FEDERAL COURT OF AUSTRALIA Taylor, in the matter of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) [2011] FCA 1455 Citation: Taylor, in the matter of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) [2011] FCA 1455 Parties: BARRY ANTHONY TAYLOR AND ANDREW FLETCHER NEEDHAM IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF HEALTHZONE LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 118 715 772 AND ITS RELATED ENTITIES LISTED IN THE SCHEDULE File number(s): NSD 2235 of 2011 Judge: YATES J Date of judgment: 13 December 2011 Catchwords: CORPORATIONS – group of companies in administration – application for extension of convening period for second meeting of creditors Legislation: Corporations Act 2001 (Cth) ss 439A, 447A(1) Cases cited: Mentha, in the matter of The Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 30 Re Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) (2009) 72 ACSR 352 Date of hearing: 13 December 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 36 Counsel for the plaintiffs: Mr S Golledge Solicitor for the plaintiffs: Middletons IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2235 of 2011 in the matter of healthzone limited (receivers and managers appointed) (administrators appointed) acn 118 715 772 AND ITS RELATED ENTITIES LISTED IN THE SCHEDULE BARRY ANTHONY TAYLOR AND ANDREW FLETCHER NEEDHAM IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF HEALTHZONE LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 118 715 772 AND ITS RELATED ENTITIES LISTED IN THE SCHEDULE Plaintiffs JUDGE: YATES J DATE OF ORDER: 13 DECEMBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (Act), the period within which the Plaintiffs must convene the meetings of creditors of each of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) (ACN 118 715 772) and its related entities listed in the Schedule as fixed by s 439A(5) of the Act, be extended by a further period of 53 business days up to and including 28 February 2012. 2. Pursuant to s 447A(1) of the Act, the meetings of the creditors of each of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) (ACN 118 715 772) and its related entities listed in the Schedule required by s 439A of the Act may be held at any time during, or within 5 business days after the end of, the convening period, as extended by Order 1, notwithstanding the provisions of s 439A(2) of the Act. 3. Pursuant to s 447A of the Act, Part 5.3A of the Act is to operate in relation to each of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) (ACN 118 715 772) and its related entities listed in the Schedule as if s 439A of the Act provided that the Plaintiffs must give notice of the meeting by: 3.1 giving to each company's creditors known to the Plaintiffs: (a) written notice of the meeting in the form of Form 529 of the Corporations Regulations 2001 (Regulations); (b) a letter in the form of tab 34 to Exhibit BAT1 referred to in the affidavit of Barry Anthony Taylor sworn on 12 December 2011; by any means permitted by regulation 5.6.11A and regulation 5.6.12(2) of the Regulations and s 600G of the Act; 3.2 publishing the documents referred to in s 439A(4) of the Act on the website nominated in the letter referred to in order 3.1(b) on and from the date of that letter until the conclusion of the meeting (and any adjournment thereof); 3.3 making the documents referred to in s 439A(4) of the Act available for inspection at the place and by the means nominated in the letter referred to in order 3.1(b) on and from the date of that letter until the conclusion of the meeting (and any adjournment thereof); 3.4 promptly sending by prepaid post to any creditor who requests a copy of any of the documents referred to in s 439A(4) of the Act prior to the date of the meeting, a copy of the document or documents so requested; and 3.5 publishing notice of the meeting in accordance with s 439A(3)(b) of the Act. 4. The costs of this proceeding be paid jointly and severally by Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) (ACN 118 715 772) and each of its related entities listed in the Schedule, as a cost of the administration of each of those companies. 5. Leave is reserved to any person claiming to be interested, including any creditor of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) (ACN 118 715 772) and its related entities listed in the Schedule to make any such application to vary or discharge any or all of these Orders upon 48 hours' notice to the Plaintiffs. 6. Within 48 hours, the Plaintiffs are to cause notice of these Orders to be given to the creditors of each of the companies named in Order 5 hereof and to ASIC by the following means: (a) by placing a copy of the Orders on the website maintained by the firm HLB Mann Judd at www.hlb.com.au; (b) by email sent to all creditors who have provided the Plaintiffs with an email address of these orders by circular notice to be issued within 48 hours; and (c) by circular notice sent by mail to ASIC and to all other creditors for whom the Plaintiffs have only a mailing address. 7. These Orders may be entered forthwith. 