In the matter of Daisytek Australia Pty Ltd (Administrators Appointed) [2003] FCA 768

FEDERAL COURT OF AUSTRALIA

In the matter of Daisytek Australia Pty Ltd (Administrators Appointed) [2003] FCA 768 CORPORATIONS – extension of time to register charge pursuant to s 266(4) – where charge void against administrators appointed pursuant to Pt 5.3A – where liquidation or deed of company arrangement is inevitable – whether discretion to extend time should be exercised Corporations Act 2001 (Cth) Pt 2K.2 subss 266(1), 266(4), Pt 5.3A Commercial Banking Co of Sydney Ltd v George Hudson Pty Ltd (in liq) (1973) 131 CLR 605 cited In re Ashpurton Estates [1983] 1 Ch 110 cited In re Barrow Borough Transport Ltd [1990] 1 Ch 227 referred to National Australia Bank Ltd v Davis & Waddell (Vic) Pty Ltd 44 ACSR 296 cited Re Application of Guardian Securities Ltd [1984] 1 NSWLR 95 cited Vector Capital Ltd v SNS Software Network Systems Pty Ltd (1988) 12 NSWLR 1 cited Australian Corporation Law Principles and Practice, Butterworths, 5.3A.0020 Gough, Company Charges, 2nd ed, Butterworths, Sydney, 1996 IN THE MATTER OF DAISYTEK AUSTRALIA PTY LIMITED (ACN 075 675 795) (ADMINISTRATORS APPOINTED) N 3026 OF 2003 GYLES J SYDNEY 24 JULY 2003

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY N 3026 OF 2003

IN THE MATTER OF DAISYTEK AUSTRALIA PTY LIMITED (ACN 075 675 795) (ADMINISTRATORS APPOINTED)

BETWEEN: GE CAPITAL FINANCE PTY LIMITED (ACN 075 554 175)

PLAINTIFF

AND: MARTIN BROWN and GREGORY HALL in their capacities as administrators of DAISYTEK AUSTRALIA PTY LIMITED (ACN 075 675 795) (ADMINISTRATORS APPOINTED)

FIRST DEFENDANT

HEWLETT PACKARD AUSTRALIA PTY LIMITED (ACN 004 394 763)

