WGL RETAIL HOLDINGS LTD & ORS AND S J SHERMAN & ORS HC AK CIV-2011-404-001117

WGL RETAIL HOLDINGS LTD & ORS AND S J SHERMAN & ORS HC AK CIV-2011-404-001117 16 March 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-001117UNDER PART 15A OF THE COMPANIES ACT1993IN THE MATTER OF WGL RETAIL HOLDINGS LTD,WHITCOULLS GROUP LTD,CALENDAR CLUB NEW ZEALANDLTD, BORDERS NEW ZEALAND LTDAND REDGROUP ONLINE LTDAND IN THE MATTER OF STEVEN JOHN SHERMAN, JOHNMELLUISH AND RYAN REGINALDEAGLE, APPLICANTSHearing: 16 March 2011 (On the papers)Counsel: M Kersey/A M Barrowclough for ApplicantsJudgment: 16 March 2011 at 4:54 PMJUDGMENT OF ASSOCIATE JUDGE BELLThis judgment was delivered by me on 16 March 2011 at 4:54 pmpursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate: .Solicitors:Russell McVeagh, PO Box 8, Auckland[1] The applicants apply for orders under s 239Y(4) and s 239AT(3) of theCompanies Act 1993. WGL Retail Holdings Ltd, Whitcoulls Group Ltd, CalendarClub New Zealand Ltd, Borders New Zealand Ltd and REDgroup Online Ltd areNew Zealand subsidiaries of Whitcoulls Group Holdings Pty Ltd, in turn asubsidiary of REDgroup Retail Pty Ltd. REDgroup Retail Pty Ltd and all itsAustralian subsidiaries have been placed in voluntary administration under theAustralian Corporations Act. The companies in this application have been placed involuntary administration under Part 15A of the Companies Act 1993. The applicantsare administrators of both the Australian and the New Zealand companies.[2] The application under s 239Y(4) seeks an extension of the period withinwhich the administrators must give notice of termination of employment toemployees of the companies in administration, unless they wish to incur personalliability for payment of wages and salary under s 239Y(3). On 1 March 2011, Imade an order extending time under s 239Y(4) to 18 March 2011 on terms.[3] Under s 239AT the administrators must convene the watershed meetingwithin the convening period. The convening period is 20 working days after the dateon which the administrators were appointed and any extension of that period unders 239AT(3). That subsection allows the Court to extend the convening period.[4] The administrators were appointed on 17 February 2011. The conveningperiod expires on 17 March 2011, unless extended. Under s 239AV, the watershedmeeting must be held within five working days after the end of a convening periodor extended convening period.[5] The decision on extension of time under s 239Y turns in part on theapplication under s 239AT, whereas the decision under s 239AT can be madeindependently of considerations under s 239Y. Accordingly, I consider theapplication under s 239AT first.[6] The purpose of the watershed meeting is to decide the future of thecompanies. Before the watershed meeting, the administrators are required to givenotice of the meeting to creditors. The notice has to give a report from theadministrators about the companies' business, property, affairs and financialcircumstances and any other matter material to the creditors' decisions to beconsidered at the meeting: s 239AU(3). With the notice, the administrators mustalso provide a statement setting out their opinion, with reasons, on:[a] Whether it would be in the creditors' interest for the company toexecute a deed of company arrangement;[b] Whether it would be in the creditors' interest for the administration toend;[c] Whether it would be in the creditors' interest for the company to beplaced in liquidation.[7] Guidance on the use of s 239AT(3) to extend time is given in a number ofAustralian judgments under the equivalent provisions in the Corporations Act and inthe decision of Heath J in Nylex New Zealand Ltd CIV-2009-404-1217 HCAuckland, 11 March 2009. In that case, Heath J said:[18] It is clear from the strict time limits contained in the legislation and the need to keep a moratorium against the exercise ofcertain creditors' rights in place for the least time practicable, thatcourts should take care in determining whether to grant applications to extend the convening period.[19] There will be cases (though this is not one) where such an application is only made for the purpose of delay and extension of the moratorium. But, in a case where complexity reigns and an administrator cannot, in the time prescribed, conduct a proper investigation to form opinions to put to creditors at a watershed meeting, it is appropriate (and indeed necessary) to extend the convening period so that the administrator can perform his or her functions properly and creditors, at the watershed meeting, can make informed decisions.[8] Referring to situations where a case had been made out for an extension of time, at [22] he said:An application to extend time requires a balance to be struck between the expectation that an administration will be relatively speedy and the need to ensure that undue haste does not prejudice sensible and constructive actions directed towards the object of the regime, namely maximising returns of the creditors.[9] In Re Riviera Group Pty Ltd (2009) 72 ACSR 352, Austin J at [13] said that reasons given for an extension can be grouped into a number of broad categories:[a] Size and scope of the business;[b] Substantial offshore activities;[c] Large number of employees with complex entitlements;[d] Complex corporate group structure and inter-company loans;[e] Complex transactions entered into by the company (for example, securities lending or derivatives transactions);[f] Lack of access to corporate financial records;[g] The time needed to execute an orderly process of disposal of assets;[h] The time needed for a thorough assessment of a proposal for a deed of company arrangement;[i] Where the extension will allow sale of the business as a going concern;[j] More generally, additional time is likely to enhance the return for unsecured creditors.