FEDERAL COURT OF AUSTRALIA Sims, in the matter of Destra Corporation Limited [2008] FCA 2002 ANTHONY MILTON SIMS AND ORS IN THEIR CAPACITY AS ADMINISTRATORS OF DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND ORS, IN THE MATTER OF DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND ORS NSD 1867 of 2008 EMMETT J 3 DECEMBER 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1867 of 2008 IN THE MATTER OF DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND THE COMPANIES LISTED IN SCHEDULE "A", ANTHONY MILTON SIMS AND ANDREW LESLIE SMITH AND GRANT DEDE SPARKS IN THEIR CAPACITY AS ADMINISTRATORS OF DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND THE COMPANIES LISTED IN SCHEDULE "A" First Plaintiffs DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND THE COMPANIES LISTED IN SCHEDULE "A" Second Plaintiffs JUDGE: EMMETT J DATE OF ORDER: 3 DECEMBER 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act), the period within which the First Plaintiffs must convene the second meeting of creditors of each of the Second Plaintiffs under s 439A of the Act be extended up to and including 12 February 2009. 2. Pursuant to s 447A(1) of the Act, the second meeting of creditors of each of the Second Plaintiffs required by s 439A of the Act may be held at any time during, or within five business days after the end of, the convening period, as extended by order 1 above notwithstanding the provisions of s 439A(2) of the Act. 3. Liberty be granted to the plaintiffs to apply to the Court for any further extensions of the convening period referred to in order (1) at any time prior to 12 February 2009. 4. Pursuant to s 447A(1) of the Act, Part 5.3A of the Act is to operate in relation to each of the Second Plaintiffs such that notice of the second meeting of creditors convened pursuant to s 439A (the Notice) and the documents required to be sent to creditors pursuant to s 439A(4) of the Act (the Report) will be validly given to any known creditors by: (a) sending the Notice and the Report to the personal electronic addresses of each creditor who has requested that the administrators communicate with them by electronic means; (b) sending the Report by Compact Disc Read-Only Memory (CD-Rom) together with a paper copy of the Notice and a paper letter indicating that: (i) the CD-Rom contains the Report; (ii) the Notice and the Report are available on the website maintained by the First Plaintiffs; and (iii) the First Plaintiffs will send a paper copy of the Report on request of any creditor to those creditors not referred to in order 4(a) above; and (c) placing the Notice and the Report on the website maintained by the First Plaintiffs at least 10 days before the second meeting of creditors. 5. Liberty to apply be granted to any person who can demonstrate sufficient interest to modify or discharge these orders upon appropriate notice being given to the plaintiffs. 6. The costs of this application be paid out of the assets of the Second Plaintiffs. 7. Further consideration of claims 7 and 8 of the Originating Process be reserved. 8. The Originating Process be adjourned for further hearing on 6 February 2009. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. Schedule 'A' COMPANY ACN Destra Corporation Limited ACN 006 070 480 ACN 119 608 669 Pty Limited ACN 119 608 669 Australian Football Video Pty Limited ACN 007 357 495 Becker Magna Films Pty Limited ACN 095 385 783 Brand New Media Live Pty Limited ACN 118 954 046 Brand New Media Pty Limited ACN 100 517 860 Central Station (Holdings) Pty Limited ACN 064 966 963 Central Station Pty Limited ACN 073 153 705 3D World Australia Pty Limited ACN 127 775 928 Destra Media Pty Limited ACN 094 832 694 Destra Music (Holdings) Pty Limited ACN 128 663 721 Visual Entertainment Group Pty Limited ACN 056 128 235 Destra Music Pty Limited ACN 122 385 826 Destra Vision Pty Limited ACN 128 657 278 Magna Pacific (Holdings) Pty Limited ACN 010 731 718 Magna Pacific Pty Limited ACN 010 465 666 MP3.com.au Pty Limited ACN 093 883 295 MRA Entertainment Pty Limited ACN 083 796 178 Nice Shorts Pty Limited ACN 119 343 654 Rajon Distribution Pty Limited ACN 107 483 474 Rajon Vision Pty Limited ACN 113 091 393 Rocvale Entertainment Pty Limited ACN 081 708 590 The Square Group Pty Limited ACN 113 147 916 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1867 of 2008 IN THE MATTER OF DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND THE COMPANIES LISTED IN SCHEDULE "A", ANTHONY MILTON SIMS AND ANDREW LESLIE SMITH AND GRANT DEDE SPARKS IN THEIR CAPACITY AS ADMINISTRATORS OF DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND THE COMPANIES LISTED IN SCHEDULE "A" First Plaintiffs DESTRA CORPORATION LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) AND THE COMPANIES LISTED IN SCHEDULE "A" Second Plaintiffs JUDGE: EMMETT J DATE: 3 DECEMBER 2008 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me an originating process by which the administrators of a group of companies seek orders under Part 5.3A of the Corporations Act 2001 (Cth) (the Act). The first plaintiffs, Messrs Anthony Simms, Andrew Smith and Grant Sparks (the Administrators), are the administrators of the second plaintiffs, consisting of Destra Corporation Limited and its wholly owned subsidiaries (the Group). The Administrators seek an extension of the convening period for the calling of a second meeting of the creditors of the Group pursuant to ss 439A(6) and 447A of the Act. They also seek an order permitting notice of the second meeting of creditors to be given electronically or by a combination of paper notice and covering letter with documents being provided electronically or on a compact disc. 2 On 13 November 2008, the Administrators were appointed as joint and several administrators of each member of the Group pursuant to resolutions of the respective directors of each member of the Group. There are some 23 members of the Group. 