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 2235 of 2011 In the matter of healthzone limited (receivers and managers appointed) (administrators appointed) acn 118 715 772 AND ITS RELATED ENTITIES LISTED IN THE SCHEDULE BARRY ANTHONY TAYLOR AND ANDREW FLETCHER NEEDHAM IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF HEALTHZONE LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) ACN 118 715 772 AND ITS RELATED ENTITIES LISTED IN THE SCHEDULE Plaintiffs JUDGE: YATES J DATE: 13 DECEMBER 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiffs are the joint and several administrators of companies in the Healthzone group of companies. Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) (Healthzone) is the parent company of the group. The other group companies are listed in the schedule to these reasons. 2 By originating process filed on 12 December 2011 the plaintiffs sought orders pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act) to extend the period within which meetings of creditors of the companies must be convened. They also sought orders pursuant to s 447A(1) of the Act to provide for how ss 439A(2), (3) and (4) of the Act were to apply to the companies in relation to the time for holding creditors' meetings and the giving of notice in respect thereof. 3 But for the extension sought by the plaintiffs in each case, the convening period for the relevant meetings would expire on 15 December 2011: see s 439A(5). The plaintiffs sought, in each case, an extension of the convening period up to and including 28 February 2012. 4 Following a hearing on 13 December 2011 I granted the relief sought by the plaintiffs. These are my reasons for granting that relief. Background 5 The companies operate and oversee the conduct of several businesses relating to the supply of natural health and beauty products. Although there are 19 companies in the group, it would appear that only five of them were actively trading at the time the plaintiffs were appointed as administrators. 6 The five companies are: (a) Healthzone, which is a publicly listed company. (b) Gold Mist Health Pty Limited (Receivers and Managers Appointed) (Administrators Appointed) (Gold Mist) which operates a chain of 24 retail vitamin and health stores, trading under the names "Healthy Life", "Wild Foods" and "DVC". (c) Healthy Life Partners Pty Limited (Receivers and Managers Appointed) (Administrators Appointed) (Healthy Life) which holds contracts with approximately 66 franchisees operating approximately 79 franchises for the operation of retail vitamin and health stores trading under the name "Healthy Life". (d) Jasham International Pty Limited (Receivers and Managers Appointed) (Administrators Appointed) (Jasham) which is a distributor and wholesaler of cosmetics, beauty and fragrance products. (e) Healthzone Solutions Pty Limited (Receivers and Managers Appointed) (Administrators Appointed) (Healthzone Solutions) which is a distributor and wholesaler of vitamins, health foods and nutritional supplements to health food stores, pharmacies and stores operated by Gold Mist and the Healthy Life franchisees. 7 These companies, together, have approximately 250 employees. 8 On 17 November 2011 the Commonwealth Bank of Australia (the Bank), as chargee under registered fixed and floating charges dated 4 January 2011, appointed joint and several receivers and managers to the assets and undertaking of each group company. 9 On the same day the Bank, acting pursuant to the charges, appointed the plaintiffs as administrators of each group company pursuant to s 436C of the Act. The appointment of the plaintiffs was for the strategic purpose of invoking the moratorium provisions of Part 5.3A of the Act, thus preserving, to the extent possible, the various contractual and other business arrangements of the companies. 10 The receivers and managers are currently maintaining each business as a going concern. To this end they are paying, in the normal course of business, all trade, lease and employee creditors. There is evidence before me that the receivers and managers intend to continue to make these payments during the period of their receivership. 11 There are currently 895 known creditors of the companies with claims, excluding contingent claims, totalling approximately $47,120,263.93. The Bank is the largest and only secured creditor, with a claim of $32,597,689.69 against each company. Excluding possible severance and redundancy payments, the total amount of employee claims is approximately $1 million. There are approximately 15 landlord creditors in respect of approximately 32 real property leases. There is one known equipment lease creditor. 12 The plaintiffs' application was supported by an affidavit sworn by Barry Anthony Taylor, who is one of the plaintiffs. The application was also supported by an affidavit sworn by Philip Patrick Carter, who is one of the receivers and managers. The reasons for seeking an extension of the convening periods 13 The plaintiffs sought an extension of the convening periods for the following reasons. 