New South Wales Supreme Court CITATION : ANE Furniture v Carodaba [2009] NSWSC 220 HEARING DATE(S) : 12 March 2009 JUDGMENT DATE : 12 March 2009 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 12 March 2009 DECISION : Order that the claim for relief in para 4 of the originating process be dismissed. CATCHWORDS : CORPORATIONS - voluntary administration - creditors' meeting - application for adjournment of creditors' meeting - application dismissed LEGISLATION CITED : Corporations Act 2001 (Cth) CATEGORY : Procedural and other rulings CASES CITED : Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 21 ACLC 1737 McVeigh v Linen House Pty Ltd (No. 3) [2000] VSCA 4; (2000) 1 VR 31 ANE Furniture Pty Ltd PARTIES : v Carodaba Pty Ltd FILE NUMBER(S) : SC 1876/09 COUNSEL : Plaintiff: J E Thomson Defendant: R Newlinds SC SOLICITORS : Plaintiff: Gillis Delaney Lawyers Defendant: n/a IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Thursday, 12 March 2009 1876/09 ANE Furniture Pty Ltd v Carodaba Pty Ltd JUDGMENT 1 HIS HONOUR: This is an application for an order to require the meeting of creditors of the first defendant, scheduled for 10.15am tomorrow, to be adjourned until 1 May 2009. That meeting is the second meeting of creditors convened to be held pursuant to s 439A of the Corporations Act 2001 (Cth). 2 The first defendant is a company in administration. The second defendant, Mr Dean-Willcocks, was appointed as administrator on 6 February 2009. The plaintiff is a creditor of the first defendant. It also seeks by way of final relief an order that Mr Dean-Willcocks be removed as administrator and that a Mr Gleeson be appointed as administrator in his stead. This relief is sought pursuant to s 449B. An alternative order sought is that Mr Gleeson be joint administrator of the first defendant for certain identified purposes. That application is not pursued today as it was premised upon the Court being of the view that Mr Dean-Willcocks ought not to remain as sole administrator of the company. 3 These proceedings were commenced yesterday. Barrett J made orders for short service. The second defendant was not in a position to deal with the claims made in respect of his independence and impartiality in the very limited time available. Accordingly, the application today has been confined to the application to require the meeting of creditors to be adjourned. 4 The first meeting of creditors was held on 18 February 2009. Section 436E(4) provides that at a first meeting of the creditors the creditors may pass a resolution removing the administrator from office and appointing someone else as administrator of the company. No such resolution was proposed at the first meeting of creditors. 5 As I have said, the second meeting of creditors has been convened to be held tomorrow. The grounds on which the plaintiff seeks orders requiring the adjournment of that meeting are first that it is said there is a serious question to be tried that Mr Dean-Willcocks should be removed as administrator on grounds of actual or perceived lack of independence or impartiality. The plaintiff says that the balance of convenience favours such an adjournment so that the application for his removal can be determined urgently. The plaintiff submits that the creditors are entitled to a report from an administrator and to the opinions of an administrator who is a fit and proper person to occupy that role. 6 The plaintiff also submits that the meeting should be adjourned because it says that the administrator's report to creditors is defective in that, it is alleged, the administrator has not investigated the prospect that the first defendant's business might be sold as a going concern. It is said that the administrator's opinion as to whether the company should be wound up, or whether a proposed deed of company arrangement should be approved by creditors is vitiated by his failure to properly investigate the possibility of a sale of the company's business as a going concern. 7 The plaintiff also submits that the administrator has underestimated possible recoveries a liquidator might receive from third parties, being a former director of the company and related entities, by about half a million dollars. It is also submitted that the administrator has failed in his report to deal with the capacity of the party proposing the deed of company arrangement to pay moneys which would form the deed fund under that proposed deed. 8 The alleged defects in the report are said to support the inference that the administrator lacks impartiality. It was said that the administrator has adopted a supine attitude by acting in the interests of and accepting proposals put forward on behalf of a Mr Frederick Bart. Mr Bart is a former director and controls the sole shareholder of the first defendant. These grounds are relied upon not only as corroborating a case for removal of the administrator, but are also relied upon independently as grounds for the adjournment of the meeting. 9 The Court's power to make the orders sought is said to arise on a number of grounds. First, it is said that the orders will be in the nature of an interlocutory injunction restraining the holding of the meeting until the plaintiff's claim for final relief under s 449B of the Act is determined. 10 Secondly, it is submitted that the order could be made pursuant to s 447E(1) on the ground that the Court is satisfied that the administrator has done an act, or made an omission, that is, or will be, prejudicial to the interests of the company's creditors. 