3 Destra Corporation Limited (Destra) was a publicly listed company. In recent years, it has made a number of acquisitions across a range of mainly small media related businesses with a view to building a media and entertainment group spanning video, music, magazine, online community, media sales representation and brand funded content production activities. Destra's largest shareholder is Prime Media Communications Pty Limited, which holds in excess of 43% of the issued capital. Trading in Destra's shares on the Australian Securities Exchange (ASX) was suspended on 12 November 2008. 4 The Group's businesses operate through two core divisions, being the Destra Group Entertainment Division and the Destra Group Media Division. The Entertainment Division generates revenue from the physical and online sale of music and DVD content. The Media Division creates, sells and markets a diverse range of media content to advertisers and their agencies. 5 In April 2008, the Group announced a comprehensive review of its strategy and business activities. The key findings of that review were announced on 25 August 2008. One of the key findings was that the rapid extension of the range of business activities of the Group had created a portfolio of businesses that was not well integrated and which, in the main, lacked critical mass in their chosen market segments. Another finding was that the use of debt funding in making the acquisitions had increased the level of gearing which, combined with the tighter interest rate environment, was negatively impacting on the performance and growth prospects of the Group. 6 The Group's borrowings are governed by a facility agreement provided by St George Bank Limited (St George). As at 22 April 2008, the amount owing to St George was approximately $47 million, although that has now been reduced to approximately $30 million. The facility granted by St George is secured by a series of fixed and floating charges over 18 of the companies in the Group. Thus, there are five companies which have not granted charges to St George. 7 Following the appointment of the Administrators on 13 November 2008, St George appointed Messrs David Winterbottom and Michael Brereton as receivers and managers of the 18 companies that have given charges to St George (the Receivers). The Receivers now control the businesses of most of the Group. As a consequence, the Receivers have possession of the books and records of most of the Group. While there has been a large degree of cooperation between the Receivers and the Administrators, the presence and role of the Receivers has impacted negatively upon the Administrators' capacity to conduct the necessary investigations required for the purpose of their administration. 8 The Administrators obtained the consent of the Receivers to liaise directly with the management of the Group and to seek access to the books and records of the Group. However, to date, the Administrators have received books and records from only six members of the Group. 9 The Receivers have commenced a realisation program in respect of the secured assets and have informed the Administrators that negotiations regarding the sale of Group assets are continuing. However, the Receivers are unable to provide further details at present because of the confidential nature of their dealings. 10 The Administrators have discovered that there are several problems with the accounting systems of some of the companies in the Group. For example, the majority of the companies have maintained their own separate accounting systems and reporting methods. Reconciling all of the accounts has proven difficult for the Administrators' staff. Consolidated financial reports are largely deficient for the purposes of the Administrators' investigation of the Group, particularly since some management accounts have not yet been provided. 11 In addition, the Administrators have experienced some difficulty in accessing the computer software that holds a number of accounting records, some of which can be accessed only by pass codes not held by current employees. The accounting records of some of the companies in the Group are incomplete and, as I have said, only six of the 23 companies have been able to provide copies of accounts to the Administrators. The Administrators expect that the remaining 17 companies will be able to provide completed accounts within two weeks. 12 The lack of complete accounting records presents a major problem to the Administrators in determining the true financial position of the Group. That is particularly so in relation to companies within the Group that make royalty payments and receive royalty payments. It is currently impossible to determine the amounts owing to creditors who are owed royalty payments, although the Administrators are currently working with the manager of the Group to reconcile such claims. They expect that that may take another two weeks. 13 In addition, a number of cross guarantees have been given within the Group. The guarantees are for the benefit of all creditors, present and future, of each company in the Group and are triggered by the winding up of one Group company. However, only six companies are parties to the cross guarantees. 