FEDERAL COURT OF AUSTRALIA Demcox Pty Ltd v Sydney Wide Fabrications Pty Ltd [2011] FCA 1331 Citation: Demcox Pty Ltd v Sydney Wide Fabrications Pty Ltd [2011] FCA 1331 Parties: DEMCOX PTY LTD ACN 116 658 103 v SYDNEY WIDE FABRICATIONS PTY LTD ACN 112 249 457 File number(s): NSD 1832 of 2011 Judge: YATES J Date of judgment: 16 November 2011 Catchwords: CORPORATIONS – application for termination of voluntary administration Legislation: Corporations Act 2001 (Cth) ss 435A, 436DA(2), 439C(c), 447A(1) Date of hearing: 16 November 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 19 Counsel for the Plaintiff: Mr A Smith Solicitor for the Plaintiff: Morabito Legal Counsel for the Defendant: Mr D Cook Solicitor for the Defendant: Polczynski Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1832 of 2011 BETWEEN: DEMCOX PTY LTD ACN 116 658 103 Plaintiff AND: SYDNEY WIDE FABRICATIONS PTY LTD ACN 112 249 457 Defendant JUDGE: YATES J DATE OF ORDER: 16 NOVEMBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The plaintiff's interlocutory application to terminate the voluntary administration of the defendant be refused with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1832 of 2011 BETWEEN: DEMCOX PTY LTD ACN 116 658 103 Plaintiff AND: SYDNEY WIDE FABRICATIONS PTY LTD ACN 112 249 457 Defendant JUDGE: YATES J DATE: 22 NOVEMBER 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 By interlocutory process dated 15 November 2011, the plaintiff sought an order pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act) that the voluntary administration of the defendant be brought to an end. 2 I heard argument on that matter on 16 November 2011 and, after a short period for reflection, refused the plaintiff's application, with costs. At the time I said that I would publish written reasons for refusing the application. These are my reasons. Background 3 The defendant was incorporated on 17 December 2004. Its sole director and shareholder is Michael Simos. 4 Sydney Wide Steel Pty Limited (SWS) was incorporated on 21 September 2007. Its sole director until 18 May 2011 was Mr Simos. For a period, Mr Simos was also the sole shareholder in SWS. On 22 June 2011 Mr Simos resigned as a director of SWS, but it seems that he maintains a "management role" in the company. Rose Anne Janec, who was appointed a director on 18 May 2011, is the now the sole director of, and shareholder in, SWS. There is no evidence before me as to the nature of the relationship between Ms Janec and Mr Simos beyond the bare statement of Mr Simos' management role in SWS. 5 The plaintiff is a creditor of the defendant. It claims that the defendant is indebted to it in the sum of $59,671.50. The defendant has many other creditors, including the Deputy Commissioner of Taxation, who claims a debt of $253,995.54. Both the plaintiff and the Deputy Commissioner of Taxation have served statutory demands on the defendant. 6 On 14 October 2011 the Deputy Commissioner of Taxation commenced proceedings in the Court seeking an order that the defendant be wound up in insolvency. On 21 October 2011 the plaintiff also commenced proceedings in the Court seeking an order that the defendant be wound up in insolvency. 7 On 26 October 2011 the defendant appointed Timothy Paul Heesh and Terry Grant van der Velde of the firm SV Partners, as joint and several administrators. Immediately prior to those appointments (the evidence does not reveal a more precise time), the defendant sold its business to SWS for a lump sum cash payment of $159,418.71. SWS also assumed some specific liabilities of the defendant. These liabilities included employee entitlements, such as superannuation benefits with an estimated value of $78,135.46, and customer warranties and lease liabilities. 8 The first meeting of the defendant's creditors following the appointment of the administrators was held on 4 November 2011. A second meeting of creditors has been convened to be held on 17 November 2011, the day following the hearing of this application. The administrators have recommended that, on 17 November 2011, the creditors resolve that the defendant be wound up. The first return date of the Deputy Commissioner of Taxation's originating process seeking the winding up of the defendant is 18 November 2011. The first return date for the plaintiff's originating process seeking the same relief is 25 November 2011. The plaintiff's submissions 9 The plaintiff points to the sale of the defendant's assets to SWS in the face of demands by at least the plaintiff and the Deputy Commissioner of Taxation for the payment of substantial debts and, it would seem, the commencement of proceedings seeking the winding up of the defendant. It submits that, in those circumstances, the objects of administration under Pt 5.3A of the Act as stated by s 435A could not, rationally, be met: there was no chance of the defendant's business continuing in existence and it is not apparent that the administration could result in a better return for the defendant's creditors than would result from an immediate winding up. It submits that the sale of the defendant's business was calculated to defeat creditors by removing whatever assets were available to meet their claims and that a person independent of the administrators should be appointed to review, amongst other things, whether the sale of the business was warranted and sound. It submits that the quality of the investigation into that matter, to date, has been hampered by time constraints for reporting, which have merely been asserted by the administrators. It submits that, if appointed as liquidators, there is a reasonable apprehension that the administrators will be more compliant with the requests of the defendant and Mr Simos than a liquidator appointed by the Court on a winding up. Consideration 10 Whilst, in the circumstances I have outlined, a question arises as to the purpose that was to be served by placing the defendant into administration at the time the administrators were appointed, I am not satisfied that it is appropriate to exercise the supervisory power under s 447A of the Act to bring the present administration to an end. 11 In my view, the evidence adduced on the application does not substantiate the plaintiff's submission that there is a reasonable apprehension that the administrators will be more compliant with the defendant's and Mr Simos' demands than a liquidator appointed by the Court. 