14 First, the receivers and managers have commenced a sale process for the group businesses and assets, as a going concern, in order to maximise the sale price and thus the potential return to creditors, as well as to preserve the jobs of employees. On behalf of the receivers and managers, Mr Carter has expressed the view, which is supported by Mr Taylor on behalf of the plaintiffs, that, if the assets of the companies were to be sold on a stand-alone basis, the expected sale price for those assets would be substantially less than it would be under the present sale process. The receivers and managers wish to pursue the sale process under the umbrella of voluntary administration to increase the prospect of a sale taking place. 15 The group businesses were advertised for sale on 24 November 2011. Interested parties were invited to submit initial, non-binding offers by 12 December 2011. At the present time more than 10 interested parties are reviewing preliminary financial and operational information regarding the companies. The receivers and managers hope to be in a position to select a preferred bidder by 16 December 2011, thereby commencing a period within which due diligence would be conducted. The receivers and managers hope to be in a position to exchange contracts for sale by mid-January 2012, with completion occurring by the end of January 2012. 16 Mr Carter has expressed the view that the timetable for these steps is tight, particularly in light of the impending Christmas and New Year periods. Notwithstanding his intention to achieve a completed sale by the end of January 2012, Mr Carter has foreshadowed the possibility of some slippage in that regard. He has expressed the view that it would be desirable for the receivers and managers to have the ability to extend the sale process until 28 February 2012, if required, in order to maintain flexibility in the process so as to achieve the maximum return to creditors. In his considered view, any lack of flexibility might increase, adversely to the interests of creditors, a preferred bidder's negotiating power in the sale process. For this purpose the receivers and managers have encouraged the plaintiffs to seek a corresponding extension of the convening period for each group company. 17 Secondly, partly because of other practical difficulties caused by the receiverships, the plaintiffs have been unable to complete their investigations into the affairs of the companies. For example, the receivers and managers control most of the books and records of the companies and the plaintiffs' access to key management staff has been reduced somewhat because of their ongoing involvement in the operation of the businesses during the receivership period. 18 These difficulties have been exacerbated by the size, complexity and nature of the companies' activities. For example: (a) The plaintiffs are still to be provided with information from the directors of the companies regarding their views on the financial position of those companies. This information is expected to be received on 15 December 2011 at the earliest. (b) The five trading companies use two bank accounts. Creditors of the companies have been paid from these accounts. The plaintiffs will need to investigate the transactions involving these accounts. (c) The retail businesses of two of the group companies are accounted for as one business unit which needs to be deconsolidated. (d) There are a number of particular transactions which need to be reviewed as part of the plaintiffs' investigations. (e) The plaintiffs need to consider their responsibilities regarding disclosures and notifications to the Australian Securities Exchange including disclosures provided to investors and shareholders prior to recently raised capital of approximately $10 million. 19 Thirdly, the plaintiffs have received a proposal which involves the recapitalisation of Healthzone through a rights issue. Such a proposal would require the co-operation of the Bank as secured creditor. There is no indication from the Bank that it would find the proposal attractive. From a practical point of view the proposal, if otherwise viable, could only proceed if the sale process does not proceed. The proposal was outlined on 28 November 2011. Those advancing it have indicated that they need to conduct due diligence during this month. Mr Taylor's evidence is that the plaintiffs have not had sufficient time to fully consider the proposal. He has, however, identified a number of issues which will require further investigation and consideration, if the proposal is pursued. For example: (a) The costs of the receivership, administration and any deed administration are not clearly identified or included in the estimated costs. (b) The funds to be provided in the rights issue or by refinance are not guaranteed. (c) It is unclear who will manage the operations and/or guarantee any working capital shortfall should creditors resolve to execute a deed of company arrangement. (d) The potential increase in payments to all creditors from the minimum payment to the maximum payment under the proposal is dependent upon achieving a maintainable EBITDA. The EBITDA for the group for the September 2011 quarter was negative. (e) Refinancing is extremely challenging in the current environment. (f) There is no detail as to how the deed fund would be distributed to the group companies or whether any pooling application is required. (g) Further consideration needs to be given to the effect of the proposal on employee entitlements and the employees' protection under the General Employee Entitlement and Redundancy Scheme safety net. 20 On 7 December 2011 the plaintiffs were approached by another party also expressing an interest in advancing a proposal for the recapitalisation of the group. That party has indicated that it will not be able to submit its proposal for approximately another three weeks. 