Emanuel Exports Pty Ltd v United Farmers International [1998] FCA 1090

FEDERAL COURT OF AUSTRALIA CORPORATIONS LAW – voluntary administration – Administrator appointed after application filed to wind up company – Whether winding up application should be adjourned – onus on company to show that administration in interest of company's creditors – where adjournment results in marginal advantage and no disadvantage to creditors

Corporations Law 1994 - ss 459P, 440A(2). Deputy Commissioner of Taxation v Yates Security Services (1998) 15 ACLC 448

EMANUEL EXPORTS PTY LTD V UNITED FARMERS INTERNATIONAL

WG 3010 OF 1998

RD FARRELL JR

26 AUGUST 1998

PERTH

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIADISTRICT REGISTRY WG 3010 of 1998

BETWEEN: EMANUEL EXPORTS PTY LTD

(acn 008 665 978)

Applicant

AND: UNITED FARMERS INTERNATIONAL PTY LTD

(acn 064 585 397)

Respondent

COURT: RD FARRELL JR

DATE OF ORDER: 26 AUGUST 1998

WHERE MADE: PERTH

THE COURT ORDERS THAT: 1. That the application be adjourned to 21 September 1998 at 9.30am.

2. That there be liberty to either party to apply to re-list the application in the event of the failure of the respondent's creditors to accept a proposal for a deed of company arrangement.

3. That the applicant pay the respondent's costs of today.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIADISTRICT REGISTRY WG 3010 of 1998

BETWEEN: EMANUEL EXPORTS PTY LTD

(acn 008 665 978)

Applicant

AND: UNITED FARMERS INTERNATIONAL PTY LTD

(acn 064 585 397)

