White (Administrator), in the matter of Schramm Australia Holding Pty Ltd [2023] FCA 261

Federal Court of Australia|2023-03-22|Before: Smith J

The originating process dated 17 March 2023 be made returnable on 22 March 2023.
Pursuant to s 439A(6) and s 447A(1) of the Corporations Act 2001 (Cth) (Act), the period within which the first plaintiffs (administrators) must convene the second meeting of creditors of each of the second to fourth plaintiffs (companies) under s 439A of the Act (second meetings) be extended to midnight on 23 June 2023.
Pursuant to s 447A(1) of the Act, Pt 5.3A of the Act is to operate in relation to each of the companies so that, notwithstanding s 439A(2) of the Act, the second meetings may be held together or separately at any time during the period up to, or within 5 business days after the end of, the convening period as extended in paragraph 2 above provided that the administrators give notice of the meeting in accordance with r 75-225(1) and r 75-15 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPR).
Within two business days of these orders being made, the administrators are to give notice of these orders to creditors of each of the companies (including persons claiming to be creditors) by means of a circular: (a) to be published on the website maintained by the administrators in respect of the administration of the Companies; and (b) to be sent by email or by post to all known creditors.
Pursuant to s 447A(1) of the Act and s 90-15 of the Insolvency Practice Schedule (Corporations) (IPSC), Pt 5.3A of the Act is to operate in relation to the companies such that if, pursuant to any provision in any of Part 5.3A of the Act, the IPSC, or the IPR, the administrators are required to provide any other notification to creditors during the administration of the companies, such notice will be validly given to creditors of the companies by: (a) giving such notice electronically by email sent to the email address of any creditor (including persons claiming to be creditors) of the companies for whom or which the administrators hold an email address; (b) sending such notice to the postal address or facsimile number, or otherwise as provided for by the Act or the IPR, to any creditors not being a creditor referred to in sub-paragraph 4(a) above; and (c) to the extent that the matter relates to a meeting that is the subject of r 75-40(4) of the IPR, causing such notice to be published in the Insolvency Notices website located at: .

BANKS-SMITH J: 1 On 22 March 2023 I heard and determined an urgent application for an extension of the period for convening second meetings of creditors, the expiry date for that period otherwise being 23 March 2023. I made orders as sought. These are my reasons for doing so.

Administration of Schramm Australia Group 2 The Schramm Australia Group is a global manufacturer and supplier of branded land-based hydraulic drills and equipment in the mining, oil and gas, water and other markets. 3 On 22 February 2023 Hayden White, Ian Francis and Paul Harlond (Administrators) of FTI Consulting were appointed pursuant to s 436A of the Corporations Act 2001 (Cth) joint and several administrators of the three companies that make up the group, being: the second plaintiff, Schramm Australia Holding Pty Ltd; the third plaintiff, Airdrill Pty Ltd; and the fourth plaintiff, Airdrill Hammers and Bits Pty Ltd. I will refer to those entities collectively as the Companies.

Standard and extended date 4 The Administrators convened the first meetings of creditors of the Companies on 7 March 2023. 5 Pursuant to s 439A(5) of the Corporations Act, the convening period in respect of the Companies is the period of 20 business days beginning on the day after the administration began. The convening period therefore ends on 23 March 2023. Pursuant to s 439A(2) of the Corporations Act, the second creditors meeting of each of the Companies must be held within five business days before, or within five business days after, that date. 6 The Administrators seek orders under s 439A(6) and s 447A of the Corporations Act and s 90-15 of the Insolvency Practice Schedule (Corporations) for a three month extension so that the period is extended to 23 June 2023. They also seek a 'Daisytek' order (named for the approach taken in In the matter of Daisytek Australia Pty Limited [2003] FCA 575) permitting them to hold the meetings at any time during the extended convening period, or within five business days after it, notwithstanding the terms of s 439A(2). Such an order gives administrators greater flexibility in that they can convene a meeting earlier if appropriate in the circumstances: Re Grocon Pty Ltd (Admins Apptd) (No 2) [2020] VSC 859 at [22] (Gardiner AsJ).

