Re Guerra Transport: ex parte Jay [2004] NSWSC 245

New South Wales Supreme Court

CITATION : Re Guerra Transport: ex parte Jay [2004] NSWSC 245 HEARING DATE(S) : 29 March 2004 JUDGMENT DATE : 31 March 2004 JURISDICTION: Equity JUDGMENT OF : Austin J DECISION : Application dismissed

CATCHWORDS : CORPORATIONS - voluntary administration - extension of period for holding adjourned meeting of creditors - Court's power under s 447A - discretionary considerations - consequences of failure to hold adjourned meeting LEGISLATION CITED : Corporations Act 2001 (Cth) ss 435C, 439A, 439B, 446A, 447A, 449E Corporations Regulations Reg 5.3A.07 Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 Cawthorn v Keira Constructions Pty Ltd (1994) 13 ACSR 337 David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 Dean-Willcocks v Powerline GES Pty Ltd (2002) 4 ACSR 517 Gibbons v LibertyOne Ltd (2002) 41 ACSR 442 CASES CITED : Kaye v National Investment Institute Pty Ltd [2004] FCA 100 Re AFG Insurances Ltd [2002] NSWSC 845 Re Envirostar Energy Ltd [2002] NSWSC 1246 Re LOCM Pty Ltd (1997) 15 ACLC 1576 Re Open Telecommunications Ltd; ex parte Whitton [2002] NSWSC 930 Re Vouris; ex parte Epromotions Australia Pty Ltd (2003) 47 ACSR 155 Re Western National Earthmoving Corporation Pty Ltd (1997) 141 FLR 121 PARTIES : Stephen Jay (as administrator of Guerra Transport Pty Ltd) (P) FILE NUMBER(S) : SC 6356/03 COUNSEL : P M Fordyce (Sol) (P) SOLICITORS : PMF Legal (P)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

WEDNESDAY 31 MARCH 2004

6356/03 RE GUERRA TRANSPORT PTY LTD (ADMINISTRATOR APPOINTED); EX PARTE JAY JUDGMENT 1 HIS HONOUR: The plaintiff is the voluntary administrator of Guerra Transport Pty Ltd ("the Company"), appointed as such on 9 October 2003. By an interlocutory process filed on 29 March 2004, he seeks orders which would have the effect of further adjourning a meeting of creditors he has convened pursuant to s 439A of the Corporations Act. 2 The company carries on business as freight forwarder for the transport of fresh meat and farm produce from the Griffith area to the Sydney, Melbourne and Brisbane markets. In his affidavit, the plaintiff says that the company has unsecured creditors of approximately $700,000 to $800,000. He says that Mario Guerra is the major secured creditor, for approximately $600,000. He says it is "anticipated" that if any deed proposal were to be accepted, it would involve Mr Guerra agreeing to rank as an unsecured creditor for the purpose of receiving a dividend, but he does not elaborate as to whether Mr Guerra is prepared to do so, and if so, whether he would impose conditions. 3 The plaintiff held the first meeting of creditors of the company, for the purposes of s 436E, on 16 October 2003. A committee of creditors was appointed. A member of the committee claims to represent Mr Guerra's interest, and another member of the committee claims to represent creditors who are owed about $364,000. In all, according to the plaintiff's affidavit, the members of the committee of creditors represent approximately 80% of the unsecured creditors. 4 Section 439A requires the administrator to convene what is commonly called the second meeting of creditors, at which the creditors are given the opportunity to decide, under s 439C, whether to return the company to its directors, or to resolve in favour of liquidation, or to approve a deed of company arrangement. Section 439A requires that the meeting be held within five business days after the end of the convening period, normally a period of 21 days beginning on the day when the administration begins. In this case the meeting was convened and first held on 5 November 2003, within the time required by s 439A. 5 Section 439B(2) states that a meeting convened under s 439A may be adjourned from time to time, but cannot be adjourned to a day that is more than 60 days after the first day on which the meeting was held. In this case the meeting was adjourned for a period not exceeding 55 days, which would expire on 24 December 2003. On 17 December 2003, pursuant to an application made by the plaintiff under s 447A, Hamilton J ordered that the time to which the second meeting of creditors could be adjourned be extended to 31 March 2004. 6 The financial position of the company is left unclear by the plaintiff's evidence. The plaintiff says in his affidavit that the company is able to meet its costs and is running quite smoothly and profitably before the deduction of administration costs. He has provided profit and loss statements for the period from 1 to 31 January 2004 and for the period from 1 October 2003 to 31 January 2004. These documents indicate a trading profit for January 2004 of $35,790 and a trading profit for the period from October to January of $59,052. There is a provision for income tax of $17,716. The company's balance sheet as at 31 January 2004 shows current assets of $155,766 with the Commonwealth Bank, and receivables comprising trade debtors of $509,241. The major non-current asset is plant and equipment shown at $105,503 (cost less depreciation). The main current liabilities are trade creditors at $346,160 and "loan – Guerra Transport" shown at $307,707. 