11 Thirdly, it is said that such orders could be made pursuant to s 447A. 12 The first defendant is a retailer of mattresses, beds and bedroom suites which it apparently carries on under the name of "The Sleeping Giant" and under certain other business names. It employs 65 employees and trades from six shops throughout New South Wales. 13 The administrator's report to creditors dated 5 March 2009 states that the Report as to Affairs submitted by the director, Mr Forster, and the former director, Mr Bart, discloses a deficiency of assets to liabilities of $5,741,903. There are employee claims for annual leave, long service leave and possible claims for time in lieu and redundancy totalling $933,811.23. There are unsecured creditors in addition to the employee claims to a value of $4,361,121, of whom the bulk are trade creditors. There are secured creditors with claims in excess of $1,250,000. 14 The report as to affairs contains the director's estimate that the realisable value of assets not specifically charged is $420,495. There are two floating charges. The report as to affairs records the director's opinion that the value of the assets, subject to a specific charge or charges, is $867,466 less than the amounts owing under the charges. 15 The sole shareholder of the first defendant is Tenezo Pty Limited. Mr Bart is the sole director and shareholder of that company. Up to 14 November 2008 he was a director of the first defendant. It appears that he was a director from 5 June 2005. 16 On 14 November 2008, according to the company records, he was replaced as a director by Mr Forster. Information available to the administrator is that Mr Forster has a deficiency of assets to liabilities. There is ground to think that Mr Bart may have continued as a shadow or de facto director of the company after 14 November 2008. 17 Mr Bart controls N & J Properties Pty Limited, which is a secured creditor. That company has proposed a deed of company arrangement pursuant to which it would pay $360,000 by instalments up to 24 December 2009 to comprise a deed fund. The proposed deed of company arrangement is that the deed fund would be distributed to third party ordinary unsecured participating creditors in full and final settlement of their claims. The claims of related entities, including N & J Properties Pty Limited, customer repayments, and deposits for customers who complete their purchases, as well as claims of secured creditors, would be excluded from distribution from the fund. The employees would remain employed by the company and be paid in the normal course when their entitlements arise. 18 The deed fund would first be applied in payment of the administrator's disbursements and remuneration and in payment of the deed administrator's remuneration. That is estimated to amount in total to some $150,000. It would be the balance of the fund which would be available for distribution to ordinary unsecured participating creditors. 19 The administrator estimates that if the deed of company arrangement is approved, such ordinary unsecured creditors would receive a dividend of about five cents in the dollar and would receive that sum in about January or February 2010. 20 The administrator's report to creditors details several questionable transactions involving Mr Bart. These include what is said to be a re-statement in prior year accounts of moneys initially recorded as loans to related entities, which were re-stated as payment of management fees to those entities, thereby purportedly removing as debts owed to the first defendant the amounts initially recorded as having been paid by way of loan. The amounts involved are said by the administrator to total $1,614,992. 21 The administrator's report describes these transactions in some detail and sets out information received by the administrator from Mr Bart and from the company secretary in relation to these payments. The administrator's report also describes steps taken by Mr Bart, it seems, at the end of 2008, to procure the consent of landlords of shops from which the first defendant carries on business to an assignment of the lease for the shop to related entities controlled by him. The administrator reports that the assignment of leases might constitute voidable transactions and be in breach of ss 181, 182 and/or 184 of the Corporations Act. The report also discloses the possibility of claims against Mr Forster and Mr Bart arising from the company trading whilst apparently insolvent. The administrator makes an assessment of the recoveries which might be obtained on a liquidation in relation to such claims after allowance for payment to a litigation funder, un-recouped legal expenses, expenses associated with obtaining expert evidence in relation to any such proceedings, and additional liquidation costs. 22 In his report the administrator opined that on his estimates a distribution of some 10.7 cents in the dollar might be available to creditors on this basis. He set out the extent to which such returns would increase or decrease for each $100,000 of additional or diminished recoveries. He observed that in any litigation there is always uncertainty and even particularly favourable actions are often settled in order to obtain certainty. In his assessment of returns to creditors on the winding-up the administrator did not include receipts arising from the sale of the company's assets through the sale of the business as a going concern. On p 41 of the report he said that: " ... realistically if the deed is not entered into the Company will cease to trade, it's very unlikely that the business is saleable ... ". 