Principles 7 I recently summarised the principles in Algeri (administrator), in the matter of Murray & Roberts Pty Ltd (Administrators Appointed) (No 2) [2022] FCA 1563 and for convenience and having regard to the need to publish these reasons urgently, extract and adopt those reasons: [8] When considering an application to extend the convening period, the Court must have regard to the objects of Part 5.3A set out in s 435A and reach an appropriate balance between the expectation that an administration will be undertaken in a relatively speedy and summary manner with the need to ensure that the administration is not concluded without consideration of sensible and constructive options directed towards maximising the returns for creditors and any return for shareholders: Diamond Press Australia Limited [2001] NSWSC 313 at [10] (Barrett J). [9] The administrator's view on such an application is significant and, particularly where the administration is complex, it should carry weight: In the matter of Renex Holdings (Dandenong) 1 Pty Ltd (administrators appointed) [2015] NSWSC 2002 at [9] (Black J). [10] In considering an application for an extension, the court must take into account the detriment to third parties, including the suspension of rights and remedies of secured creditors, lessors, and others: Shaw and Albarran (Joint and Several Administrators of Home Art Building Group Pty Ltd) v Home Art Building Group Pty Ltd (Administrators Appointed) [2016] WASC 274 (Beech J), where the principles are summarised at [18]. [11] The court has recognised that interests of creditors can be prejudiced not only by delay but also by the convening of premature meetings, where the administrator has been unable to obtain adequate information for the preparation of the administrators' report in a form enabling creditors to make an informed decision: In the matter of Harrisons Pharmacy Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458 at [13] (Farrell J) and the cases there cited. [12] In In the matter of Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) [2009] NSWSC 585 at [13], Austin J identified the following relevant categories of cases in which an extension had been granted: (a) where the extension will allow the sale of the business as a going concern; (b) where the size and scope of the business in administration is substantial; and (c) more generally, where additional time is likely to enhance the return for unsecured creditors. [13] In Mighty River International Limited v Hughes [2018] HCA 38; (2018) 265 CLR 480, Nettle and Gordon JJ (in dissent, but not relevantly in this respect) cited many of the authorities in the area and observed: [73] Generally speaking, courts have been disposed to grant substantial extensions in cases where the administration has been complicated by, for example, the size and scope of the business, substantial offshore activities, large numbers of employees with complex entitlements, complex corporate structures and intercompany loans, and complex recovery proceedings, and, more generally, where the additional time is likely to enhance the return to unsecured creditors. Provided the evidentiary case for extension has been properly prepared, there has been no evidence of material prejudice to those affected by the moratorium imposed by the administration, and the administrator's estimate of time has had a reasonable basis, the courts have tended to grant extensions for the periods sought by administrators. (footnote omitted) [14] The principles have also been collected and applied more recently in this Court in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717 at [64] (Middleton J); and Algeri, in the matter of WBHO Australia Pty Ltd (Administrators Appointed) (No 2) [2022] FCA 234 at [16]-[17] (Beach J). I also set out the above principles in Nipps (Administrator) v Remagen Lend ADA Pty Ltd, in the matter of Adaman Resources Pty Ltd (Administrators Appointed) (No 2) [2021] FCA 577 at [15]-[22].

Evidence 8 The Administrators rely on an affidavit of Mr White. The facts referred to in these reasons are based on his evidence.

Some more about the Companies 9 The Schramm Australia Group is privately-owned, with its sole shareholder being Schramm II Inc (US), a company incorporated in the United States of America. The Schramm Australia Group principally operates in the mining, oil and gas and water industries, and operates two businesses. The first is the manufacture and supply of land based, mobile, hydraulic drilling rigs, including aftermarket equipment and maintenance/repair services, which is operated by Airdrill. The second is the manufacture and supply of drilling consumables, being reverse circulation hammers and bits, which is operated by Hammers and Bits. 10 As at the date of the appointment of the Administrators, the Companies employed approximately 103 staff, and have four offices, two service centres, one warehouse and two factories across Western Australia, South Australia and Queensland. 11 The Companies have executed a General Security Deed dated 14 January 2022 (GSD) in favour of Decathlon Alpha IV, L.P., a Delaware limited partnership. The GSD purports to secure a facility established by a Revenue Loan and Security Agreement dated 1 November 2021 (RLSA) between relevantly Decathlon and Schramm II Inc. Pursuant to the RLSA, Decathlon has advanced funds of not less than USD $6,732,321.92 to Schramm II Inc. The Administrators' investigations into the GSD and the position of Decathlon are continuing. 12 As to the financial position of the Companies, whilst investigations are continuing, it is the Administrators' preliminary opinion that an immediate liquidation of Airdrill would likely result in unsecured creditors receiving a nil return, and an immediate liquidation of Hammers and Bits would likely result in unsecured creditors receiving a nil or negligible return. Mr White deposes to there being a large number of unsecured creditors of each. It is not necessary to set out the quantum of anticipated claims by unsecured creditors at this point, but such evidence, along with evidence as to outstanding employee entitlements, was before the Court.