21 If either or both proposals are ultimately pursued by those advancing them, they may provide for an improved return to creditors compared to liquidation of the companies. However, time is required for the plaintiffs to fully consider those proposals when properly formulated. The attitude of creditors to an extension of the convening periods 22 The first meeting of creditors of each company was held on 29 November 2011. The meetings were held concurrently. The plaintiffs informed creditors that they may need to apply to the Court for an extension of the convening periods until a date in early 2012. According to Mr Taylor, no creditor at the meetings raised any objection to an application being made in that regard. 23 At that time a committee of creditors was appointed for each of the five operating companies: see s 436E. Four of the committees (in respect of the creditors of Healthzone, Gold Mist, Healthzone Solutions and Jasham, respectively) include an employee representative. The committees of creditors have expressed unanimous support for the extension sought by the plaintiffs. The impact of an extension of the convening periods on creditors 24 Mr Taylor has given evidence that he expects that an extension of the convening periods will have the following impact on creditors: (a) All pre-appointment claims and entitlements will remain in moratorium subject to the outcome of the receivership and the administration. (b) The employment of employee creditors will continue. They will be paid during the receivership period. (c) Rent will continue to be paid to landlord creditors during the receivership, although they will not be able to enforce their rights under their leases for that period. (d) Trade creditors will be paid for goods and services supplied under purchase orders signed by the receivers and managers or their representatives. 25 There is evidence that the receivers and managers will advise creditors of any sale that is achieved in the interim. Relevant principles 26 The relevant principles which inform the exercise of the discretion to grant an extension of the convening period have been discussed in a number of cases. In the present case it is not necessary to set out any extensive recitation of those principles. In Mentha, in the matter of The Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 30, McKerracher J stated: [15] The court has jurisdiction to make the extension orders sought by reason of s 439A(6) CA. In exercising that jurisdiction, the Court should have regard to, and balance, the interests of creditors in a speedy administration and the need to allow sufficient time to administrators to carry out their function properly and maximise the benefit to creditors through a proper administration: Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10], Re Austcorp Group Ltd [2009] FCA 636 at [18]. [16] In order for the administrators to carry out their function properly, it is necessary that they should have sufficient time to investigate the affairs of the companies under administration and to provide sensible information and advice to the creditors: Hayes, in the matter of Estate Property Group Ltd (Administrators Appointed) [2007] FCA 935 at [1]. That includes sufficient time to investigate and carry out a sale process in which structured 'due diligence' procedures are adopted: Re Diamond Press at [11], Re Hans Continental Smallgoods Pty Ltd [2008] FCA 1933 at [21]. It also includes time to pursue a possible recapitalisation. In Re Chemeq Ltd; Ex parte McMaster [2007] WASC 154 an extension of six months was allowed for this purpose. [17] What will be 'sufficient' will obviously depend on the complexities of the issues involved in the administration. 27 On an application such as the present, the applicant must adduce evidence to establish grounds that are adequate to enable the Court to carry out the balancing exercise that is required. If there is a particular person or group who might be prejudiced by the extension, then evidence should be adduced about their position. The longer the extension that is sought, the more important it is for the Court to be given a clear and complete explanation of the state of the administration, the grounds for the extension and any potential prejudice that would flow from granting it: Re Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) (2009) 72 ACSR 352 at [18]. Consideration 28 I was satisfied that it was appropriate to grant the extension of the convening periods as sought, for the following reasons. 