7 I regard this information as inadequate for the purposes of the application. There is no note explaining the loan of $307,707, or identifying the lender, or indicating whether the lender would press for payment but for the administration. There is no aged debtors or aged creditors ledger, or other information from which the Court could assess the company's cash flow position. The plaintiff's evidence in his affidavit, that Mr Guerra is a secured creditor for approximately $600,000, and that the amount owed to unsecured creditors is between $700,000 and $800,000, is not reflected in the balance sheet. It is not possible, from information provided on the application, to quantify the "administration expenses" which qualify the plaintiff's statement in his affidavit concerning the company's profitability. While it is not the Court's task, in an application such as the present one, to determine whether the company is solvent, it is important for the Court to have an understanding of the company's financial position where the application invites the Court to permit it to continue trading under administration for a substantial further period. 8 The plaintiff puts forward two possible "scenarios" for a deed of company arrangement, which he calls the "Trade-on Scenario" and the "Sale Scenario". 9 As to the Trade-on Scenario, the plaintiff says that it is necessary to have an adequate degree of certainty about the company's anticipated trading position in the next few months, in order to formulate a proposal. He deposes that he recently attended a meeting with the company's accountant and the person in charge of the day-to-day operation of the business. They told him that the industry in which the company operates is experiencing a downturn in trade due to the ongoing and worsening drought in the southern part of New South Wales and adjoining areas in Victoria. This has reduced the demand for freight services. 10 The plaintiff accepts this advice and says he is presently unable to formulate a deed of company arrangement based on the Trade-on Scenario. He says that allowing more time to observe the performance of the company over the seasonal downturn would provide him with the opportunity to evaluate its performance and formulate a realistic proposal. His preliminary estimate is that a proposal under the Trade-on Scenario would produce approximately 20 to 30 cents in the dollar for unsecured creditors over a three or four-year period, though the foundation for that estimate is far from clear. 11 As to the Sale Scenario, the plaintiff has authorised the company's accountant, Mr Wilmot, to negotiate, under his supervision, with interested buyers. There are three interested buyers, who have been identified without advertising. The company does not own the land and building upon which the business is conducted, these being owned by its shareholder, Mr Guerra. It does not own any trucks or equipment because, since the plaintiff's appointment, these functions had been outsourced to contractors. It appears that the value of the business lies in its customer base and goodwill, as well as the right to operate from its premises. Therefore the sale of the business at a good price requires the co-operation of Mr Guerra, who owns the premises and has the customer contracts. 12 Mr Wilmot has provided an affidavit in which he says that he has signed confidentiality agreements with two of the prospective purchasers, as is prevented from disclosing their identities or details of the negotiations. The third prospective purchaser is negotiating through a broker and he does not know its identity. He says he has had about 10 telephone discussions about the business with one of the two who have signed confidentiality agreements, and four discussions with the other, and has met with representatives of each of them once. Both of them have visited the company's premises and one of them has reviewed part of the company's financial records. He has not received any written offer, although the prospective purchasers have given a broad indicative price for the business in the order of $250,000. Both of them are asking for more information about the business. Mr Wilmot deposes that he is not able to say how long it will take to conclude the negotiations, although based on progress so far and the level of interest, he estimates another six weeks before a written offer is made. 13 The plaintiff deposes that he is confident that offers for the purchase of the business will soon be made, but it is unlikely that they will be made before 31 March 2004. He says that if the price for the business is about $250,000, there will be a return to creditors of about 15 to 18 cents in the dollar. I take it that this assumes that Mr Guerra would be treated as an unsecured creditor. 