FEDERAL COURT OF AUSTRALIA ABC Learning Centres Limited, in the matter of; application by Walker (No 2) [2008] FCA 1944 PETER WALKER & GREGORY MOLONEY (IN THEIR CAPACITY AS VOLUNTARY ADMINISTRATORS OF ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) & ORS, IN THE MATTER OF ABC LEARNING CENTRES LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) and ORS NSD 1767 of 2008 EMMETT J 12 NOVEMBER 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1767 of 2008 IN THE MATTER OF ABC LEARNING CENTRES LIMITED & ORS, PETER WALKER & GREGORY MOLONEY (IN THEIR CAPACITY AS VOLUNTARY ADMINISTRATORS OF ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) & THE COMPANIES LISTED IN SCHEDULE 1 First Plaintiffs AND ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) & THE COMPANIES LISTED IN SCHEDULE 1 Second Plaintiffs JUDGE: EMMETT J DATE OF ORDER: 12 NOVEMBER 2008 WHERE MADE: SYDNEY THE COURT: 1. Directs that the First Plaintiffs would be justified in relying on the information contained in the affidavit of Mr Christopher John Honey sworn 12 November 2008 and the exhibits thereto in deciding whether on not to consent to all future draw-downs of funding pursuant to clause 3.2(a)(ii)(A) of the Cash Advance Facility Agreement made on 7 November 2008 between the First Plaintiffs, the Second Plaintiffs, Westpac Banking Corporation, Commonwealth Bank of Australia and CBA Corporate Services (NSW) Pty Limited. 2. Orders that the costs and expenses of this proceeding be costs and expenses of the administration of the Second Plaintiffs. 3. Orders that there be filed by no later than 4.00 pm on 14 November 2008: (a) an affidavit confirming the matters justifying an order for confidentiality in respect of the exhibits to the affidavit of Mr Christopher John Honey sworn 12 November 2008, and (b) a redacted version of Exhibit CJH-1. 4. Orders that access to Exhibits CJH-1 and CJH-2 be limited to the parties and their legal representatives. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. Schedule 1 All in Administration and with Receivers and Managers Appointed Company Name ACN A.B.C. Learning Centres Limited 079 736 664 Childcare Centres Australia Limited 100 250 646 Hutchinson's Childcare Services Limited 100 493 874 Kids Campus Limited 099 815 472 Peppercorn Management Group Limited 087 155 860 A.B.C. Canadian Holdings Pty Limited 126 839 941 A.B.C. Corporate Care Pty Limited 098 738 928 A.B.C. Developmental Learning Centres Pty Limited 010 788 502 A.B.C. Early Childhood Training College Pty Limited 069 159 566 A.B.C. Education Services Pty Limited 107 310 743 A.B.C. Employment Services Pty Limited 130 442 394 A.B.C. European Holdings No.1 Pty Limited 122 710 123 A.B.C. European Holdings No.2 Pty Limited 122 710 132 A.B.C. European Holdings No.3 Pty Limited 128 132 829 A.B.C. Land Holdings Pty Limited 108 964 227 A.B.C. Learning Centres Finance Pty Limited 125 820 395 A.B.C. New Ideas Pty Limited 112 237 377 A.B.C. Queensland Pty Limited 129 029 769 A.B.C. USA Holdings Pty Limited 121 360 147 A.B.C. USA Property Holdings No.1 Pty Limited 126 641 665 A.B.C. USA Property Holdings No.2 Pty Limited 126 641 674 Childcare Development Solutions Pty Limited ATF the Childcare Development Solutions Unity Trust 107 241 181 DPPA Pty Limited 114 743 092 Flel Pty Limited 096 172 075 FutureOne Pty Limited 009 221 470 HCCS Operations Pty Limited 097 846 707 Kids Campus (W.A.) Pty Limited 112 150 099 Kids Campus Australia Pty Limited 104 407 187 Kids Campus Holdings Pty Limited 107 379 751 Klendo Pty Limited 098 366 968 Marshen Pty Limited 101 400 104 Peppercorn Holdings No.1 Pty Limited 095 599 250 Peppercorn Holdings No.2 Pty Limited 099 074 781 Peppercorn Holdings No.3 Pty Limited 100 679 374 Peppercorn Holdings No.4 Pty Limited 101 236 766 Peppercorn Holdings No.5 Pty Limited 103 201 136 Peppercorn Holdings No.6 Pty Limited 103 210 751 Premier Early Learning Centres Pty Limited 100 831 856 Select Childcare Management Pty Limited 093 925 056 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1767 of 2008 IN THE MATTER OF ABC LEARNING CENTRES LIMITED & ORS, PETER WALKER & GREGORY MOLONEY (IN THEIR CAPACITY AS VOLUNTARY ADMINISTRATORS OF ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) & THE COMPANIES LISTED IN SCHEDULE 1 First Plaintiffs AND ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) & THE COMPANIES LISTED IN SCHEDULE 1 Second Plaintiffs JUDGE: EMMETT J DATE: 12 NOVEMBER 2008 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me an application pursuant to s 447D of the Corporations Act 2001 (Cth) (the Act) for directions. Section 447D(1) provides that the administrator of a company under administration may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. The application is made by Peter Walker and Gregory Moloney (the Administrators) in their capacity as voluntary administrators of ABC Leaning Centres Limited (ABC) and 38 other companies associated with ABC. I shall refer to all of the companies as the ABC Group. All members of the ABC Group have been joined as plaintiffs in the application. 