23 I think it is fair to say, as is submitted for the plaintiff, that the grounds for that opinion were not expounded in the report. The administrator opined that: " As the return to creditors under the proposed deed exceeds the potential return under an immediate liquidation, has a higher degree of certainty and does not put certain classes of creditors at risk, I am of opinion, subject to the assumptions and qualifications detailed herein, that it is in the creditors' interest that the company execute a deed of company arrangement ... ... As a deed has been proposed which provides a greater return to creditors in a relatively short period of time with a higher degree of certainty than an immediate winding up of the company, I am of the opinion that it is not in the creditors' interest that the company be wound up. My opinion is subject to the primary assumptions detailed above and also to the following assumptions and qualifications: (i) possible recoveries from investigatory matters in the event of liquidation are as per my estimates herein; (ii) recoveries and creditors claims (including contingent claims) are in keeping with the estimates detailed in section 4; (iii) the business is not readily saleable as a going concern; (iv) N & J Properties Pty Limited is able to fund Deed obligations. ... For the reasons given above, I recommend that the company execute a deed of company arrangement. " 24 Section 439A(4) requires the administrator to set out his opinion as to whether it would be in the creditors' interests for the company to execute a deed of company arrangement or for the administration to end or for the company to be wound up, and set out his or her reasons for those opinions and such other information known to the administrator as would enable the creditors to make an informed decision about those matters. 25 As Mr Newlinds SC submitted, and as the administrator himself stated in his report, the opinion the administrator is required to express is whether it is in the interests of the company's creditors, as creditors, for the company to execute a proposed deed of company arrangement, or the administration to end, or for the company to be wound up. Wider considerations of public interest and commercial morality are not called into play when the administrator is required to form and express such an opinion. 26 The plaintiff complains that the first defendant was being stripped when it was on its knees (to use counsel's colourful metaphor) and that Mr Bart, by his proposed deed of company arrangement, is seeking to avoid liquidation where his conduct could be investigated and is doing so by offering unsecured creditors a tiny dividend of five cents in the dollar. The plaintiff submits that the administrator is acquiescing in that course of conduct and lacks independence and impartiality. Hence it is said that the second meeting of creditors should not be allowed to proceed to decide whether the deed of company arrangement should be entered into until the company's affairs have been investigated and a report provided by an administrator who is truly independent and impartial and is seen to be such. 27 The importance of an administrator as well as a liquidator being, and being seen to be independent and impartial, was not disputed (Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 21 ACLC 1737 at [123]-[141]). Mr Dean-Willcocks has provided an updated Declaration of Independence, Relevant Relationships and Indemnities as an annexure to his report to creditors of 5 March 2009. This updated declaration follows extensive correspondence between the plaintiff's solicitors and Mr Dean-Willcocks' solicitors in relation to his relationship with Mr Star and Mr Star's relationship with Mr Bart. The present administration is a matter which was referred to Mr Dean-Willcocks by Mr John Star. Mr Star was a partner in a firm called Star Dean-Willcocks of which Mr Dean-Willcocks was a partner from January 1991 until June 2001. In his updated declaration Mr Dean-Willcocks states that: " Mr Star has no financial interest in Dean Willcocks' Insolvency Solutions (that being the present name of Mr Dean-Willcocks'firm) and limited business dealings with myself. " 28 It appears from the correspondence that Mr Star sub-let some premises from Mr Dean-Willcocks or his firm and that from time to time Mr Star refers matters such as the present to Mr Dean-Willcocks. Mr Dean-Willcocks' solicitors stated in a letter of 2 March 2009 that they were instructed that, historically, Mr Star had referred several matters only on average annually. They said that Mr Star was one of hundreds of accountants and lawyers who referred work to Mr Dean-Willcocks or his former firm. 29 The plaintiff says that it should be inferred that Mr Star has provided advice to Mr Bart at the time Mr Bart took steps to procure the assignment of leases to related companies. It says that Mr Star has a well-documented long relationship with Mr Bart. Mr Star was appointed as a voluntary administrator and subsequently as deed administrator to a related entity to the first defendant, a company called Roseneath Stud Pty Limited. However, that appointment was made as long ago as 1997. The evidence does not establish that Mr Star has advised Mr Bart except in respect of the appointment of a voluntary administrator to the first defendant. But even if he had provided advice in relation to the matters which the plaintiff says give rise to potential claims of the company against Mr Bart it would not follow that Mr Dean-Willcocks has an actual conflict of interest, nor that he has a perceived conflict of interest on reasonable grounds. 