14 On 18 March 2004 the plaintiff wrote to the committee of creditors confirming his intention to apply for a further extension of the time for holding the adjourned meeting, of two or three months. He has not received any reply, and believes that none of the committee members opposes the application. It appears that he has not written to the creditors generally about the present application. He says that Mr Guerra has given oral consent to the application. 15 Upon the basis of this evidence, the plaintiff seeks an order under s 447A(1) of the Corporations Act, having the effect that the meeting of creditors held on 16 October and adjourned to 19 November 2003 would now be held on or before 30 June 2004, and that the plaintiff be empowered to hold the meeting at any time before 30 June 2004 upon giving notice to the creditors in accordance with the Corporations Regulations. 16 Section 447A(1) authorises the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. Section 439B(2) allows the second creditors' meeting to be adjourned, but it says that the meeting "cannot be adjourned to a day that is more than 60 days after the first day on which the meeting was held". The question is whether this express language excludes the use of s 447A to grant an extension for a longer period. 17 The plaintiff's solicitor did not refer directly to any case where s 447A(1) has been used to extend the adjournment period beyond 60 days. However, he referred the Court to two decisions in which the Court used s 447A(1) to give a second extension of the convening period for the meeting. The statutory context is somewhat different. Section 439A(6) permits the Court to extend the convening period "on an application made within the period referred to in paragraph (5)(a) or (b), as the case requires". The period referred to in paragraph (5)(b), which applies except where the convening period falls over Easter, is "the period of 21 days beginning on the day when the administration begins". Once the convening period has been extended, an application for a second extension will necessarily be made outside that 21 day period, even if within the extended convening period. Arguably s 439A(6) does not in terms authorise the Court to extend the extended convening period because the application is not made within the period referred to in paragraph (5)(b). However, in Re Western National Earthmoving Corporation Pty Ltd (1997) 141 FLR 121 Parker J in the Supreme Court of Western Australia used s 447A(1) so as to permit a second extension of the convening period to be made, and that decision was followed by Barrett J in Re Envirostar Energy Ltd [2002] NSWSC 1246. 18 The problem addressed in those cases was that the section authorising the Court to grant an extension of the convening period was silent as to whether a second extension could be ordered on an application made within the extended period. The problem in the present case is that the application for an extension of the adjournment period is made in the teeth of an express prohibition on the creditors themselves adjourning their meeting for more than 60 days, and in the absence of any express power for the Court to permit a longer adjournment. 19 There is, both before and after Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270, a substantial body of case law directly in point, not directly cited by the plaintiff's solicitor. The case law stems from Cawthorn v Keira Constructions Pty Ltd (1994) 13 ACSR 337 (Young J), in which his Honour held that s 447A(1) permits the Court to make orders having the effect of extending the adjournment period beyond 60 days. It rested on a rather uncertain foundation until the High Court clarified the law in Australasian Memory. For example, in Re LOCM Pty Ltd (1997) 15 ACLC 1576 Goldberg J said he was at first inclined to hold that the express language of s 439B(2), when read in light of the explanatory memorandum for the Corporate Law Reform Bill 1992, ousted the general jurisdiction under s 447A. However, he noted the breadth of the language of s 447A, and the fact that Cawthorn had been followed in other cases, and said he was not convinced that the line of cases invoking s 447A was wrong. 20 In my opinion the general principles adopted by the High Court in Australasian Memory put the matter beyond doubt. In that case the administrator convened the second meeting of creditors to be held eight days earlier than the end of the convening period, in contravention of s 439A(2), which says that the meeting must be held within five business days after the end of the convening period. In a joint judgment, the High Court held that s 447A(1) enables an order to be made altering the time fixed by s 439A(2), notwithstanding the mandatory language of the latter subsection. The Court noted (at 279, 280) the wide language of s 447A(1), and found no cogent reasons for reading it down. They specifically rejected a suggested limitation on the section, according to which it could not be used to alter the times fixed by sections in Part 5.3A which contain express provision for variation of the time so fixed. 