2 On Thursday, 6 November 2008, the Administrators were appointed as administrators of each of the companies in the ABC Group. On the same day, Messrs Murray Smith, John Cronin and Christopher Honey (the Receivers) were appointed receivers and managers of all of the companies in the ABC Group. The Receivers were appointed pursuant to the provisions of the charges given by the members of the ABC Group as security for borrowing facilities made available to them by a syndicate of banks. In order for the ABC Group to continue operating, it is necessary for further funding to be provided. 3 The members of the ABC Group operate childcare centres in Australia and abroad, including the United Kingdom, the United States and New Zealand. ABC is the ultimate parent company and is listed on the Australian Securities Exchange. The ABC Group operate approximately 1045 centres in Australia and process approximately 100,000 childcare transactions each week. The group has approximately 15,000 employees in Australia. Further, the group contracts the equivalent of approximately 1600 full time casual agency staff in any given week. As most casual agency contractors do not work full time, that equates to approximately 3000 to 4000 casual contract staff who may in any one week work at the childcare centres operated by the ABC Group. The childcare centres and the head office of the ABC Group are occupied under leases from third parties. The majority of those leases are held in the names of two of the companies in the ABC Group. 4 As a result of the appointment of the Administrators, the ABC Group's finance facilities, provided by a syndicate of banks, were immediately terminated. The syndicate of banks is represented by CBA Corporate Services (NSW) Pty Ltd (the Security Trustee), which appointed the Receivers. At the date of the appointment of the Receivers, the members of the ABC Group were indebted to the syndicate of banks in an amount in excess of $915 million. The result of the appointment of the administrators was that there was no external funding available either to the Administrators or the Receivers to conduct the external administration of the companies in the ABC Group. 5 However, on the day following the appointment, a member of the syndicate of banks, Westpac Banking Corporation (Westpac), entered into a cash advance facility agreement with the companies in the ABC Group, including two New Zealand companies. An initial drawdown under the cash advance facility agreement was expected to cover the funding requirements of the ABC Group up to 13 November 2008. The cash advance facility was entered into on behalf of the members of the ABC Group by the Receivers with the consent of the Administrators. It was essential for Westpac, in entering into the agreement, to ensure that it would receive a degree of priority in respect of any advances made pursuant to the agreement. 6 Section 443A(1) of the Act provides that the administrator of a company under administration is liable for debts that he or she incurs in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator and, inter alia, the repayment of money borrowed, interest in respect of money borrowed and borrowing costs. Under s 556(1)(a), in the winding up of a company, the expenses properly incurred by an administrator of the company, even if the administration ended before the winding up began, in preserving, realising or getting-in any of the property of the company or in carrying on the company's business, must be paid in priority to all other unsecured debts and claims. 7 Since the charges pursuant to which the Receivers were appointed have been entered into within the last six months, it is possible that there may be some challenge to the validity of the charges. However, the provisions to which I have just referred would be expected to ensure effective priority to Westpac in respect of any advances to be made under the agreement. 