FEDERAL COURT OF AUSTRALIA Park, in the matter of Surfstitch Group Ltd (Administrators Appointed) [2017] FCA 1244 File number: NSD 1842 of 2017 Judge: MARKOVIC J Date of judgment: 20 October 2017 Catchwords: BANKRUPTCY AND INSOLVENCY – application to vary administrators' personal liability under s 443A of the Corporations Act 2001 (Cth) – where administrators may become liable for a contingent liability of companies in administration – whether to make orders varying administrators' liability – application allowed Legislation: Corporations Act 2001 (Cth) ss 443A, 447A Cases cited: McCluskey v Pasminco Ltd (Administrators Appointed) (2002) 120 FCR 326 Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd (admins apptd) (2010) 82 ACSR 142; [2010] FCA 1469 Date of hearing: 20 October 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 19 Counsel for the Plaintiff: Mr M L Rose Solicitor for the Plaintiff: King & Wood Mallesons ORDERS NSD 1842 of 2017 IN THE MATTER OF SURFSTITCH GROUP LTD (ADMINISTRATORS APPOINTED) ACN 602 288 004 JOHN RICHARD PARK; QUENTIN JAMES OLDE & JOSEPH RONALD HANSELL IN THEIR CAPACITIES AS JOINT & SEVERAL ADMINISTRATORS OF SURFSTITCH GROUP LTD (ADMINISTRATORS APPOINTED) ACN 602 288 004 Plaintiff JUDGE: MARKOVIC J DATE OF ORDER: 20 OCTOBER 2017 THE COURT ORDERS THAT: 1. The originating process filed on 20 October be made returnable instanter. 2. Until further order, pursuant to s 37AF of the Federal Court of Australia 1976 (Cth) (Federal Court Act), and on the grounds set out in s 37AG(1)(a) of the Federal Court Act, the affidavit of John Richard Park sworn 19 October 2017 and the exhibit thereto marked JP-1 be marked "confidential" and not be published, disclosed to or accessed by any person except pursuant to an order of the Court. 3. Pursuant to s 447A of the Corporations Act 2001 (Cth) (Corporations Act), Part 5.3A of the Corporations Act is to operate such that if: (a) the plaintiffs are liable for debts incurred in respect of the repayment of money borrowed by Surfstitch Australia Pty Ltd under the sale proceeds undertaking dated 5 October 2017 (Undertaking); (b) the indemnity of the plaintiffs under s 443D of the Corporations Act out of the property of Surfstitch Group Ltd (Administrators Appointed) ACN 602 288 004 and Surfstitch Holdings Pty Ltd (Administrators Appointed) ACN 601 114 603 (Companies) is insufficient to meet any amount for which the plaintiffs are liable under the Undertaking, then the plaintiffs will not be personally liable to repay any such amount to the extent of that insufficiency. 4. The plaintiffs' costs of and incidental to this application be costs and expenses in the administration of each of the Companies and be paid out of the assets of each of the Companies. 5. The plaintiffs, within seven business days of the making of these orders, are to take all reasonable steps to give notice of these orders to the creditors of the Companies (including persons claiming to be creditors) and to the lender by means of a circular: (a) to be sent by email transmission to creditors for whom the plaintiffs have a current email address; or (b) to be sent by ordinary post to creditors to creditors for whom the plaintiffs have only a postal address. 6. Any person who can demonstrate sufficient interest (including any creditor of the Companies) for the purpose of modifying or discharging Orders 2 to 4 above shall have liberty to apply on giving all other interested parties not less than 3 business days' notice. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT) MARKOVIC J: 1 By an originating process filed on 20 October 2017 the plaintiffs, who are the administrators of Surfstitch Group Limited (Administrators Appointed) (Surfstitch Group) and Surfstitch Holdings Pty Limited (Administrators Appointed) (Surfstitch Holdings) (collectively, the Companies), seek orders pursuant to s 447A of the Corporations Act 2001 (Cth) (Act) to vary their personal liability under s 443A of the Act in relation to the repayment of money borrowed by Surfstitch Pty Limited (SSAU) under a document titled Sale Proceeds Undertaking dated 5 October 2017 (Undertaking). 2 The application is supported by an affidavit sworn by one of the administrators, John Richard Park, on 19 October 2017. background 3 On 24 August 2017 Mr Park, Quentin James Olde and Joseph Ronald Hansell were appointed as joint and several voluntary administrators of Surfstitch Group and Surfstitch Holdings. Surfstitch Group is listed on the Australian Securities Exchange However, in accordance with s 437F(1) of the Act, its shares are currently suspended from trading. Surfstitch Group is an e-commerce retailer of action sports and youth apparel which, at the time of the administrators' appointment, operated across a number of jurisdictions including Australia, the UK, the US and France. It operates retailing and media operations through subsidiary companies. 