Supreme Court New South Wales Medium Neutral Citation: In the Matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 Hearing dates: 22 October 2012 Decision date: 22 October 2012 Before: Brereton J Decision: Application to adjourn winding up refused Catchwords: CORPORATIONS - application to adjourn the hearing of an application for an order to wind up a company - where administrators appointed during pendency of winding up application - application to wind up company for failure to comply with a creditor's statutory demand - Corporations Act, s 440A(2) - whether creditors stand to get more by payment of their debts from one form of process or administration than from the other Legislation Cited: (Cth) Corporations Act 2001, s 459P, s 459G, s 436A, s 440A, s 439A(4)(b), s 477(2)(a) Cases Cited: Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47; (2003) 44 ACSR 377 Reed Constructions Australia Pty Limited [2012] NSWSC 1045 Category: Interlocutory applications Parties: Offshore & Ocean Engineering Pty Ltd - Applicant (Defendant) Greenwich Contractors Pty Ltd - Respondent (Plaintiff) Representation: Counsel: Mr AG Martin - Applicant (Defendant) Ms K Cooper - Respondent (Plaintiff) Solicitors: MBP Legal - Applicant (Defendant) Bransgroves Lawyers - Respondent (Plaintiff) File Number(s): 2012/263230 Judgment (ex tempore) 1HIS HONOUR: On 23 August 2012 the plaintiff Greenwich Contractors Pty Limited filed an originating process claiming an order pursuant to (Cth) Corporations Act 2001, s 459P, that the defendant company Offshore & Ocean Engineering Pty Limited be wound up in insolvency for failure to comply with a creditor's statutory demand dated 20 April 2012 and served on the defendant on or about that date, which originally claimed a debt of $208,870.59. The defendant made an application pursuant to Corporations Act, s 459G, to set aside the creditor's statutory demand. On 26 July 2012, by consent, the Court made an order varying the amount of the creditor's statutory demand to $162,073.84, and extending time for compliance with it until 16 August 2012. So far as appears, it seems uncontroversial that the company did not comply with the demand so amended within the time so extended. As a result, the plaintiff filed an application to have the defendant wound up in insolvency, which was made returnable on 5 October 2012. 2Meanwhile, on 21 September 2012 - after the winding-up proceedings had been instituted - the defendant appointed administrators pursuant to Corporations Act, s 436A. Then, on 26 September 2012, St George Bank, a secured creditor of the defendant, appointed receivers and managers pursuant to a charge. The first meeting of creditors was held on 3 October 2012. The proceedings came before the Registrar on 5 October, when they were adjourned to today, with the direction that any application pursuant to s 440A be filed and served by 19 October, returnable on 22 October. The second creditors' meeting is to be held on 29 October. 3By interlocutory process filed in court today, the defendant company seeks an order pursuant to the Corporations Act, s 440A(2), adjourning the hearing of the winding-up application until 19 November 2012. Section 440A(2) provides as follows: The Court is to adjourn the hearing of an application for an order to wind-up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. 4Accordingly, the Court is required to adjourn the winding-up application under s 440A(2) if satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound-up. In Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456, McPherson JA, speaking for the Queensland Court of Appeal, said that the question of whether an administration should continue, rather than that there be a winding-up, was "closely related to the further question of whether the creditors could hope to get more by payment of their debts from one form of process or administration than from the other". His Honour said (at 457): In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors. 5In Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47; (2003) 44 ACSR 377, Campbell J, as his Honour then was, said (at [18]): Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase. 6What is required by s 440A(2) is satisfaction that it is in the interest of the company's creditors for the company to continue under administration, rather than be wound-up, as distinct from satisfaction that it may be so. That reinforces the view that a substantial degree of persuasion that administration rather than liquidation is in the interests of the company's creditors is required to invoke the section. 7Mr Allsop, the sole director of the company, has proposed a deed of company arrangement for consideration by the company's creditors at the second creditor's meeting. The proposal is that a deed fund totalling $1,500,000 be established, comprising instalments of $250,000 payable on or before 12 months from date of execution; a further $250,000 by 18 months from execution; a further $250,000 by 24 months from execution; a further $375,000 by 30 months from execution; and, a further $375,000, being the final payment, on or before 36 months from the date of execution. In addition, should the company successfully regain control of a vessel, the "Herakles", a further contribution of $500,000 would be made within six months of such control being regained. And, it is proposed that the company grant the deed administrator a fixed and floating charge to secure the obligations under the deed, while a secured creditor associated with Mr Allsop, Mentanza Pty Limited, would agree to the deed administrator's charge ranking ahead of its charge. Finally, Mentanza would pay to the company $100,000 to fund recovery of ownership and control of the "Herakles", and Mr Allsop would provide the deed administrator with assistance as when required. 8It is noteworthy that the sums of money that are proposed to constitute the deed fund are, however, not a third party contribution to the assets of the company of funds which would not otherwise be available to creditors, but are - as I understand the proposal - to be derived from the orderly realisation of some of the assets, being commercial vessels, and the income derived by others of them over a period of time. 9The receivers and managers have apparently entered into some discussions with Mr Allsop as to how the assets might be sold, but there can be no assurance that they will accede to his proposals in that respect. If they do, then there will be an orderly realisation, and there is no reason why the assets available to creditors in a liquidation would not then be at least equivalent to the assets that would be available in the proposed deed of company arrangement scenario. 