[10] This summarised examples of cases where Australian courts have accepted that there were good grounds for extension. Obviously, it is not intended to be exhaustive and should not be read as excluding other grounds from being advanced.[11] In this case, the applicants rely on the following factors as justifying an extension: size and complexity, investigations, and going concern sale.[12] On size and complexity, this is the largest administration to date under Part 15A of the Companies Act. The businesses operated by the companies in administration include 87 stores throughout New Zealand. The companies operateNew Zealand's largest book retailers. They employ approximately 1200 staff. Thebusinesses of REDgroup are spread across Australia, New Zealand and Singapore.Head office functions are split between Australia and New Zealand.[13] Staff are employed on a variety of different employment contracts, includingpermanent full-time, permanent fixed and casual, and there are associatedcomplexities as to entitlements, rostering and annual and sick leave.[14] The companies have about 96 sites throughout New Zealand comprisingWhitcoulls, Borders and Bennetts stores, as well as temporary stores and office andstorage sites. These are leased from three commercial landlord and 69 individuallandlords. The administrators need to resolve issues on the leases.[15] There are supplier issues that need to be addressed. These include, inparticular, retention of title claims. The administrators are keen to maintaincontinuity of supply of stock and a supply of essential services.[16] The business of some of the companies is seasonal, especially Calendar ClubNew Zealand Ltd. Seasonality affects forward ordering requirements.[17] A matter of added local difficulty arises out of the earthquake in Christchurchon 22 February 2011. Seven of the 13 Whitcoulls stores in Christchurch remainclosed after the earthquake. The administrators are identifying capital expenditurerequirements to re-open these stores that remain closed. They are looking at ways ofretaining staff from these stores by reconsidering relocating staff, if possible, to otherstores in Christchurch or elsewhere in New Zealand. They also need to pursueinsurance claims.[18] On investigations, the scale of the companies' operations and the complexityof the issues mean that the administrators could not reasonably get to grips with all problems within the 20 working days allowed under s 239AT(2) so as to reasonably meet their obligations under s 239AU, especially to give a fair report to creditors asto the companies' business, property, affairs and financial circumstances and othermatters material to creditors' decisions to be considered at the meeting, and also togive their opinions on the matters to be decided by creditors at a watershed meeting.[19] On sale as a going concern, the applicants' preliminary view is that a sale ofthe businesses of the companies has the prospect of being the best outcome for the majority of creditors. They say that a sale represents a greater prospect of thecontinuance of employment contracts, continuity of leases, grant of new leases andcontinuity of business relationships with suppliers and other contractors than wouldresult from an immediate winding-up of the company, either through receivership orthrough liquidation. They have put the businesses of the companies on the market.The sale process is at an early stage. They reasonably anticipate that as mattersprogress it will be necessary for purchasers to have time to complete due diligence.It will be necessary to maintain a degree of certainty as to the continuity of thecompanies' commercial relationships and it will be necessary to maintain a level ofcertainty for security of tenure over the companies' leased premises. While theapplicants do not say so, I would also accept that it is necessary to maintain a level of certainty as to continuity of employment relationships.[20] The applicants are planning on the basis that a sale might take 14 weeks, that is, to 3 May 2011. The businesses will be advertised, information will be distributed, indicative bids will be received, bidders will be short listed, a draft sale agreement would be distributed, negotiations would be completed, and a sales agreement would be signed. They are optimistic about finding buyers and signing an agreement by early May but recognise that a number of post-sale conditions will need attention tocomplete the transaction. These include lessors' consents to assignment, novation orrenewal of leases and possibly regulatory consents such as under the Overseas Investment Act. Given the months required to complete a sale even on a best casescenario, they are conscious that they will need to continue the administration andthe companies' trading operations for a number of months to allow any sale to benegotiated on optimal terms.[21] On these considerations, there is a strong case for an extension of time under s 239AT(3).[22] I accept the applicants' submission that creditor interests are not undulyaffected by an extension of time. PEP Advisory IV Pty Ltd, a secured creditor in the sum of $A118 million, has indicated its support for the extension to the conveningperiod. The first creditors' meeting for each company was held concurrently on1 March 2011. Those attending were told that the applicants intended to apply to extend the convening period, although the minutes do not show that the creditors were told of the length of the extension. The applicants say that creditors made no adverse comment.