29 First, I was satisfied that the sale of the group businesses and other assets as a going concern is likely to produce the greatest return to creditors. The sale process is being actively pursued and is proceeding with due expedition. However, time is necessary in order to assist that process in achieving its intended objective. 30 Secondly, I was satisfied that the proposals made or foreshadowed to date concerning the possible recapitalisation of the group are nascent and dependent on whether the sale process is ultimately successful. It is in the interests of creditors that an opportunity be afforded to allow those proposals to be fully advanced and that the plaintiffs have a proper opportunity to consider them, although I accept that much will depend on the attitude of the Bank as secured creditor. 31 Thirdly, I was satisfied that the plaintiffs have not had a full opportunity to otherwise consider the position of the group companies. I accept that the receiverships have, in a practical way, impeded their ability to do so and that, in any event, the focus of attention of the plaintiffs and the receivers and managers has been, quite properly, the sale process. I also accept that the affairs of the companies as a group are, in any event, somewhat complex and that more time is necessary to enable the plaintiffs to attempt to disentangle transactions that appear to have been carried out by the group without due regard to the position of the companies as discrete legal entities, and to otherwise investigate other transactions carried out prior to their appointment. 32 Fourthly, for the above reasons, I was satisfied that the plaintiffs are not presently in a position to provide a considered and meaningful recommendation to creditors about the future of the companies as a group. Indeed, determining whether the group businesses and assets can be sold as a going concern will no doubt be the first step in enabling the plaintiffs to make an ultimate recommendation or recommendations to creditors. 33 Fifthly, I was satisfied that the potential prejudice to creditors that would flow from granting the extensions that were sought was, on the current evidence, minimal. Although prolongation of the administrations by extending the convening periods might impede some creditors in the exercise of their rights, no specific instance of prejudice was brought to my attention. The orders I have made would enable creditors or other interested persons to come forward and seek a discharge or variation of the orders, if circumstances warranted that course. Of particular significance is the fact that the committees of creditors have supported the plaintiffs' application and no creditor to date appears to have opposed the extensions being granted. 34 Sixthly, I was satisfied that a proper account has been given of the administrations to date, sufficient to warrant the granting of an extension of the convening periods until 28 February 2012. 35 Seventhly, in relation to the ancillary relief, I was satisfied that it was appropriate to modify the application of s 439A(2) of the Act to enable the plaintiffs to convene the meetings to be held at any time during or within five business days after the end of the extended convening periods. The effect of this order will be that the plaintiffs can convene the meetings for a date earlier within the extended convening periods than would otherwise be the case. This will provide a measure of flexibility to enable the meetings to be convened earlier if circumstances warrant that course. I was also satisfied that, on cost considerations alone, the application of s 439A of the Act should be modified to enable the documents referred to in s 439A(4) of the Act to be supplied to creditors by electronic means. The orders provide, however, that should a creditor request a paper copy of any of those documents, it will be provided in that form by the plaintiffs to that creditor. Disposition 36 Orders were made in accordance with draft orders submitted by the plaintiffs in the course of oral address. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 16 December 2011 SCHEDULE All with Receivers and Managers appointed and with Administrators appointed BOD International Pty Limited (ACN 119 518 295) DVC Discount Vitamin Centres Pty Limited (ACN 006 382 270) Gold Mist Health Pty Limited (ACN 111 745 594) Health Minders (WA) Pty Limited (ACN 009 102 854) Health Minders Finance Pty Limited (ACN 061 921 177) Health Minders International Pty Limited (ACN 127 390 041) Health Minders Milperra Pty Limited (ACN 003 950 472) Health Minders Pty Limited (ACN 136 905 201) Healthy Life China Pty Limited (ACN 136 831 582) Healthy Life Partners Pty Limited (ACN 084 265 421) Healthzone Solutions Pty Limited (ACN 002 202 913) HZL1 Pty Limited (ACN 136 831 635) HZL2 Pty Limited (ACN 136 831 546) HZL3 Pty Limited (ACN 136 831 555) HZL5 Pty Limited (ACN 136 831 493) Jasham International Pty Limited (ACN 109 573 346) Newco (Victoria) Pty Limited (ACN 127 227 883) Supa Boost Effervescent Vitamins Pty Limited (ACN 010 827 237)