SECOND DEFENDANT

JUDGE: GYLES J

DATE: 24 JULY 2003

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 On 13 June 2003 I made orders on the application of GE Capital Finance Pty Limited ("GE") extending the period for lodging notice of a registrable charge in relation to Daisytek Australia Pty Limited (Administrators Appointed) ("Daisytek") on certain terms and conditions pursuant to s 266(4) of the Corporations Act 2001 (Cth) ("the Act"). So far as the researches of counsel go, this is the first occasion upon which the application of that section has arisen in relation to the appointment of an administrator pursuant to Pt 5.3A of the Act. I gave short reasons, and indicated that I would give somewhat fuller reasons in due course. These are those reasons. 2 A short chronology of events is as follows: 29 October 2002 Blocked account agreement between GE, Daisytek and Australian & New Zealand Banking Group Limited. 21 November 2002 Subordination deed between GE, Daisytek, Daisytek Australia (Queensland) Pty Limited ("Daisytek Queensland"), and Daisytek Incorporated of Texas in the United States of America ("Daisytek Inc"). On or about 22Facility agreement between GE, Daisytek (as borrower) and Daisytek November 2002Queensland (as guarantor). 22 November 2002 Fixed and floating charge by each of Daisytek and Daisytek Queensland in favour of GE. 12 December 2002 Notification of Daisytek Queensland charge lodged. 6 January 2003 Effective last day for lodging notification of Daisytek charge. 4 March 2003 GE's then solicitors realise that notification not lodged. 10 March 2003 Solicitors received executed notification. 14 March 2003 Notification of Daisytek charge lodged. 20 March 2003 GE notifies Daisytek of default under facility agreement. 16 May 2003 Directors of Daisytek resolve, pursuant to s 436A of the Act, that "the Company is insolvent, or is likely to become insolvent at some future time" and appoint administrators pursuant to Pt 5.3A of the Act. 19 May 2003 Daisytek International, a US corporation associated with Daisytek Inc, confirms to directors of Daisytek that there will be no request from Daisytek International, subsidiaries or associated companies for any repayment of inter-company accounts and that it is the group's intention to capitalise all inter-company accounts effective 31 March 2003. 22 May 2003 Proceeding commenced. 23 May 2003 First meeting of creditors of Daisytek pursuant to s 436E of the Act. 16 June 2003 Date for second meeting of creditors of Daisytek pursuant to s 439A of the Act – extended to 4 July 2003. 3 In order to understand how the contention in the matter arises, it is necessary to explain briefly the business and financial circumstances of Daisytek. I will not endeavour to summarise all of the relevant evidence. Indeed, of necessity, there is much estimation involved in it. I shall state conclusions which are sufficient for present purposes. 4 Daisytek carried on a substantial business of selling computer equipment supplies. In November 2002 sales turnover was in excess of $10 million. The GE facility was to provide working capital to finance the business. The balance sheet of Daisytek in November 2002 showed little in the way of tangible assets apart from stock on hand, and little in the way of capital. Apart from the GE loan (which stood at a little over $15 million), the other source of working capital was an inter-company liability of nearly $15 million. The only effective security available was trade receivables and stock on hand. The latter was complicated by reason of retention of title clauses in favour of vendors. The GE security documents and the procedures for making advances were structured with the nature of the business of Daisytek in mind, and involved monitoring of the progress of that business. 5 Sales turnover was over $12 million in December 2002, over $15 million in January 2003, over $10 million in February 2003, and over $11 million in March 2003. The business was running at a revenue loss throughout the period. 6 The GE loan balance commenced at $15,300,000. It is claimed that by the end of November 2002 it was $20,158,307, at the end of December it was $20,849,151, at the end of January 2003 it was $24,274,656, at the end of February 2003 it was $25,593,162, at the end of March 2003 it was $17,722,206, at the end of April 2003 it was $14,810,241 and at 15 May 2003 it was $15,408,941. At or about that date, the inter-company indebtedness was claimed to be $13,100,000 and trade creditors were claimed to be about $10,900,000. It was estimated that priority debts for costs and employee entitlements were $5,400,000. The administrators estimate that the GE claim had been reduced to $12,500,000 after collections from customers (if the security is good), and that the total likely to be received from realisation of assets is $13,400,000, assuming the validity of retention of title claims to stock. 7 Factors which complicate the situation are the arrangement for capitalisation of inter-company debt and the effect of the subordination deed between (inter alia) GE and Daisytek Inc as to the subrogation of GE in relation to that debt. It is submitted that the subordination deed is not affected by the failure to notify the charge. I cannot determine those issues in this proceeding and, in any event, the resolution of them will depend upon commercial as well as legal considerations. 8 Daisytek continued to partially trade after appointment of the administrators. The administrators considered that this was likely to improve the chances of selling the business on a going concern basis, and would also assist in collecting accounts receivable. On 4 June 2003 Lindgren J granted an extension for the convening of the second creditors' meeting to 4 July 2003. It was desirable that the result of this application be known well before then. In view of this, the matter was accorded expedition and I made orders without full reasons. 9 A letter was sent by the administrators to all creditors and shareholders known to them, which outlined the short facts, explained the nature of the application to the Court and advised details of this proceeding, inviting either direct appearance or the lodging of submissions with the administrators. The same information was given at the first meeting of creditors. Various parties indicated an interest in the matter in one way or another. In the end, the only party which appeared to contest the orders was Hewlett Packard Australia Pty Limited ("Hewlett Packard"), which had been the major supplier of equipment to Daisytek. It was submitted on behalf of GE that Hewlett Packard claimed retention of title in relation to the stock representing the amounts claimed to be owed to it, and also that there was no proper proof that the correct contracting Hewlett Packard entity was before the Court. I was satisfied that Hewlett Packard was an appropriate contradictor and, although not strictly representative of other creditors, could satisfactorily present the arguments which needed to be considered. The administrators, on behalf of Daisytek, were also represented. In the result, I was satisfied that there was adequate evidence and argument to enable the issues to be properly determined, and that there had been a proper opportunity for creditors to put their points of view. 10 Section 