[23] A creditors' committee has been formed for two of the companies,Whitcoulls Group Ltd and Borders New Zealand Ltd. The applicants say they gavethese committees notice of their intention to apply for an extension. No adversecomment has been received.[24] The applicants also refer to their personal liability to pay for general debts under s 239ADH and their personal liability to pay for rent under s 239ADI as showing that suppliers of goods, services and premises are protected in the interim.[25] There is clearly a good case for extension under s 239AT(3). The considerations favouring an extension far outweigh any considerations that might require the administrators to comply strictly with the limited timeframe under s 239AT(2). An extension offers better chances of achieving the objects of administration under s 239A:239A Objects of this PartThe objects of this Part are to provide for the business, property, and affairs of an insolvent company, or a company that may in the future become insolvent, 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 shareholders than would result from an immediate liquidation of the company.[26] The next question is what period should be allowed for the extension. The applicants seek six months. This is at the top end of the range, not only inNew Zealand, but also for Australia, albeit that in some cases Australian courts havegiven further extensions beyond six months. To date, there have been few cases inNew Zealand where an extension of this length has been allowed.[27] In Australia, the administrators obtained an order under s 439A(6) of the Corporations Act 2001 extending the time for convening a watershed meeting to 18 September 2011 (re REDgroup Retail Pty Ltd (administrators appointed) Federal Court, New South Wales, Stone J, 14 March 2011 No. (P) NSD279/2011). I havenot been provided with a copy of the evidence or submissions presented to theAustralian court.[28] I accept the administrators' submission that efficiencies can be obtained if theNew Zealand administration can be co-ordinated with the Australian administration,including having common periods for convening watershed meetings.[29] Independently of the Australian case, I also accept that in the circumstances of this case, an extension of six months is appropriate. That is largely because of thescale and complexity of the administration and the time required to complete thesales process. I accept that it would be commercially unrealistic to have a shorterperiod. I do not accept that creditors' interests would be enhanced by a shorterperiod. Given the time expected to complete the sales process, I doubt that creditorswill be in a position to give informed consideration as to the matters required at a watershed meeting until that sales process has been completed.[30] While the time is extended for six months, there will also be a condition under s 239ADO allowing the applicants to call the watershed meeting within the convening period if circumstances allow.[31] Following Heath J in the Nylex case, I also direct that notice is to be given by advertisements in the following newspapers:[a] The New Zealand Herald;[b] The Dominion Post;[c] The Christchurch Press; and[d] The Otago Daily Times.[32] With the convening period extended, I also accept that it is appropriate to give an extension of time under s 239Y(3) for the same period. Such an extension is more likely to promote continuity of employment relationships, which is likely to be in the best interests of creditors and employees as a whole. It will allow theapplicants to continue their "business as usual" approach. The risks of not extendingtime under s 239Y are that administrators may feel constrained to terminate employment, reducing the chances of a successful administration.[33] In summary, I make the following orders:[a] For each of the companies, WGL Retail Holdings Ltd, Whitcoulls Group Ltd, Calendar Club New Zealand Ltd, Borders New ZealandLtd and REDgroup Online Ltd, the period of 20 working days unders 239AT(2) during which the applicants must convene the watershedmeeting (convening period), is extended up to and including 17September 2011;[b] Under s 239ADO of the Companies Act, Part 15A of the Act is to have effect in relation to the companies as if it were provided that the meeting of creditors required by s 239AV may be held at any timeduring the period up to or within five business days after the end of the convening period as extended by the above order, notwithstanding the provisions of s 239AV;[c] Under s 239Y(4), the period in s 239Y(3), which was extended to 18 March 2011 on 1 March 2011, is further extended up to and including 17 September 2011. The extension of the period under s 239Y is on the same terms and conditions as in my minute of 1 March 2011;[d] Leave is granted to any person who can demonstrate a sufficient interest to apply to modify or discharge these orders on appropriate notice being given to the applicants and the Court;[e] The applicants' solicitor/client costs of this application are an expense incurred by the applicants in the administration of the companies;[f] Notice of these orders is to be made available on the applicants'website www.ferrierhodgson.com.au on or by 25 March 2011 and is also to be advertised once in the following newspapers:[i] The New Zealand Herald;[ii] The Dominion Post;[iii] The Christchurch Press; and[iv] The Otago Daily Times.__________________________R M BellAssociate Judge