30 On the materials on this application I do not think there is a serious question to be tried that Mr Dean-Willcocks should be removed as administrator. The highest the evidence goes is that he was formerly in partnership with Mr Star, that there are some limited business dealings between them of the kind described earlier in these reasons and referred to in the correspondence between the solicitors, and that Mr Star has had an association with Mr Bart from time to time over a number of years, and has advised him in relation to the affairs of the first defendant in connection with the appointment of an administrator. I cannot see how that could give rise to any reasonable apprehension that Mr Dean-Willcocks lacked impartiality or independence. If a creditor formed such an apprehension it ought to be dispelled by the detailed analysis in Mr Dean Willcocks' reports of the potential claims the company has against Mr Bart. It is also relevant in this regard that on 11 March 2009 Mr Dean-Willcocks submitted a report to the Australian Securities and Investment Commission pursuant to s 438D(2) of the Corporations Act describing, again in detail, matters which might provide grounds for Mr Forster or Mr Bart to be disqualified from managing a corporation pursuant to s 206F of the Act. 31 As well as matters referred to earlier in these reasons, Mr Dean-Willcocks referred to the fact that Mr Bart had not provided him with information in relation to the affairs of the company which he had requested. There is no substance in the plaintiff's complaint that Mr Dean-Willcocks has acted supinely or that he failed to investigate possible breaches of the Act by Mr Bart, or that he has failed to pursue him for information. In his declaration Mr Dean-Willcocks stated that his assessment of the risk to his independence did not identify any real or potential risk, or any matter that would prevent his accepting his appointment. He stated that neither he, nor his firm, had within the preceding 24 months any relationships with the company, an associate of the company or any person or entity that has a charge on the whole, or substantially the whole, of the company's property. The nature of his contact with the company prior to accepting his engagement were discussions with Mr Bart, Mr Forster and Mr Star in which they discussed the company's financial affairs and circumstances, and the alternative courses of action available to the company, together with his remuneration. He declared that there were no other prior professional relationships or engagements that should be disclosed. 32 I do not accept that the meeting should be adjourned in order that the Court should first determine the plaintiff's claim for Mr Dean-Willcocks' removal as administrator. For the reasons which follow, there would in any event be serious objections to that course on the grounds of balance of convenience. 33 I do not think the content of the report provides any corroboration of the charge of lack of independence and lack of impartiality. Given the potential for a claim by the plaintiff to set aside a deed of company arrangement if a meeting of creditors resolves to approve entry into the deed, now is not a proper occasion for expressing any firm views on whether the administrator in his report failed to include all material information. If it is accepted for the sake of argument that he did not, it does not follow from that that the defects should be or could be attributed to a lack of impartiality or independence. 34 The question remains whether the meeting should be adjourned on the ground that the administrator's report is defective in the ways the plaintiff contends. 35 Counsel for the plaintiff was not able to point to any case in which orders such as those now sought have been obtained on the ground of alleged deficiencies in the notice or in the report to creditors. 36 The scheme of Pt 5.3A is to require a very expeditious assessment of the company's affairs and expression of the administrator's opinion. Section 445D gives the Court power to terminate a deed of company arrangement if information about the company's affairs with which the creditors were provided was false or misleading, provided that such information can reasonably have been expected to be material to the creditors' position. An order may also be made if such information was contained in the administrator's report under s 439(4), or if there was a material omission from the report. In McVeigh v Linen House Pty Ltd (No. 3) [2000] VSCA 4; (2000) 1 VR 31 Philips JA, with whom Tadgell and Buchanan JJA agreed said (at 56-57 [66]) that Pt 5.3A is: " ... a legislative scheme which deliberately postpones any curial examination or scrutiny of what is put before the creditors until after they have agreed upon the execution by the company of the deed ... " 37 The Court should be very wary of intervening before the second meeting of creditors on the grounds of deficiencies in the administrator's report. It is in the power of the creditors to adjourn the second meeting if they see fit and they are the best judges of what they consider to be material to their decision. 