Respondent

COURT: RD FARRELL JR

DATE: 26 AUGUST 1998

PLACE: PERTH

REASONS FOR JUDGMENT (Edited from Transcript) On 28 May 1998 the applicant, Emanuel Exports Pty Ltd, filed an application under section 459P of the Corporations Law to wind up the respondent, United Farmers International Pty Ltd ("the Company"). The application was based upon the Company's failure to comply with a statutory demand issued by the applicant claiming a sum of $10,007.17 due from the Company to the applicant pursuant to a judgment of the Supreme Court of Western Australia for taxed costs. The respondent had failed to comply with the terms of the statutory demand within 21 days of service. Thus, by the operation of section 459C of the Corporations Law, it is presumed that the Company is insolvent. The winding up application was first listed for a directions hearing on 6 July 1998 and was adjourned to 3 August 1998. Administrators were appointed to the Company on 30 July 1998. At the hearing on 3 August 1998, the administrators sought a further adjournment of the proceedings and the application was adjourned to 2 September 1998 to enable the Company to file evidence as to why the matter should be further adjourned under section 440A (2) of the Corporations Law. Section 440A (2) provides that: 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. Pursuant to a liberty to apply, the applicant later requested that the winding up application be re-listed for hearing prior to a meeting of the Company's creditors due to take place on 27 August 1998. The matter was therefore listed today. The applicant cites and relies upon the decision of Santow J in Deputy Commissioner of Taxation v Yates Security Services[1], where he stated: "It is clear from the forgoing that in any application for an adjournment consequent upon an administrator being appointed, in the face of opposition to that application for adjournment, the onus is on the company to show, by persuasive evidence, that it is in the interests of the company's creditors that the administration continue rather than liquidation ensue." The respondent has no difficulty with that statement of principle, but contends that in the circumstances of this case, as disclosed by the evidence before the Court, the Court should be so persuaded that it is in the interests of the creditors that the winding up application be adjourned and the creditors' meeting proceed. With regard to the evidence before the Court, the Company concedes that the evidence is perhaps not as comprehensive as it would have wished. Its explanation for this deficiency is that it had not contemplated that the matter would be before the Court until after the meeting of creditors had taken place. The respondent has filed an affidavit of one of the administrators, Mr Glen Featherby, dated 14 August 1998 which states that, in his opinion, it is in the best interests of the creditors that the voluntary administration be allowed to take its course and that the creditors be allowed to consider a deed of arrangement proposal. While the nature of this proposal is not disclosed in Mr Featherby's affidavit, the proposal is before the Court, being part of the administrators' report[2] which forms an annexure to the affidavit of Mr James Bruining dated 21 August 1998, filed by the applicant. The applicant contends that the administrators' report should be regarded as hearsay because its authors had not deposed to its content, or that it should at least be accorded less weight than if it had been verified under affidavit. The respondent replies that: · the affidavit is properly before the Court having been tendered by the applicant as part of Mr Bruining's affidavit; and that · Mr Featherby, as an officer of the Court, is under an obligation not to mislead the Court in compiling such a report. I am satisfied that it is appropriate to have regard to the content of the report as part of the evidence before the Court in deciding whether the Company has met its onus. There is, therefore, some basis upon which the Court can assess Mr Featherby's opinion as to the best interests of the creditors. Having reference to the report, it is apparent that the Company has ceased trading for many months and has no tangible or realisable assets apart from book debts of $181,967 and contingent assets of $2,376,000, being an alleged damages claim against the applicant, which was the subject of the Supreme Court proceedings. Those proceedings were dismissed on procedural grounds. The administrators have estimated that the book debts would not realise anything. It is also apparent from the report that if one disregards the damages claim against the applicant, then the Company may have been insolvent since June 1995. The administrators estimate the Company's liabilities to be $122,501. It also appears from the report that the sole director of the Company, Mr Sealey, has proposed a deed of company arrangement. It is this proposal which appears to be the basis of Mr Featherby's opinion as to the interests of the creditors. Under this proposed arrangement, as detailed in page 9 of the administrators' report, it is assumed that nothing will be recovered from the debtors, and that nothing will be recovered from the contingent debtors, ie the applicant. However, the sole director, Mr Sealey, proposes to contribute a further $10,000 as part of the arrangement. The administrators thus estimate that, after administration costs of $7,500, an amount of $2,500 will be available to creditors. As an additional feature of the proposed arrangement Mr Sealey, who is a major creditor, and his father, another of the creditors, have proposed that they will not prove their debts in administration. This leaves remaining creditors to the value of $50,578. Thus the administrators predict that unsecured creditors would receive a dividend of approximately 4.9 cents in the dollar if the Company entered into the proposed deed of company arrangement. They compare this with a nil return if the Company was placed into liquidation, because no $10,000 contribution would be made by Mr Sealey in any liquidation and Mr Sealey and his father would be likely to seek to prove their debts in such a liquidation. The administrators conclude their report by noting that the principal purpose of voluntary administration and any deed of company arrangement is to facilitate the survival of the Company and to provide a return to creditors greater than would otherwise be available in liquidation. The effect of the director's proposal, in their view, is to provide a greater return to creditors than if the Company was placed in liquidation. There is thus evidence before me that, in the event of an adjournment, the creditors will have the opportunity to consider a deed of company arrangement which proposes: · an additional $10,000 being made available to be divided between them after paying the administrators; and · the director and his father foregoing any opportunity to participate in the distribution of that $10,000. There is no evidence that any equivalent offer would be available under liquidation. If the adjournment is not granted, then while the applicant will be able to pursue its rights to wind up the Company, the other creditors will not have had the opportunity to consider the proposed deed of company arrangement. The applicant has cast doubt in its submissions as to the likelihood of the deed of arrangement resulting in benefit to the creditors. For example, the source of Mr Sealey's proposed $10,000 contribution is unclear. The administrations' report indicates that he has negligible assets. It was suggested that it might be obtained by way of a loan, but presumably such a lender would require security. Another question is the relative imbalance of the costs of administration compared to the residue left to the creditors. It would only take a relatively small over-run in the costs of administration to result in negligible return for the creditors, notwithstanding the $10,000 contribution from the applicant. Further, a difficulty arises from the lack of any reference in the administrators' report to the entitlements of the creditors under the proposal if the claim by the Company against the applicant were able to be revived and were ultimately successful. It was submitted from the bar table that this deficiency in the deed of arrangement had been recognised and that it was proposed that it be amended at the creditors' meeting tomorrow. Counsel for the respondent offered to lead evidence from Mr Sealey to support that contention, but that offer was not taken up. In Deputy Commissioner of Taxation v Yates Security Services there was a concrete factor which amounted to a detriment to one of the major creditors if the adjournment was granted. The timing of that application was such that, had the adjournment been granted and a deed of arrangement entered into, then payments which the applicant would otherwise have been entitled to challenge as preference payments would not have been susceptible to such a challenge. The applicant and major creditor in that case was therefore disadvantaged and the relatively marginal benefits to the other creditors contemplated by any deed of arrangement in that case was outweighed by the disadvantage to the applicant, so that an adjournment was not in the interests of creditors. In my view, there is no such equivalent disadvantage to the applicant in this case. Thus, evidence of a marginal benefit is capable of being persuasive. The Court must have persuasive evidence that it is in the interests of the Company's creditors for the Company to continue under administration rather than be wound up. There is evidence before me that a deed of proposal will be considered at tomorrow's meeting which includes within it an offer from the director to contribute $10,000 and an undertaking from the director and his father that they will not prove their debts in any such distribution. I am satisfied that it is in the interests of the Company's creditors that they have an opportunity to at least consider that proposition. To the extent that the proposition may be susceptible to attack or may be perceived to be inadequate under closer examination, it is appropriate that the creditors of the Company have the opportunity to make that assessment rather than the Court. In making their assessment the creditors may, of course, be able to rely upon matters which were not apparent in the evidence before me. I note that if a deed of arrangement is entered into which, in the applicant's view, is inappropriate then the applicant is able under the Corporations Law to make certain applications in an effort to bring the administration to an end in any event. I will order that this application be adjourned to 21 September 1998 with ancillary orders providing for liberty to apply.