14 Another difficulty is that it is not clear which of the companies in the Group are indebted to particular creditors. It will take some time after receipt by the Administrators of all the books and records before they will be in a position to determine with which company creditors should lodge proofs of debt and in respect of which company the Administrators should admit such proofs of debt. The existence of the cross guarantees complicates the determination of which companies are debtors to particular creditors. 15 The true asset position of the Group is further complicated by a difficulty in valuing intangible assets currently listed in various asset schedules. It appears that a significant portion of those intangible assets represent goodwill on the purchase of businesses and subsidiaries. The balance represents intellectual property rights, the values of which are presently unknown to the Administrators. While the directors of the companies in the Group are cooperating, they have not yet been able to produce reports as to affairs in respect of all of the companies. The Receivers provided the directors with an extension until 11 December 2008 and the Administrators propose to do the same. 16 A number of retention of title claims have also been made by various creditors, particularly artists who claim retention of title rights over presses of records and compact discs in respect of which the artists claim intellectual property rights. Those claims require further investigation and the taking of legal advice to determine the true position. The need to inquire into those matters has deflected the Administrators' resources away from investigating the financial affairs of the Group. 17 The parties who have an interest in the administration include the unsecured creditors whose claims amount to approximately $37.4 million. There are approximately 3,500 such unsecured creditors. Employee claims amount to approximately $1 million, and there are approximately 144 employees. In addition, Destra has approximately 5,000 shareholders. 18 Since their appointment, the Administrators have undertaken numerous tasks involving general administration and statutory obligations dealing with employees, directors, creditors and shareholders, conducting the first meetings of creditor, investigating assets and trading. They have endeavoured to cooperate with the Receivers, who are continuing to trade the businesses of the Group as going concerns. 19 The Receivers are presently unsure whether any funds will ultimately flow to the Administrators for the benefit of unsecured creditors. The Receivers have not been able to indicate to the Administrators the period of time for which they expect the receivership to run. Having regard to the complexity of the Group and the nature of its assets, the Administrators expect that the asset realisation program of the Receivers will take a period of some months to complete. The Receivers have confirmed to the Administrators that they consider that the assets of the Group and structures are complex and that the Receivers do not oppose any application that might be made for an extension of the convening period for the second creditors' meeting. 20 Under the provisions of s 439A(1) of the Act, the Administrators would be required to convene the second meeting of creditors by 11 December 2008, unless the convening period is extended by the Court. The power to extend the convening period is not exercised as a matter of course and a grant of an extension is an exception rather than the rule. It is an important objective of Part 5.3A that creditors be fully informed about the company's position as early as possible, and have an opportunity to vote on its future as soon as possible. 21 However, in considering an application for an extension, the Court's function is to strike an appropriate balance between the expectation that the administration will be a relatively speedy and summary matter, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors, and any return for shareholders. An extension will often be granted where the prospects of a better outcome for creditors through a potentially longer period of administration outweigh the general expectation of a prompt resolution of the administration. 22 A very important consideration is whether an extension is necessary to enable the administrator to prepare and provide the report and statements and to arrive at the opinions referred to in s 439A(4)(b), in order to inform creditors adequately so that the creditors will be in a position to choose whether to return the company to the directors, execute a deed of company arrangement or place the company into liquidation. Where an extension is granted, it is usually desirable that it be accompanied by an order permitting the meeting to be held before the end of the extended convening period if the administrator comes to the view that sufficient information is available for the meeting convened earlier. 23 The Administrators need significantly more time in order to be in a position to report properly to creditors and to make a recommendation as to the options available to the creditors. One of the functions of the Administrators is to determine the solvency of the companies in the Group. That will depend upon a number of matters including the rights of St George, the progress of and outcomes from the Receivers' sale program, whether or not the sales program is likely to yield a surplus for the benefit of unsecured creditors, determination of royalty rights and payments to creditors, determining the companies who are indebted to particular creditors and generally conducting investigations into the financial position, businesses, assets and liabilities of the members of the Group. The latter will require access to reports as to affairs as well as full access to books and records. 