21 The Court referred to David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265, where the High Court held that s 459G(2), according to which an application to set aside a statutory demand may only be made within 21 days after service of the demand, should not be treated as supplemented or qualified by the general curative provisions of s 1322. They distinguished that case on two grounds. The first was that s 459G(2) defines the jurisdiction of the Court by imposing a requirement as to time as an essential condition of the new right conferred by the section. The second was that in David Grant, the Court had regard to the place occupied by s 459G in the scheme established by Part 5.4, and the consequences that would follow if the section was qualified by s 1322. In Australasian Memory the Court observed that similar considerations do not arise in relation to s 439A(2). 22 More fundamentally, the Court contrasted s 1322, a general power standing apart from the statutory scheme of Part 5.3A, with s 447A, which it described (at 281) as "an integral part of the legislative scheme provided for by Part 5.3A". This implies a legislative intention that s 447A is available to permit alterations to the way in which Part 5.3A is to operate, even where the provision in question would be construed as absolute if read in isolation from s 447A: see Re Vouris; ex parte Epromotions Australia Pty Ltd (2003) 47 ACSR 155, 179 per Campbell J. 23 Section 439B(2) is expressed as a prohibition on any adjournment for more than 60 days. That is a prohibition upon an adjournment being made by the creditors at the meeting. The subsection does not in terms operate to limit the jurisdiction of the Court in any way; in particular it does not limit the Court's jurisdiction under s 447A(1). In that respect s 439B(2) is indistinguishable from s 439A(2). The fact that the latter provision is expressed as a mandatory requirement rather than a prohibition, and is addressed to the administrator rather than to the creditors in a meeting, makes no difference in principle. Neither provision operates to limit the jurisdiction of the Court. There is nothing about the position of s 439B(2) in Part 5.3A, nor the consequences of not complying with it, that would suggest an exception to the Court's general jurisdiction under s 447A. There is no obstacle to reading s 439B(2) in conjunction with s 447A(1). 24 In Dean-Willcocks v Powerline GES Pty Ltd (2002) 4 ACSR 517 Barrett J returned to the earlier cases in light of Australasian Memory, and held that the High Court's judgment indicated, by necessary implication, the availability of s 447A to support an order permitting adjournment for more than 60 days. In Kaye v National Investment Institute Pty Ltd [2004] FCA 100 Goldberg J, who had decided LOCM, referred to that case and Cawthorn (but not Australasian Memory or any later case) as authority for the proposition that there was "no doubt" that he had the power to extend the 60 day period specified s 439B(2). A similar order was made by Young CJ in Eq in Re Open Telecommunications Ltd; ex parte Whitton [2002] NSWSC 930; see also Re Vouris; Epromotions Australia Pty Ltd at 179. 25 The authorities make it clear, in my view, that the Court has the power under s 447A(1) to make an order modifying the manner in which s 439B(2) operates in relation to a particular company. In the present case, unlike the authorities to which I have referred, the plaintiff seeks an order having the effect of further adjourning the meeting of creditors to a date on or before 30 June 2004, without any motion for such an adjournment being put to the creditors. The logic of the cases suggest that the Court has the power to make such an order. However, the Court may be very unlikely to do so, on discretionary grounds. The orders made in the cases to which I have referred did not go so far, and merely authorised the creditors at the adjourned meeting to decide upon a further adjournment for an extended period. 26 While the Court has the necessary power, I had decided that this is not case where the power should be exercised. In the first place, the facts before me do not justify an order which would force a further adjournment on the creditors without giving them the opportunity to express their views. No evidence has been adduced to suggest that there would have been any particular difficulty in convening a meeting of the creditors as a whole to consider a further adjournment, if the plaintiff had acted in a timely manner. But the plaintiff has not only omitted to convene a meeting of creditors to consider a further adjournment. He has not even notified them of his application. He has merely written to the committee of creditors. 27 The omission to notify creditors generally of the proposal to seek an extension is a matter that could have serious consequences. So long as the administration of the company continues, the moratorium achieved by Part 5.3A continues to operate, potentially prejudicing the position of creditors and other litigants against the company (including, for example, any dismissed employees), lessors and chargees. Because of the inadequacies of the financial information, identified above, the Court is not in the position to identify the persons affected by the moratorium, except for Mr Guerra, who has not provided direct evidence but is said to have consented orally to the extension. Nor can the Court be confident that, if the company is allowed to continue to trade in administration for another three months, notwithstanding apparently adverse conditions, its financial position would not deteriorate to the detriment of existing and new creditors. 