Work undertaken since appointment 13 Mr White deposes to the extensive work undertaken by the Administrators since their appointment in respect of ongoing trading, employees, securing assets, dealing with customers, identifying and securing the books and records of the Companies, and complying with statutory tasks. There is no suggestion that this extension is sought because of any delay on the part of the Administrators. It is a sizeable group of companies and all such tasks take time. 14 Of more relevance is the nature and intensity of the work that has been necessary for the Administrators to undertake since their appointment in order to implement a sale process. This is the primary reason for this application.

Primary reason for extension 15 Mr White deposes to the fact that the Administrators have already undertaken extensive work in relation to the possibility of a sale or recapitalisation of the Companies or a purchase of the Companies' assets or businesses by way of an Asset Sale Agreement (ASA) or Deed of Company Arrangement (DOCA) to maximise the potential return to creditors (Sale Process). 16 Relevantly, they have conducted an initial expression of interest campaign that included: advertising the Businesses for sale in newspapers and inviting expressions of interest by 8 March 2023; proactively contacting parties who had previously expressed an interest in purchasing the businesses, or were identified by employees of the Companies or the Administrators as potentially having an interest in doing so; reviewing expressions of interest submitted by interested parties; and negotiating confidentiality agreements with interested parties. 17 On 8 March 2023 the Administrators provided interested parties with a process letter which provided an overview of the sale process, and a confidential 'teaser document' by way of a slide deck which provided information about the financial performance, management and operations of the Companies. The process letter included a timetable that would see a review of interested parties, a period for due diligence by invitation, submission of binding offers and assessment of binding offers by 22 March 2023. 18 As at 22 March 2023 the Administrators had received 43 expressions of interest, 29 signed confidentiality deeds and 10 non-binding indicative offers. 19 However, Mr White deposes that the general response to the timeline from the shortlisted interested parties has been that it is too short. In particular, most shortlisted interested parties indicated to the Administrators that the timeline is too short in relation to the due diligence stage. One shortlisted interested party indicated that they were unable to submit a final binding offer in the timeframe but would be interested if there was a longer timeline. Other shortlisted interested parties indicated that they would need to include significant conditions in their final binding offers in order to meet the timeline. 20 Based on this feedback, the Administrators anticipate that extending the due diligence stage to 2 April 2023 will provide sufficient time for these parties to complete due diligence, undertake site visits and engage with senior management of the Companies. 21 Mr White deposes that based on the scope of the Sale Process and his experience as an insolvency practitioner, after the completion of due diligence another 10 business days or so will be required to give the shortlisted interested parties time to submit binding offers. A further eight to 10 business days will then be required for the Administrators to negotiate with the successful bidder and finalise the terms of any proposed DOCA or ASA and for completion. 22 Mr White also deposes that the sale of businesses may require the approval of the Foreign Investment Review Board or the Australian Competition and Consumer Commission, which will also require additional time. 23 There are other potentially complicating factors which may add to the time required to complete the Sale Process, including the need to analyse offers that are not directly comparable as they may relate to different assets. Further, the potential sale or reorganisation of the businesses of Schramm II Inc may also complicate the Sale Process, given the value of the intellectual property and goodwill of the Schramm brand in both the USA and Australia. The Administrators do not presently know what impact that may have on the Sale Process, if any. 24 All of these things must be taken into account by the Administrators in considering the best outcome for each company and advising the creditors of each company of their recommendation prior to the second meetings of those creditors. 25 Accordingly, the Administrators request a three month extension to the convening period to 23 June 2023. This is the length of time which the Administrators presently reasonably foresee as being necessary to complete the Sale Process and prepare their reports to creditors.