12 There is no evidence before me that would warrant an inference that the administrators are not acting independently. In this connection I have no reason to doubt the statement of independence given by the administrators in fulfilment of their obligation to declare relevant relationships under s 436DA(2) of the Act. Moreover, the administrators have prepared a report to creditors. The content of that report is consistent with the administrators' acting independently. 13 The administrators have reported that, primarily due to time constraints, they have been unable to make a conclusive statement about whether fair value was achieved on the sale of the defendant's business and whether the sale was a potential uncommercial transaction. Nevertheless they have identified those matters as ones to be investigated on a winding up of the defendant. The administrators have reported that there have been approximately 110 payments to 20 creditors (totalling $116,000) that may be considered preferential. They have reported that there was evidence of approximately 27 possible related party transactions (totalling $46,500) in the six month period prior to their appointment. The administrators have also reported that, as a director, Mr Simos may have liability in respect of insolvent trading. The administrators noted that no deed of company arrangement had been proposed and that, based on the current asset position of the company, a dividend distribution of any kind is unlikely. As I have noted, the administrators recommended that the creditors resolve to wind up the defendant, as the only viable option available to them at the meeting to be held on 17 November 2011. 14 It is that last recommendation that lies at the heart of the plaintiff's application to terminate the administration. The overwhelming likelihood, when the meeting is held on 17 November 2011, is that the creditors will resolve under s 439C(c) of the Act that the defendant be wound up. In that event, there is a real likelihood that the administrators will be appointed as liquidators. That, however, will be a matter for the creditors to decide. The plaintiff wishes to pre-empt that outcome by having the administration brought to an end now, with the Court proceeding immediately to wind up the defendant, waiving compliance with any procedural requirements that the plaintiff cannot presently establish. An alternative would be to bring the administration to an end now, in the expectation that an order would be made for the winding up of the defendant when the proceedings commenced by the Deputy Commissioner of Taxation come before the Court on 18 November 2011. I would not countenance that alternative. In my view the situation should not arise where the defendant is placed back under the stewardship of its sole director against the possibility that a winding up order might be made on 18 November 2011. 15 I have mentioned that the defendant's creditors are numerous. The evidence before me suggests that only two of those creditors are related parties, namely Mr Simos, with a claim of $100,000 and SWS with a claim of $9,525.24. At the present time there are 40 creditors whose total claims amount to $708,795.89. The plaintiff and the Deputy Commissioner of Taxation are substantial creditors whose claims in aggregate clearly exceed those of Mr Simos and SWS. The Deputy Commissioner of Taxation is aware of the present application but neither consents to nor opposes it. I infer from this that the Deputy Commissioner of Taxation does not share the plaintiff's concerns about the independence of the administrators. 16 In my view the interests of creditors are best served by allowing the administration to continue and to permit them to express their will at the meeting tomorrow. If the creditors follow the administrators' recommendation and place the defendant in liquidation, they may well appoint the administrators as liquidators; they may, equally, be persuaded to appoint another or others as liquidators. That will be a matter for them. 17 One reason why the present administrators might, in the circumstances, be appointed liquidators is that they have commenced the task of investigating the company's affairs and have reached a certain stage of their investigations, as outlined in their report to creditors. The creditors may feel that the administrators, as liquidators, would be best placed to complete the task of investigating the defendant's affairs. No doubt the plaintiff will express its own views at the meeting about the desirability of appointing the administrators as liquidators, and exercise its voting rights as it sees fit. 18 Given that the meeting of creditors is to be held in less than 24 hours, and given that there is no objective evidence to support the plaintiff's concerns about the administrators, I am satisfied that the interests of the creditors will be best served by allowing them to resolve to wind up the defendant (if that be their desire) and to appoint a liquidator or liquidators in whom they, collectively, repose confidence. In short, I am not satisfied that the particular circumstances of this case warrants any intervention by the Court in the exercise of its supervisory jurisdiction and powers. 19 In the circumstances, the plaintiff's application should be refused with costs. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 22 November 2011