38 Counsel for the plaintiff referred to a valuation of the first defendant's office furniture and equipment, including its plant and equipment and motor vehicles at various shops. The valuation was made as at 30 December 2008. The "market value for existing use", which was based upon the value of the plant and equipment installed in its present situation and available for providing a service to the proprietor in a continuing use, came to a total of $2,840,000 for plant and equipment and $54,500 for motor vehicles. This valuation was referred to by the administrator in his report. The administrator also referred to what I take it was a valuation of the trading names on the basis of an existing use of an amount of $2 million. However, these values would be dependent upon the continuation of the company's business in the hands of a purchaser. 39 I do not accept the plaintiff's contention that it should be inferred that the administrator has simply not considered the sale of the business as a going concern. The basis for that submission was a statement made by Mr Dean-Willcocks that he had indicated to creditors at the first meeting that he did not propose to offer the business for sale at that stage. He noted that it was likely that at the next meeting of creditors a deed of company arrangement would be proposed on the basis that the business of the company continued. He also pointed out there was a practical problem associated with any sale given there were some 16 landlords and that apparently a number of the leases were not in the name of the company. As I said earlier in these reasons, in his report to creditors Mr Dean-Willcocks stated that he thought it very unlikely that the business was saleable. It is fair to say that he did not expound the grounds for that opinion. Some such grounds can be inferred from the correspondence between the solicitors, or may be gleaned from the report, including the loss sustained by the company, the number of different leases of premises at which the company trades and the fact that some of the leases are not in the company's name. However, whatever may be the merits of the criticism of the report for not stating the grounds for the opinion that the business is not likely to be saleable, such criticism does not warrant an order adjourning the meeting. 40 The same is true in respect of the plaintiff's submission that Mr Dean-Willcocks has understated the level of potential recoveries if a liquidator were to pursue claims against Mr Bart or companies related to the first defendant. That is so for a number of reasons. I have already mentioned two. Namely, that the creditors, if they wish for further information on these matters can adjourn the meeting. Also the plaintiff is not necessarily without remedy if the deed of company arrangement is approved, as an application could be made for termination of the deed pursuant to s 445D. No doubt the plaintiff would have to show that material omitted or mis-stated was material to the creditors' position. Of course, the plaintiff will be entitled to address the meeting to persuade creditors of the correctness of its position. 41 There are other reasons why the meeting should not be interfered with. There is the potential loss to creditors if the deed of company arrangement which is now proposed does not proceed because the meeting is adjourned. Next, the administrator is carrying on the company's business and is liable for the debts which he incurs, although entitled, of course, to indemnity from the company's assets. There is no guarantee that the administrator will be prepared to continue to trade until an adjourned meeting is held. 42 In both these last respects it is relevant that no undertaking as to damages has been proffered by the plaintiff and, in any event, even if such an undertaking had been proffered, there is no evidence as to the ability of the plaintiff to satisfy such an undertaking. 43 Next, the statements upon which the plaintiff relies to show that the administrator has not properly investigated the sale of the company's business as a going concern were made at the first meeting of creditors. That is to say, Mr Dean-Willcocks said that he did not propose to offer the business for sale at this stage and it was likely that at the next meeting a deed of company arrangement would be proposed on the basis that the company's business continued. So far as appears from the evidence no objection was taken at that time by the creditors attending the meeting of whom the plaintiff was one. 44 Next, on 2 March 2009 the administrator's solicitors proposed that the plaintiff nominate a representative to review the administrator's investigation and report to creditors with full access to books and records. They sought that any issues which required clarification or further investigation could be raised at the meeting and adjourned if necessary to allow for further enquiries. The proposal that a nominated representative review the administrator's investigation with full access to books and records was not adopted. 45 In all of these circumstances it would not be appropriate to adjourn the meeting, assuming that I have the power to do so. The existence of that power was not disputed at least on the first ground on which it was advanced. I can assume that the power would arise under either or both of the other grounds the plaintiff identified. But assuming the existence of the power, for the reasons I have given, it is not appropriate to make the orders sought. 46 For these reasons I order that the claim for relief in para 4 of the originating process be dismissed. ****** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.