Effect on creditors and other stakeholders 26 Mr White deposes that the Sale Process is the course of action most likely to maximise returns to creditors and achieve the objects of Part 5.3A of the Corporations Act. If there is no extension to the convening period, such that the Sale Process does not complete before the second meeting of creditors of each of the Companies, the Administrators will have no viable proposal to present to creditors at the second meetings. 27 If the second meetings were to proceed, it is likely that they would be adjourned, such that there would need to be two second meetings and two reports to creditors for each of the Companies, which would result in additional costs in the administrations. Alternatively, the Companies would be placed into liquidation. 28 On 20 March 2023 the Administrators notified all known creditors of their intention to make this application, advised the hearing date, and invited creditors to request a copy of the application. As at the date of his affidavit, Mr White was not aware of any creditor having requested the documents. Nor was he aware of any opposition to the application from creditors. 29 As to the employees, Mr White deposes to the effect that in the Administrators' view, the completion of the Sale Process will maximise their prospects of retaining employment with the Companies. If the Sale Process does not complete, the employees would ultimately be made redundant. The ability to realise the circulating assets of the Companies in order to pay potential priority claims of employees is also likely to be less in liquidation. 30 Mr White accepts that the landlords of four premises leased by the Companies will be affected by the prolongation of the statutory moratorium if the convening period is extended. However, the Administrators do not consider that the landlords will be prejudiced by any extension. The Administrators have paid and will continue to pay rent during the extension period. A sale of the businesses might involve an assignment of the leases, which would benefit the landlords. Should the Companies enter liquidation, they will vacate the leased premises and the Administrators expect to provide consent under s 440B of the Corporations Act to the landlords to re-take possession of the premises as soon as possible thereafter. Accordingly, Mr White submits that the landlords will not be worse off than they would be if there were no extension of the convening period. I accept Mr White's submission in this regard. 31 As at the date of Mr White's affidavit, the Administrators have not been informed of any concern raised by the landlords regarding the progress of the administrations. 32 The secured creditor, Decathlon, has provided its consent to this application. In an email dated 17 March 2023, Decathlon stated that it was 'supportive of the three month extension'. The email from FTI Consulting notifying Decathlon of the intended application and a copy of its response was in evidence.

Extension appropriate 33 Having regard to the evidence, I consider that the three month extension of the convening period is justified and appropriate. The matters raised by the Administrators paint a picture of an active sale process proceeding under a time pressure that might sensibly be alleviated for the benefit of all parties by the requested extension of time. The Administrators have moved quickly to instigate the Sale Process but it has many moving parts. I accept that it is in the interests of creditors to make orders that will have the effect of facilitating the Sale Process continuing in a timely manner. 34 Mr White's affidavit provides the evidentiary case for the requested extension, and there is no evidence of material prejudice to unsecured creditors, employees, landlords or Decathlon. 35 There has been disclosure to creditors of the intention to bring this application. 36 The purpose of the extension falls squarely within the principles set out in In the matter of Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) [2009] NSWSC 585 that I have referred to above. 37 The Administrators' estimate of the time required for the extension has a reasonable basis. It is appropriate to give weight to the views of the Administrators in matters such as these and where the evidentiary basis is provided. 38 For those reasons there will be an extension of the period within which the Administrators must convene the second meetings of creditors in respect of each of the Companies under s 439A of the Corporations Act to 23 June 2023. There will also be a Daisytek order to facilitate any prospect of convening the meetings earlier than the latest possible date.

Suppression and non-publication order 39 One of the annexures to Mr White's affidavit discloses information relevant to the value of certain assets of the Companies. That information is clearly commercially sensitive and it is in the interests of the administration of justice that it should be protected from disclosure or publication pending the completion of the Sale Process or any other process for the sale of the Companies' assets or businesses. Accordingly, an order will be made pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) to that effect.

Notices to creditors, liberty to apply and costs 40 The Administrators also seek directions addressing the manner in which notice generally is to be given to creditors during the period of the administrations, and preserving liberty to apply to interested parties. Those directions are routine and will be made. There will also be an order that the costs of the application be costs in the administration of the Companies.

Orders 41 Orders were made accordingly. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Banks-Smith.

Corporations Act 2001(Cth)ss 436A, 439A, 440B, 447A, Part

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