266 of the Act (so far as is relevant) is as follows: '(1) Where: (a) an order is made, or a resolution is passed, for the winding up of a company; or (b) an administrator of a company is appointed under section 436A, 436B or 436C; or (ba) a company executes a deed of company arrangement; a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company, or the deed's administrator, as the case may be, unless: (c) a notice in respect of the charge was lodged under section 263 or 264, as the case requires: (i) within the relevant period; or (ii) at least 6 months before the critical day; … (4) The Court, if it is satisfied that the failure to lodge a notice in respect of a charge, or in respect of a variation in the terms of a charge, as required by any provision of this Part: (a) was accidental or due to inadvertence or some other sufficient cause; or (b) is not of a nature to prejudice the position of creditors or shareholders; or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order.' The GE charge was void as against the administrators from 16 May 2003, the date of their appointment. 11 I was satisfied that the failure to lodge the notice in respect of the charge was both accidental and due to inadvertence within the meaning of s 266(4)(a). I do not need to set out the detailed facts which lead to that conclusion. The issue which required close consideration was whether the discretion this triggered should be exercised and, if so, on what terms and conditions (if any). 12 Chapter 5 of the Act deals with External Administration, including the following Parts: Part 5.1 Arrangements and reconstructions Part 5.2 Receivers, and other controllers, of property of corporations Part 5.3A Administration of a company's affairs with a view to executing a deed of company arrangement Part 5.4 Winding up in insolvency Part 5.4A Winding up by the Court on other grounds Part 5.4B Winding up in insolvency or by the Court. 13 Part 5.3A was introduced in July 1993, in response to the Report of Law Reform Commission of Australia on the General Insolvency Inquiry (ALRC 45), known as the Harmer Report. The intention was to introduce a procedure which integrated some of the features of voluntary winding up and of schemes of arrangement and which would take over from official management. The provisions have similarities with, although are by no means identical to, insolvency regimes in other jurisdictions, most particularly the administration order regime which has been available in England and Wales since 1986 (Australian Corporation Law Principles and Practice, Butterworths, ¶ 5.3A.0020). 14 Relevant provisions of Pt 5.3A include the following: '435A Object of Part The object of this Part is to provide for the business, property and affairs of an insolvent company 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 members than would result from an immediate winding up of the company. … 435C When administration begins and ends (1) The administration of a company: (a) begins when an administrator of the company is appointed under section 436A, 436B or 436C; and (b) ends on the happening of whichever event of a kind referred to in subsection (2) or (3) happens first after the administration begins. (2) The normal outcome of the administration of a company is that: (a) a deed of company arrangement is executed by both the company and the deed's administrator; or (b) the company's creditors resolve under paragraph 439C(b) that the administration should end; or (c) the company's creditors resolve under paragraph 439C(c) that the company be wound up. … 436A Company may appoint administrator if board thinks it is or will become insolvent (1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed. … 437A Role of administrator (1) While a company is under administration, the administrator: (a) has control of the company's business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration. (2) Nothing in subsection (1) limits the generality of anything else in it. 437B Administrator acts as company's agent When performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company's agent. … 438A Administrator to investigate affairs and consider possible courses of action As soon as practicable after the administration of a company begins, the administrator must: (a) investigate the company's business, property, affairs and financial circumstances; and (b) form an opinion about each of the following matters: (i) whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors' interests for the administration to end; (iii) whether it would be in the creditors' interests for the company to be wound up. … 439A Administrator to convene meeting and inform creditors (1) The administrator of a company under administration must convene a meeting of the company's creditors within the convening period as fixed by subsection (5) or extended under subsection (6). … (4) The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of: (a) a report by the administrator about the company's business, property, affairs and financial circumstances; and (b) a statement setting out the administrator's opinion about each of the following matters: (i) whether it would be in the creditors' interests for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors' interests for the administration to end; (iii) whether it would be in the creditors' interests for the company to be wound up; and his or her reasons for those opinions; and (c) if a deed of company arrangement is proposed—a statement setting out details of the proposed deed. … 439C What creditors may decide At a meeting convened under section 439A, the creditors may resolve: (a) that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or (b) that the administration should end; or (c) that the company be wound up. 440A Winding up company (1) A company under administration cannot be wound up voluntarily, except as provided by section 446A. (2) 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. (3) The Court is not to appoint a provisional liquidator of 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 have a provisional liquidator appointed. 440B Charge unenforceable During the administration of a company, a person cannot enforce a charge on property of the company, except: (a) with the administrator's written consent; or (b) with the leave of the Court. … 440D Stay of proceedings (1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. (2) Subsection (1) does not apply to: (a) a criminal proceeding; or (b) a prescribed proceeding.' Division 7 of Pt 5.3A deals in some detail with the rights of chargee, owner or lessor. Division 8 deals with the powers of the administrator. Division 9 deals with the administrator's liability and indemnity for debts of the administration. Division 10 deals with the execution and effect of a deed of company arrangement. Division 11 deals with the variation, termination and avoidance of a deed of company arrangement. Division 12 deals with the transition to creditors' voluntary winding up. Division 13 deals with certain miscellaneous powers of the Court. Division 14 deals with qualifications of administrators. Division 15 deals with the removal, replacement and remuneration of administrators. Division 16 deals with notices about steps to be taken under the Part. Division 17 contains miscellaneous provisions.