8 Clause 3.2(a)(ii) of the agreement provides that subsequent drawdowns may be made only after whichever is the earlier of the following: (a) the Administrators' confirming to the other parties in writing that the Administrators consent to all further drawdowns' being made, or (b) the Administrators' obtaining directions from the Court confirming that the Administrators are justified in entering into the agreement. The Administrators have quite properly taken the view that, since the agreement has now been entered into, as a matter of urgency, it is inappropriate to ask the Court for directions confirming that they were justified in entering into the agreement. It might have been a different matter, had an application been possible before the agreement was entered into. 9 The purpose of the present application is to give the Administrators some comfort in relation to the first of the events to which I have just referred, namely, the Administrators' confirming that they consent to all further drawdowns being made. The purpose of the funding is to allow the Receivers to continue to operate the childcare centres, at least up until the end of December 2008. Without the funding contemplated by the agreement, it may well be necessary to close all or some of the childcare centres before then. 10 The Receivers have prepared a confidential cash flow spreadsheet in relation to the cash that it is estimated will be required to fund the continued operation of the ABC Group until the end of December 2008. In calculating the amount of the funds estimated to be required, the Receivers have added to cumulative net movement shown in that cash flow spreadsheet additional funding required for the last few days of December 2008 and the Receivers' fees and expenses for the period from their appointment to the end of December 2008. The cash flow indicates that the funding under the agreement, together with continued receipts from the operation of the childcare centres, will be applied towards the continued trading of the companies in the ABC Group in paying the following: (a) employee wages and agency costs, (b) rent in respect of childcare premises and the ABC Group's head office, (c) critical suppliers, (d) ongoing information technology and related costs for the centres, and (e) payroll tax, PAYG, WorkCover and superannuation outgoings. 11 Mr Christopher Honey, one of the Receivers, has sworn an affidavit to which he has exhibited the agreement and the cash flow spreadsheet. Mr Honey says that he considers that access to funds under the agreement is critical to the following matters: (a) maximising the prospects of continuous childcare, up to Christmas and beyond, for as many of the children for whom the ABC Group provide care as possible and thereby minimising the disruption to the children and their families, as well as maintaining the value of the businesses as a going concern for the benefit of creditors, (b) allowing the Receivers to investigate properly the true financial position of the companies in the ABC Group, (c) preserving, for the benefit of creditors, the value of the assets of the companies in the ABC Group on the basis of a going concern, so as to maximise the prospects of a sale of the businesses or parts thereof, and (d) maximising the prospects of the continuous employment for as many employees of the ABC Group as possible. 12 The Administrators find themselves in an unusual situation. Because of the early stage of the administration, the Administrators are unable to provide a complete analysis of the activities of each member of the ABC Group. Since the appointment of the Administrators, the Receivers have been in effective day-to-day control of the business operations of the ABC Group. The Receivers are in possession of the books and records of the members of the ABC Group and they have undertaken the necessary reviews to form opinions as to the matters referred to in Mr Honey's affidavit to which I have referred. The Administrators have not been in a position to undertake such a review themselves. 13 As I have said, because of the appointment of the Receivers, there are no funds currently available to the Administrators to fund the administration, although the Administrators expect to receive limited funding from the Receivers to enable them to undertake any necessary review and reports required by them as administrators. The Administrators were satisfied that the initial drawdown under the cash advance facility agreement was immediately necessary to preserve the businesses of the companies in the ABC Group and to allow for payment of wages that became due in the week ending 7 November 2008. The Administrators consider, however, that further funds beyond the facility limit of the agreement will be required to fund continued operations after 26 December 2008. 