24 The Administrators consider that it is preferable to allow the Receivers to complete their sale processes as efficiently as possible. It would then be more likely that the Receivers and the Administrators will be able to discharge their respective obligations in an efficient and effective manner, while limiting the possibility of disputes between the Administrators and Receivers which are, in effect, disputes between unsecured and secured creditors. The Administrators are of the view that, because of the appointment of the Receivers, the assets of the Group are not at risk, and it is therefore more efficient for the Receivers to be permitted to pursue their role for the time being. The Administrators have been informed by St George that it has no objection to the extension of the convening period. 25 The Administrators have considered whether, in the present state of their knowledge of the affairs of the Group, they should convene the second meeting of creditors as required by the Act and recommend that the companies be placed into liquidation. The Administrators have concluded that that would not be in best interests of creditors at this stage, because the Administrators simply do not have sufficient information about the Receivers' proposed sale program and its likely results and it is possible that the Receivers may consider a deed of company arrangement to effect some sales. 26 In addition, as is clear from what I have already said, the Administrators' investigations are not sufficiently advanced to enable them to form a view as to whether liquidation is the only real alternative. In those circumstances, the Administrators ask that the convening period be extended to 12 February 2009 to enable them to investigate further the intellectual property and media rights that constitute complex assets of the Group, and investigate properly the financial affairs, business assets and liabilities of the Group. 27 The Administrators do not intend to occupy any leased premises that might be vacated by the Receivers. Accordingly, the extension would not impact adversely on the rights of landlords. 28 At the first meeting of creditors, there were no quorums for a number of companies. The creditors who attended were informed that the second meeting of creditors would be delayed for a further 60 days. The chairman invited any creditor present to indicate any objection. No creditor who was present responded to that invitation. In relation to those companies where there was no quorum, the extension will enable the Administrators to make inquiries of creditors of those companies to ascertain their attitude towards the appointment of the Administrators. The Administrators consider that an extension of the convening period is reasonable and is in the best interests of all creditors of the Group to enable them to conduct their functions and investigations and report to creditors in a meaningful way. In the light of those matters, I propose to extend the convening period as sought by the Administrators. 29 The further matter which is the subject of the originating process is the question of notification to creditors. There are more than 3,500 creditors of 23 companies. The Administrators propose to provide a report to creditors of all 23 companies in a single document. Since that document will provide information about the affairs of 23 individual companies, it will be quite substantial. The Administrators have estimated that the cost of producing 3,500 hard copies of that report and mailing it to creditors would be in excess of $20,000. 30 Some creditors have elected to receive a copy of the Administrators' report by email. However, the Administrators propose a further regime for those who have not elected to receive communication by email, involving the following: 1. A hard copy of the notice convening the second meeting will be sent to those creditors containing the Administrators' report on a CD-ROM; 2. A website will be set up by the Administrators tocontain a copy of their report; 3. The notice convening the meeting and containing the CD-ROM will be accompanied by a letter inviting creditors to contact the offices of the Administrators if they are unable to gain access to the report by reading the CD-ROM; and 4. Those creditors who are unable to gain access either to the internet or to the CD-ROM will be invited to telephone the Administrators to receive a hard copy of the report by mail. 31 The Administrators propose to send those documents at least 10 days before the second meeting such that, if any creditors are not able to gain access to the material that is provided electronically, there will be sufficient time to obtain a hard copy of the report. The Administrators estimate that the costs to be saved by that regime will be in excess of $10,000. I therefore consider that it is in the best interest of the creditors that the Administrators be permitted to distribute their report in that form. That seems to me to be common sense, and I propose to make orders accordingly. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 21 January 2009 Counsel for the Plaintiffs: Mr M Oakes SC Solicitor for the Plaintiffs: Blake Dawson Date of Hearing: 3 December 2008 Date of Judgment: 3 December 2008