4 According to Mr Park, Surfstitch Group is the head company in the group. Its only assets appear to be shares in Surfstitch Holdings. Surfstitch Holdings is the holding entity and its assets appear to be certain intellectual property and shares in the operating subsidiaries including, relevantly, SSAU. SSAU operates Surfstitch Australia, which is the group's Australian online retailing platform. It is not subject to any form of external insolvency appointment and continues to trade. 5 On 15 September 2017 the administrators sought and obtained from the Court orders pursuant to s 439A(6) of the Act extending the convening period for the meeting of creditors of the Companies to 21 December 2017, together with consequential orders: see Park (Administrator), in the matter of Surfstitch Group Limited [2017] FCA 1221 (In the matter of Surfstitch). Further background on the administrators' appointment, their work and investigations that have been carried out are set out in In the matter of Surfstitch at [5] and following. 6 The administrators have, since mid-September 2017, taken steps to attempt to effect a sale or recapitalisation of Surfstitch Group and Surfstitch Holdings. 7 On 18 September 2017 SSAU, Surfstitch Holdings and Gordon Brothers Pty Limited (Lender), as lender, executed a document titled Finance Facility – Summary of Indicative Terms and Conditions. On 5 October 2017 SSAU and the Lender entered into a term facility (Facility) and a general security agreement and SSAU, Surfstitch Group and Surfstitch Holdings executed the Undertaking. 8 The Undertaking provides, amongst other things, that if SSAU is unable to repay the amount outstanding under the Facility by the due date then Surfstitch Group and Surfstitch Holdings will make sufficient funds available to SSAU to enable it to repay the Facility. The Undertaking also includes provisions that, at least as between the parties to it, seek to limit the administrators' liability. 9 Mr Park is of the opinion that it was necessary to provide the Undertaking: (1) to ensure that SSAU could avail itself of the Facility and have available to it sufficient working capital to support its operations in the lead up to the Christmas trading period. The provision of the Undertaking was a condition precedent to any advance under the Facility; (2) because, in the absence of providing the Undertaking, there was a lack of certainty about the future of, among others, Surfstitch Group and Surfstitch Holdings and whether they and SSAU would have sufficient cash resources to trade through to the Christmas period; and (3) because of a concern about the ability to secure a viable trade sale or recapitalisation which, in Mr Park's view, could have been severely and negatively impacted to the detriment of creditors and members had the Undertaking not been provided. statutory framework and legal principles 10 Section 447A(1) of the Act empowers the Court to make such orders as it thinks appropriate about how Pt 5.3A of the Act is to operate in relation to a particular company. In the case of a company under administration, such an order may be made on the application of the administrator. 11 Section 443A of the Act provides: 443A General debts (1) The administrator of a company under administration is liable for debts 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, for: (a) services rendered; or (b) goods bought; or (c) property hired, leased, used or occupied, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goods; or (d) the repayment of money borrowed; or (e) interest in respect of money borrowed; or (f) borrowing costs. (2) Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator's rights against the company or anyone else. 12 Section 443D of the Act entitles the administrator of a company to be indemnified out of the company's property, other than certain PPS Act retention of title property that is not relevant for present purposes, for, in summary, expenses incurred in the course of the administration. 13 The relevant considerations on an application pursuant to s 447A of the Act for limitation of an administrator's liability under s 443A of the Act were summarised by Gilmour J in Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd (admins apptd) (2010) 82 ACSR 142; [2010] FCA 1469 (Re Griffin Coal) at [23] to [37]. After setting out the relevant provisions of the Act, his Honour said at [28]-[30]: 28 It is well established that the court has power under s 447A of the Corporations Act to order an indemnity where the indemnity available to the administrator under s 443D is insufficient or in doubt, in order to satisfy the debts for which the administrator is personally liable pursuant to s 443A: Mentha, Re Spyglass Management Group Pty Ltd (2004) 51 ACSR 432; [2004] FCA 1469. 29 It is also well established that the court has power under s 447A of the Corporations Act to make orders to limit the administrators' personal liability under s 443: Hayes Re Estate Property Group Ltd (admins apptd) [2007] FCA 1393; Re Malanos [2007] NSWSC 865 (Re Malanos); Re View Gold Pty Ltd, View Resources Ltd & View Nickel Pty Ltd; Ex Parte Saker [2008] WASC 241 (Re View); Re Great Southern Infrastructure Pty Ltd; Ex parte Jones [2009] WASC 161 (Re Great Southern); Carter, Re SFM Australasia Pty Ltd (admins apptd) [2009] FCA 360; and Vision (Brisbane) Pty Ltd (admins apptd) [2010] FCA 186. 