Nortel v Coretel [2002] NSWSC 799

New South Wales Supreme Court

CITATION : Nortel v Coretel [2002] NSWSC 799 CURRENT JURISDICTION: Equity Divisiion Corporations List FILE NUMBER(S) : SC 3825/02 HEARING DATE(S) : 02/09/02, 03/09/02 JUDGMENT DATE : 3 September 2002

PARTIES : Nortel Networks Australia Pty Ltd - Plaintiff Coretel Pty Ltd - Defendant JUDGMENT OF : Barrett J

COUNSEL : Mr D R Pritchard - Plaintiff Mr D S McCrostie, Solicitor - Defendant SOLICITORS : Cowley Hearne - Plaintiff P W Turk & Associates - Defendant CATCHWORDS : CORPORATIONS - application for winding up - voluntary administration - whether interests of creditors will be better served by continuation of administration than by winding up LEGISLATION CITED : Corporations Act 2001 (Cth) CASES CITED : Mobil Oil Australia Pty Ltd v Eugene Transport Pty Ltd (2001) NSWSC 783 DECISION : Winding up application adjourned

- 6 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

TUESDAY 3 SEPTEMBER 2002

3825/02 - NORTEL NETWORKS AUSTRALIA PTY LTD v CORETEL PTY LTD FKA NETCARE CORPORATION PTY LTD

JUDGMENT

1 Coretel Pty Ltd was placed in voluntary administration on 6 August 2002. The first meeting of creditors called for by Pt 5.3A of the Corporations Act 2001 took place on 13 August 2002. The second meeting commenced in Perth yesterday. There was tabled at that second meeting a report by the administrators, to which I shall return. 2 At the time administrators were appointed there was on foot an application by Nortel Networks Australia Pty Ltd, the present plaintiff, for an order for the winding up in insolvency of Coretel. This application is still pending. It is based on failure to comply with a statutory demand in respect of a debt of slightly more than $400,000. Some action was taken towards seeking an order that the statutory demand be set aside on the grounds that there existed a genuine dispute, but it appears that the proceedings were not properly constituted and they were not persisted with. The statutory presumption of insolvency has therefore arisen. 3 The winding up application came before the court yesterday and I heard submissions on the question whether s.440A(2) of the Corporations Act 2001 (Cth) required the hearing of the application to be adjourned. They were supplemented today by evidence of what transpired at the Perth meeting late yesterday afternoon, Sydney time. 4 Mr McCrostie for the administrators submits that there must be an adjournment. Mr Pritchard, who appeared for Nortel, the creditor seeking the winding up order, submits that the section does not require an adjournment. I express their submissions in these mandatory or compulsory terms because the section itself is cast in that way. It describes circumstances in which the court "is to adjourn the hearing." No discretion is involved. If the court finds that the relevant circumstances exist, it must adjourn. If it finds that those circumstances did not exist, the compulsion to adjourn does not apply and the ordinary discretion comes into play. 5 The question the court must decide on the evidence before it is whether it is satisfied that it is in the interests of the creditors for the company to continue under administration rather than to be wound up. The background against which that question must be addressed in this case may be briefly described. 6 Coretel is one of two related companies engaged in what I think can best be described as a common or combined business. Their affairs are described in the evidence as "interrelated and mutually dependent". The two companies share premises, staff and facilities. They are both in administration and have the same administrators. Coretel has debts of the order of $2.5 million and, it seems, assets available to creditors ostensibly of about $1.36 million but, importantly, the vast bulk of the assets consists of receivables from the related company which is also in administration, with the result that the $1.36 million cannot, in any sense, be regarded as a realisable figure. 7 At the first meeting of creditors, six creditors accounting for $2.5 million of debts were present. At the second meeting there were again six creditors accounting for roughly the same amount. The second meeting resolved to adjourn for 60 days or at least there was passed a resolution, the precise effect of which must be regarded as doubtful but which may be accepted as conveying a general desire, on the part of those voting, that there should be an adjournment of up to 60 days. That motion was carried with all votes in favour except the vote of Nortel, which was against. 8 Nortel, I must add, stands in a special position. It was a supplier of plant and equipment under an arrangement incorporating a retention of title provision. Nortel contends that it is entitled to recover possession of the plant and equipment concerned because all the relevant items are its property and have not been paid for. 9 The administrators estimate that there will be no return to creditors in the winding up. Alternatives are discussed in the administrators' report to creditors particularly at clauses 8.2 to 8.5. In those clauses, the administrators say that they have been approached by several potential investors aware of the situation who are continuing to look at the business with a view to equity injection or outright purchase. To this point, or at least the point at which the report speaks, the discussions with interested parties were continued and no firm proposals or deed of company arrangement have been received. At yesterday's meeting, the administrators updated this and expressed themselves "hopeful that a productive outcome could be achieved from those discussions". 