10The administrator, as he is required to do by the legislation, has expressed an opinion under s 439A(4)(b), in this case that it is in the creditor's interests for the company to execute a deed of company arrangement. His reasons are that, first, a related party, namely Mentanza, would subordinate its claim, resulting in a greater dividend for the unsecured creditors; secondly, additional funding to cover the legal costs in pursuing the "Herakles" recovery would be provided to the company; thirdly, the company would grant the deed administrator a fixed and floating charge ranking ahead of Mentanza, reducing the risk to unsecured creditors; fourthly, the director would provide assistance to the deed administrator when required; and, fifthly, a deed of company arrangement would yield a higher return to creditors compared with the company being wound-up. The administrator further opines that it would not be in the creditor's interests for the administration to end, and control to be returned to the officers of the company, as the company is insolvent; and, it is not in the interests of creditors for the company to be wound-up, as its assets are highly specialised and will require the director's substantial experience and expertise to obtain contracts for the vessels, whereas if the company is wound-up a liquidator is likely to auction the vessels without active contracts. However, in the event that the receivers and managers do not recover the "Herakles" or the "Van Auld", a liquidator would have no funds to pursue the same, and should a debtor wish to settle their debt, a liquidator would be prevented from settling an amount of more than $20,000 less than the original claim, pursuant to s 477(2)(a). 11I do not see this last point as one worthy of much weight; it reflects a restriction imposed by law for policy reasons on a liquidator's authority. As I understand the proposal so far as Mentanza is concerned, it is that it would subordinate its charge to the proposed charge in favour of the administrator to secure the deed fund. That provides no assurance that there will be a deed fund. Not too much weight should be given to the consideration that a director will provide assistance when required, as it is in any event the obligation of a director of a company in any form of administration to provide assistance to the administrators or liquidators, as the case may be. 12So far as concerns the assertion that the company's assets are highly specialised, and will require the director's substantial experience and expertise to obtain contracts, I proceed on the basis that that is so. The difficulty is that, as things stand, it is not going to be the administrator who is concerned with realising those vessels, but the receivers and managers, who have a fixed and floating charge over the assets and undertaking of the company, and who will seek to realise those assets for the benefit of the secured creditor, St George Bank. They may or may not act in accordance with the director's recommendations. If they do, as I have said, then it seems to me that the same benefits will enure to the company in liquidation, as they would to the company in administration. If they do not, similarly, it will make no practical difference. 13I turn to the analysis of the likely return to creditors. The administrator has expressed the view that on a liquidation scenario, unsecured creditors would receive about 3.8 cents in the dollar, and on a deed of company arrangement scenario, between 21.7 and 31.2 cents, depending upon whether the deed fund was $1.5 million or $2 million. However, the assumption, so far as concerns the estimated return in the case of liquidation, depends on realisation of the assets of the corporation in a manner which does not engage, or at least to the full, Mr Allsop's assistance and input, and therefore does not generate the surplus that would be required to fund the deed of company arrangement. If the assets were realised for a value commensurate with that which Mr Allsop opines that they could be with his assistance, then there would be at least sufficient funds in a liquidation to provide a return commensurate with that which would be obtained in the deed of company arrangement scenario. It is also to be borne in mind that any dividend to creditors would, on the deed of company arrangement scenario, not be realised for at least three years, before which time the deed fund would not be fully funded. 14The situation is, therefore, that there is a possibility that if the realisation of assets proceeds favourably, then it may be that the deed scenario would offer a better solution for creditors, but at the same time, if that realisation proceeds satisfactorily, then a liquidation scenario should offer practically the same benefits. This is not a case in which it is proposed that additional funds or assets be introduced to the company from a third party, which would not otherwise be available to creditors. A mere possibility of a better outcome is insufficient to establish that it "is" in the interests of creditors that the company continue under administration, rather than be wound-up. I am not persuaded that it is in the interest of the company's creditors for the company to continue under administration, rather than be wound-up. 15Finally, it cannot go without observation that when a manifestly insolvent company appoints voluntary administrators following resistance to a creditor's statutory demand and the initiating of winding-up proceedings, the Court approaches with a degree of scepticism whether the appointment is not an attempt as a last resort to avoid the consequences of liquidation. As I observed in Reed Constructions Australia Pty Limited [2012] NSWSC 1045, the circumstances that an application under s 440A follows an application to set aside a creditor's statutory demand, and the initiation of winding-up proceedings before administrators were appointed, places it in a class where that scepticism is attracted. 16I therefore decline to adjourn the application under s 440A. 17The defendant has sought a short adjournment of the originating process, in order to enable it to consider an application for leave to appeal from my decision. It seems to me that there is no prejudice to the plaintiff, or the public, from an adjournment to a date before the proposed second meeting, in order to enable the defendant to consider its position. For that purpose, I adjourn the proceedings to 9am on Thursday 25 October 2012, before the Registrar. ********** 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. Decision last updated: 26 October 2012