30 The principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A can be summarised as follows: (a) the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Pt 5.3A of the Corporations Act: Re Great Southern at [13]. (b) typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors: Re Malanos at [9] and Re View at [17]. (c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement: Re View at [18], and also Re Application of Fincorp Group Holdings Pty Ltd [2007] NSWSC 628 at [17]. (d) notice has been given to those who may be affected by the order: Re Great Southern at [12]. consideration 14 Neither Surfstitch Group nor Surfstitch Holdings are borrowers under the Facility. However, as submitted by the administrators, s 443A of the Act is not in terms restricted to liabilities incurred directly by administrators. The administrators seek orders because of their concern that compliance with the Companies' obligations under the Undertaking may require or give rise to a liability for the repayment of money or borrowing costs for which they could be personally liable. 15 The other issue of note here is that it appears that entry into the Undertaking gives rise to a contingent liability in respect of which s 443A could operate. The administrators submitted that they have not identified any authorities in which a court has considered this issue, but referred to McCluskey v Pasminco Ltd (Administrators Appointed) (2002) 120 FCR 326, where Goldberg J said at [40]: Although, as Tadgell J said in Commissioner of Taxation (Cth) v Gosstray [1986] VR 876 at 878: "A contingent creditor, like an elephant, is rather easier to recognise than to define", the critical integer to be identified in a contingent claim is that there be an existing obligation and that out of that obligation there will arise a liability of the company to pay a sum of money on the happening of an event that may not necessarily occur: Winter v Inland Revenue Commissioners [1963] AC 235 at 262; Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 at 459 per Kitto J; Jones (as Trustee of Bankrupt Estate of Graham) v Deputy Commissioner of Taxation (1998) 39 ATR 525 at 529; 157 ALR 349 at 354. 16 The administrators submitted, and I accept, that the Undertaking is an existing obligation and that there may arise out of that obligation a liability of Surfstitch Group and Surfstitch Holdings on the happening of an event, that is, the failure of SSAU to repay amounts due under the Facility, which may not necessarily occur. The application is made in those circumstances. 17 Having regard to the principles set out in Re Griffin Coal and the circumstances of Surfstitch Group and Surfstitch Holdings, in my opinion, it is appropriate that the orders sought by the administrators be made. I accept the administrators' submission that the objects of s 435A of the Act are best served by the orders sought. 18 My reasons for reaching that conclusion are: (1) the proposed arrangements are in the best interests of Surfstitch Group's and Surfstitch Holdings' creditors. Mr Park's evidence is that he considers that entry into of the Undertaking furthers the objects of s 435A of the Act by facilitating the ongoing trade of the Companies' business and the maximisation of potential returns to creditors. Further, the terms of the Undertaking contemplate a limitation of the administrators' liability and the Lender has not objected to that being so, although I note that I was informed by counsel appearing for the administrators that the Lender has not been informed of today's application; (2) there is evidence before me that, based on current forecasts, it is anticipated that SSAU will have sufficient funds available to it to repay the Facility in full before its expiry date and, on that basis, Mr Park believes that no creditor of either Surfstitch Group or Surfstitch Holdings will suffer any prejudice if the orders sought are made; and (3) that the proposed arrangements are in the interests of the Companies' creditors is also evident from the fact that they will allow the potential for a greater return than if the business were to cease immediately. The entry into the Undertaking will maximise the chance of the Companies' business or as much as possible of it continuing in existence or, alternatively, will result in a better return to creditors than could otherwise be obtained on a winding up. The continued trade which the Undertaking allows will be for the benefit of the Companies' creditors and I can see no disadvantage to those creditors by the orders sought being made. 19 The administrators also sought an order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) that Mr Park's affidavit and the exhibit thereto be marked confidential and not be published or disclosed except pursuant to an order of the Court. Mr Park gave evidence as to why such an order should be made and, on the basis of that evidence, I am satisfied that it should be made. I will make an order accordingly. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic. Associate: Dated: 24 November 2017