Mentha, in the matter of Spyglass Management Group Pty Ltd (Administrators Appointed) [2004] FCA 1469

FEDERAL COURT OF AUSTRALIA

Mentha, in the matter of Spyglass Management Group Pty Ltd (Administrators Appointed) [2004] FCA 1469 CORPORATIONS – external administration – loan to administrator – whether rendering of services for which administrator can claim indemnity – modification of Part 5.3A so that loan is a service Corporations Act 2001 (Cth) ss 443A, 443D, 443E, 447A, 556

Re Ansett Australia Ltd (No.1) (2002) 115 FCR 376 applied In the matter of Spyglass Management Group Pty Ltd (Administrators Appointed) MARK FRANCIS XAVIER MENTHA AND CRAIG PETER SHEPARD in their capacity as Joint and Several Administrators of Spyglass Management Group Pty Ltd (Administrators Appointed) V 1352 of 2004 FINKELSTEIN J 9 NOVEMBER 2004 MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V 1352 of 2004

In the matter of Spyglass Management Group Pty Ltd (Administrators Appointed)

MARK FRANCIS XAVIER MENTHA AND CRAIG PETER SHEPARD in their capacity as Joint and Several Administrators of Spyglass Management Group Pty Ltd (Administrators Appointed)

Plaintiffs

JUDGE: FINKELSTEIN J

DATE: 9 NOVEMBER 2004

PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 The administrators of Spyglass Management Group Pty Ltd (Administrators appointed) are confronted with a difficulty. The company, which operates the AFL Hall of Fame and Sensation, is hopelessly insolvent. It has many creditors, whose debts in aggregate exceed $26 million. The company's landlord, which claims to be owed approximately $21 million, most being rent due for the unexpired term of a fifteen year lease which inevitably will be discounted to a much smaller sum, and the AFL, the company's major sponsor which is owed around $408,000, account for a significant proportion of the company's total indebtedness. Their relevance will soon become apparent. 2 The administrators believe that if the company's business is not sold the unsecured creditors will receive nothing. The total realisable value of the company's assets, apart from its business, is probably less than $128,000. The administrators wish to sell the company's business as a going concern. They believe that in due course they may find a suitable buyer who will pay a reasonable price for the business. In that event there is a prospect of some return for unsecured creditors. 3 Without funding, the administrators are not in a position to operate the company's business so that it can be sold as a going concern. The business is unprofitable and the administrators lack the money to cover any shortfall. The administrators approached the landlord and the AFL to ascertain whether they would provide funds to enable the company to continue trading. Those creditors have each agreed to lend $162,500 subject to certain conditions. One condition is that, pursuant to s 447A of the Corporations Act 2001 (Cth), Part 5.3A of the Act is to operate in relation to the company as if s 443A(1)(a) provides (1) that advances made to the administrators are debts incurred by them in the performance and exercise of their functions and powers as administrators of the company for services rendered; and (b) if the indemnity that the administrators have under s 443D is insufficient to meet such debts or any other debts for which the administrators are personally liable to the lenders, the administrators will not be liable to repay such debt or liability to the extent of that insufficiency. 4 The reason why the lenders insist on the first order is as follows. Section 443D(a) provides that the administrator of a company is entitled to be indemnified out of the company's property for debts for which he is liable under Div 9, Sub Div A (which is where s 443A is found) or the remittance provisions as defined in s 443BA(3). The administrator's indemnity is given priority over the company's unsecured debts, as well as debts secured by a floating charge on the company's property, subject to certain immaterial exceptions: s 443E. The debts for which an administrator is liable under Sub Div 9A include those he incurs in the performance or exercise of his functions and powers for (a) services rendered; or (b) goods bought; or (c) property hired, leased, used or occupied: s 443A(1). A loan is not included within "goods bought or property hired, leased, used or occupied". In Re Ansett Australia Ltd (No.1) (2002) 115 FCR 376, 388 Goldberg J, after analysing the authorities, held that "the lending of money would not be considered to be the rendering of services". On this basis, if the administrators take the loan they will not be entitled to an indemnity under s 443D in respect of the loan. The first order, if made, will ensure that the administrators have an indemnity for the repayment of the loan. This is because the order will provide in substance that the loan is a "service" rendered to the administrators. 5 It is, in my view, proper for the first order sought to be made. The administrators are satisfied that, in the long run, if they take the loan and run the business, there is a reasonable prospect that they will be able to provide some return for unsecured creditors. Of course there is a risk that the business will not be sold and that by continuing to operate the business, the company's debts will increase. However, the administrators are willing to run that risk in the belief that to do so is in the creditors' interests. The creditors are of the same view. At their first meeting, which was held last Friday, creditors whose debts equal about 98 per cent of the company's total known debts gave their approval to the proposal (most of them by a representative other than the chairman) once it was fully explained to them. 6 The second order sought is for the administrators' benefit. It will have the effect of converting the loan into a "non-recourse" loan. As the lenders have agreed to a loan of this kind, there is no reason why the order should not be made. Practically speaking the creditors have no interest in the second order because they cannot be disadvantaged by it. On the other hand, they stand to benefit if the loan goes ahead. That is a sufficient reason to make the second order. 7 The administrators also seek a direction that they are justified in giving an undertaking to the lenders to the following effect: "The Administrators hereby undertake to the Lenders that, unless the Lenders agree to the contrary, if the Administrators recommend that the Company enter into a deed of company arrangement, the instrument setting out the terms of the Deed prepared by them in accordance with section 444A(3) of the Act will provide that any proceeds of realising the property of the Company that is available to pay creditors' claims, will be distributed first in the order prescribed by section 556(1)(a), (b) and (c) of the Act." 8 There is a particular reason why the lenders seek this undertaking. I have already mentioned that the right of indemnity given to an administrator by s 443D(a) is given priority over other debts as a result of s 443E(1). In due course it is likely that the company will execute a deed of company arrangement. It is anticipated that a resolution to that effect will be passed by the creditors at their second meeting. The deed of company arrangement will provide for the distribution of the company's assets between its secured and unsecured creditors. Usually, under such a deed the creditors are given the same priority as they would be given if the company were wound up. Relevantly, those priorities are established by s 556. It is, however, possible for the order of priorities to be altered. The purpose for the undertaking is if there is a deed of company arrangement that binds the creditors and the company, to preserve the priority which the lenders indirectly have through the administrator's indemnity. It is reasonable for the lenders to seek such an undertaking. It is also reasonable for the administrators to give the undertaking. At any rate, the creditors are content that the undertaking be given. Accordingly, a direction to that effect will be made. 9 That leaves only the question of costs. The administrators ask that the costs of the application be costs in the administration. It is probably unnecessary for such an order to be made; the administrators' costs are likely to be costs in the administration in any event. However, so that there can be no doubt, the order which the administrators seek will be made. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.