14 At this stage, the Administrators do not know whether such funding will be available and, even if it were available, whether borrowing further funds would be in the interests of the creditors of the companies in the ABC Group. The Administrators have expressed the view that the obligations to repay the proposed new advances under the agreement would be unlikely to prejudice other unsecured creditors, since the advances would, in the normal course of events, be repaid first, whether advanced directly to a receiver or to an administrator. The Administrators accept that the view expressed by Mr Honey, that borrowing money under the agreement is in the best interests of creditors and other people having an interest in the affairs of the ABC Group, is a reasonable one. 15 For several weeks prior to the appointment of the Administrators and the Receivers, the Receivers were engaged by the members of the syndicate of banks to undertake an investigation and review of the members of the ABC Group. For that reason, the Receivers have been in an even better position to form an opinion about the business affairs of the members of the ABC Group. In those circumstances, the Administrators are of the view that it would be reasonable to rely upon the information provided to them by the Receivers, particularly the information contained in Mr Honey's affidavit and the exhibits to that affidavit, consisting of the cash advance facility agreement and the cash flow spreadsheet. 16 The Administrators are not in day-to-day control of the affairs and operations of the members of the ABC Group. They will not be in a position to determine day-by-day what is necessary by way of drawdown under the agreement or the application of that funding. Having regard to the position of the Receivers, that will be their responsibility. In all of the circumstance, it is well nigh impossible for the Administrators to form a final view of their own based on their own investigations and inquiries. Nevertheless, since they will be liable for the borrowings in question, it is not unreasonable that their consent should be required for any further drawdowns. In essence, the application before me is for a direction that the Administrators would be justified in relying on the information contained in Mr Honey's affidavit in deciding whether or not to give their consent pursuant to clause 3.2 of the agreement to all further drawdowns. 17 The relief claimed in the originating process is in slightly different terms, insofar as it seeks a direction that the Administrators would be justified in consenting pursuant to clause 3.2 to all further drawdowns. Before the Court would give a direction under s 447D, there must be something more than the making of a business or commercial decision. It may be a legal issue of substance or procedure or it may be an issue of power, propriety or reasonableness. It is insufficient that an administrator has some apprehension or unease about the business decision and wants reassurance. 18 It would not be appropriate for the Court to give a direction that the Administrators would be justified in consenting to drawdowns under the agreement. That is a business decision that they themselves must make in their capacity as administrators. On the other hand, as I have said, their position is an unusual one, in that they are not in the position in which administrators would normally find themselves, of being able to investigate and form a view of their own as to the financial position and other state of affairs of their company. The fact that the Receivers were appointed and the fact that the Receivers, by reason of their prior involvement, have had a much greater opportunity and facility to ascertain the state of the ABC Group, means that it would not be unreasonable for the Administrator to rely upon the information provided by the Receivers. The information contained in Mr Honey's affidavit is sworn. I have directed that certain of the information contained in the exhibits be kept confidential in the interests of the ABC Group and its creditors generally. I am satisfied, however, that it is appropriate for the Court to give a direction, pursuant to s 447D of the Act, that the Administrators are justified in relying on the information contained in Mr Honey's affidavit in deciding whether or not to consent pursuant to s 3.2 of the agreement to all further drawdowns of funds under the agreement. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 16 December 2008 Counsel for the Plaintiffs: Mr M Oakes SC Solicitor for the Plaintiffs: Kemp Strang Date of Hearing: 12 November 2008 Date of Judgment: 12 November 2008