28 The case in favour of the extension is essentially that if a deed of company arrangement can be made, Mr Guerra may be prepared to be treated as an unsecured creditor rather than relying on his security. According to the plaintiff, that would give the creditors generally a better return than sale of the business by a liquidator. 29 There are no particulars concerning Mr Guerra's secured rights, there is some doubt in view of the discrepancy between the affidavit and the financial statements as to the amount of his claim, and most importantly, there is no direct evidence of his attitude. Assuming, however, that Mr Guerra would be prepared to sacrifice his security and be treated as an unsecured creditor in the context of a deed of company arrangement, the evidence as to the prospects of any such deed being entered into is quite thin. So far as the Trade-on Proposal is concerned, all that can be said is that the company's trading prospects in the short term are poor because of the drought. That hardly provides a satisfactory basis for a deed proposal, and any extension to accommodate an improvement after the end of the drought would have to be for a prolonged and uncertain time. Indeed, it is hard to see, on the evidence, how the prospects of a deed to implement the Trade-On proposal would be enhanced at all by an extension of only three months. 30 As far as the Sale Proposal is concerned, the evidence does not establish a plausible basis for the plaintiff's belief that negotiations which have not come to fruition in the period from 9 October 2003 to date would produce an outcome in the ensuing three months. There is no reason why those negotiations cannot continue if the company is in liquidation, nor why the liquidator could not bring the company back into voluntary administration under s 436B if a real prospect for a deed of company arrangement emerges. 31 The application was made, without explanation of its lateness, on 29 March 2004, two days before the extended adjournment period was due to expire. It is a poorly prepared application, based upon inadequate information. The failure of the application will mean, having regard to s 435C(3)(e), that the administration will come to an end on 31 March 2004. As far as I can see, the Corporations Act does not specifically cover the consequences of an administration coming to an end in such circumstances. Neither s 446A(1) nor reg 5.3A.07 has any application. But clearly the correct result should be, the creditors having failed to resolve in favour of anything else, that the company should pass into liquidation as if the creditors had resolved to that effect. 32 To make the position clear, I shall make an order under s 447A causing s 446A to apply as if the creditors of the company had resolved on 31 March 2004 under paragraph 439C(c) that the company be wound up. The Court has the power to make such an order at the termination of a winding up: Gibbons v LibertyOne Ltd (2002) 41 ACSR 442. 33 The plaintiff has also applied for an order under s 447A having the effect that the committee of creditors of the company will be empowered to approve the plaintiff's remuneration as administrator pursuant to s 449E(1). Section 449E(1) states (to the extent relevant) that an administrator is entitled to such remuneration as is fixed by resolution of the company's creditors passed at a meeting convened under s 439A. The meeting of creditors has not yet approved the plaintiff's remuneration. If the meeting were to be adjournment to 30 June 2004, the plaintiff would have been without remuneration in respect of his role as administrator of the company for nearly 10 months. In similar circumstances, the Court has used s 447A in the manner proposed by the plaintiff: Re AFG Insurances Ltd [2002] NSWSC 845. 34 Here, however, the administration will come to an end on 31 March 2004, for the reasons I have given. The committee of creditors of the company will cease to have any functions, since their functions are conferred in respect of a company under administration: s 435F. Therefore the order proposed is inappropriate. In my opinion it will be open to the plaintiff to make an application to the Court for remuneration in respect of the administration under s 449E(1)(b), notwithstanding that the administration will have come to an end before the application is made. 35 I shall make the following orders: (1) Interlocutory process filed on 29 March 2004 is dismissed. (2) Order, under s 447A(1) of the Corporations Act 2001 (Cth), that Part 5.3A of the Act is to operate in relation to Guerra Transport Pty Ltd as if the creditors of the company resolved under s 439C(c), on 31 March 2004, that the company be wound up.

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