10 A major stakeholder in Coretel is Paladin. Consultations with that company have led to a decision by the administrators not to proceed immediately with an attempt to obtain expressions of interest because of concerns regarding the impact of such a campaign could have on the related company's existing customers and the uncertainty which may be perceived by future customers. In other words, as I read it, active steps towards sale might disturb the equilibrium in such a way as to prejudice the value of that which is available to be sold. 11 Also under consideration by the administrators is the possibility of proceedings against Nortel and possibilities of obtaining litigation funding to pursue that avenue. This was also mentioned at yesterday's meeting. 12 Turning to the statutory criterion in s.440A(2), it becomes necessary to decide whether or not the court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than being wound up. Winding up, it seems on the evidence, will yield the general body of creditors nothing or next to nothing. The administrators' assessment is that nothing will be yielded. 13 Nortel, on the other hand, will benefit from a transition from administration to winding up because it will become free from the constraints in Div 7 of Pt 5.3A which, at the moment, preclude it from exercising such rights as it has under the retention of title clause. Upon a winding up, Nortel will be free to assert its rights to repossess the relevant plant and equipment and, if successful, will no doubt bring about a partial dismantling of the income producing structure so that any going concern sale by a liquidator will be problematic, to say the least. 14 It should also be mentioned that the administrators have, as I have mentioned, the possibility of legal proceedings against Nortel in contemplation. 15 I was referred to various judicial statements as to the approach to be taken to the question posed by s.440A(2). A useful summation I think is to be found in the judgment of Justice Hamilton in Mobil Oil Australia Pty Ltd v Eugene Transport Pty Ltd (2001) NSWSC 783. His Honour said: "The question under s.440A(2) of the Corporations Act is whether it is in the interests of the creditors that there be an adjournment of the liquidation proceedings. Various things have been said in various cases concerning what is involved in that. In my view, it is important for the court not to be diverted by those various formulations from the test embedded in the words of the statute. However, it was made clear in the judgment of McPherson JA in the Queensland Court of Appeal in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 that, in general, for an adjournment of any length to be granted there must be material that indicates that the creditors will receive either a greater or a more accelerated payment than they would under a liquidation. The various other authorities in which this section has been discussed have recently been gathered by me in my judgment in TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830. The amount of material to justify the adjournment will be less in the case of a short adjournment, particularly a short adjournment in the early days, which the administrators will use to gather and bring forward more ample material as to the possible benefits of an administration." 16 In the present case, an adjournment of 60 days is suggested, that being the period by which the creditors have expressed themselves willing to see the meeting of creditors extended. This is, I consider, long rather than short. The material before me as to positive outcomes of the administrators for creditors foreseen by the administrators is not particularly strong, although I do think that the possibilities referred to in clauses 8.2 to 8.5 of the report to creditors are cogently stated and should be regarded as real. 17 The outcome in the alternative situation of a winding up is, however, clearly defined. Nortel will take possession of plant and equipment or at least attempt to do so, and creditors will receive nothing or virtually nothing. The choice, therefore, is between a virtually certain zero to creditors in the case of winding up and the possibility, although still not fully developed, of a buy-out or capital injection which will yield something for creditors if administration is allow to continue. That creditors prefer the latter is borne out by the fact that at the second meeting, as I have said, five out of the six who voted were opposed to a resolution that the company be wound up and supported a resolution that the meeting be adjourned, the one creditor who voted the other way on each resolution being Nortel, whose interests diverge from those the general body of creditors in the way I have described. The result of this voting indicates creditors' views as to the way in which they see their interests being best served. 18 Although it cannot be said that the administrators have made a strong case for the proposition that the position of creditors will be better served by continuation of administration than it will be by winding up, I do consider the balance falls that way, and I am satisfied that, at this stage at least, it is in the interests of the creditors of Coretel Pty Ltd that the company continue under administration rather than being wound up. 19 The originating process whereby Nortel Networks Australia Pty Ltd seeks an order for winding up under s.459P must therefore be adjourned. It is adjourned to 10am on Monday 4 November 2002 before the Corporations List judge with liberty to apply on 48 hours' notice in the meantime. 20 Costs of the application with which I have just dealt will be costs in the cause.