to operate the business and are continuing negotiations with interested parties, as well as assessing the ROT claims which he observes will have an impact on the level of unsecured claims against the company. 19 Mr Weston's email continues by stating that, until those matters have been finalised by the receivers, he is unable to provide creditors with an estimate of a return in respect of their claims. Mr Weston states that he understands that it is the intention of the director of the company, Mr Studdy, to propose a Deed of Company Arrangement ("DOCA"). However, no firm proposal for a DOCA has been made because the director will not be in a position to put forward a DOCA until the resolution of the sale process and the ROT claims is completed. 20 Mr Weston's email, whilst notifying the creditors of today's application, does not inform them of the period of the extension which is sought. Nevertheless, he did ask the creditors to advise, as a matter of urgency, if they had any objection to the application for an extension. There has been response from one unsecured creditor, namely QBE Insurance; that company submitted a proof of debt in the amount of nearly $4 million. It indicated that it had no objection to the request for a further extension of the convening period. In addition, the secured creditor, HSBC Bank (Australia) Limited, advised that it has no objection to the application for a further extension of time. 21 Mr Weston expresses his opinion that it is in the interests of creditors that, at the second meeting, they be able to vote on the basis of accurate and useful information about the affairs of the company with meaningful recommendations from the administrators. Needless to say, the administrators are bound to express the opinions required in section 439A(4) of the Act but Mr Weston says that the granting of the extension which is sought will assist him, in particular, because time will be provided for the sale negotiations to continue and be completed, and for other reasons mentioned in paragraph 40 of his affidavit. Those reasons include the ongoing discussions between the receivers and the ROT claimants. 22 In Mr Weston's opinion, a further extension of the convening period will not unduly prejudice the creditors of the company or other stakeholders. This is because, in particular, the receivers appear to be paying the rent to the landlords for the use of the warehouse premises and the company's employees are continuing to be paid their wages and entitlements. 23 I was taken in evidence this morning to a draft report to creditors that has been prepared by Mr Weston. Needless to say, the report cannot be finalised, at least until the sale process is completed, but it indicates that, at least on the assumptions made in it as to the total estimated realisable values of the company's property, there will be a dividend for unsecured creditors. It will not be 100 cents in the dollar but the figures do suggest that, despite an estimated net deficiency in the order of $18 million, there will be funds available to meet some part of the claims of unsecured creditors. 24 As I said earlier, the position with respect to a DOCA is still uncertain but I accept the submission of Mr Coleman, who appears for the plaintiffs, that I could not expect to be provided with any more concrete information by the director of the company until the sale process is completed and perhaps some further progress is made in relation to the ROT claims. 25 During the course of the application this morning, I raised with Mr Coleman the possibility of imposing a condition on the grant of a further extension of time. The condition which I suggested was that the receivers use their best endeavours to arrange a mediation with the ROT claimants. 26 It seemed to me that, on the evidence that was before me at that stage of the application, unless there was some greater certainty in the position with respect to the ROT claimants, the amount which would remain available for the benefit of unsecured creditors was quite uncertain, and that the position may continue in that state for a lengthy period of time. That is because the information in the receiver's letter of 28 May 2010 was that there was no agreement as to the amount which would be retained on the sale of inventory the subject of ROT claims, and the proceedings in the Supreme Court seem to be at a very early stage. 27 However, having had the benefit of the additional information from Ms Barlow, to which I referred above, I do not now see the need to impose a condition. I am satisfied that the balancing exercise which informs the exercise of the discretion weighs in favour of the grant of an extension of two months. 28 I take into account, of course, the opinions expressed by Mr Weston as an experienced administrator and practitioner. I also take into account the matters to which I referred above which suggest that there is real utility in the grant of the extension which thereby strikes the balance in favour of the exercise of the discretion in accordance with the principles stated in the authorities. 29 I will therefore make orders in terms of the draft short minutes of orders that have been handed to me by Mr Coleman. The orders are in the usual form of those which are made in these applications and I will make orders accordingly. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Weston, in the matter of 7 Steel Distribution Pty Limited (ACN 131 352 364)(Administrators Appointed)(Receivers and Managers Appointed) (No 2) [2010] FCA 593

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