Supreme Court New South Wales Medium Neutral Citation: In the matter of Sales Express Pty Ltd (Administrators Appointed) [2014] NSWSC 460 Hearing dates: Tuesday, 22 April 2014 Decision date: 22 April 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: (1) Pursuant to s 447A(2)(b) of the Corporations Act the administration of the first defendant, Sales Express Proprietary Limited is to end. (2) The first defendant Sales Express Proprietary Limited be wound up in insolvency and Richard John Hewson and Nicholas Harwood of level 25 to 26 Riverside Centre, 123 Eagle Street, Brisbane, Queensland be appointed liquidators Catchwords: CORPORATIONS - external administration - winding up - administration under Corporations Act Pt 5.3A - voluntary administration imposed by director in his own interests - where proposed DOCA offers no benefit for creditors who support it, and the only credit or who might benefit opposes it - whether administration involves an abuse of the provisions of Pt 5.3A - held, it does. Legislation Cited: (Cth) Corporations Act 2001, s 447A Cases Cited: Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2007) 47 ACSR 391 Deputy Commissioner of Taxation v Alternative Business Solutions (AUST) Pty Limited) [2006] FCA 400 Re Indopal Pty Limited (1987) 12 ACLR 54 Spacorp v Australia Pty Ltd v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 1979 St Leonards Property Pty Limited v Ambridge Investments Pty Ltd (2004) 210 ALR 265; (2004) 50 CSR 443; [2004] NSWSC 851 Workers Compensation Nominal Insurer v Perfume Empire Proprietary Limited [2011] NSWSC 379 Category: Principal judgment Parties: Rank Arena Group (Australia) Pty Ltd (plaintiff) Sales Express Pty Ltd (defendant) Representation: Counsel: R S Angyal SC (plaintiff) A W Smith (defendant) Solicitors: Results Legal (plaintiff) Norman Waterhouse (defendant) File Number(s): 2014/69569 Judgment (ex tempore) 1HIS HONOUR: By originating process filed on 6 March 2014 the plaintiff Rank Arena Group (Australia) Pty Ltd seeks an order under (Cth) Corporations Act 2001, s 447A(1), s 447A(2)(b) and 447A(2)(c) that the administration of the first defendant Sales Express Pty Ltd end forthwith, and a consequential order that the first defendant be wound up in insolvency pursuant to Corporations Act, s 459A. 2Earlier proceedings between the plaintiff, to which for present purposes I shall refer as Rank Arena, and the first defendant, to which I shall refer to as Sales Express, were prosecuted in this court and settled by an agreement made in late 2013, the substantive relevant provisions of which involved: (1) Sales Express' sole director Mr Matthew Gerard agreeing to undertake to the court that, pending the liquidation of Sales Express, it would not divest itself of any assets and also agreeing to give corresponding undertakings with respect to nine subsidiaries of Sales Express: (2) Sales Express agreeing to procure by 21 February 2014 the appointment of a liquidator, failing which it would consent to a winding up order at the instance of Rank Arena; (3) Sales Express consenting to judgment against it for $1.64 million. In consideration of those terms, Rank Arena undertook not to enforce the judgment until after 21 February (being the date by which Sales Express had promised to go into liquidation). The parties otherwise gave each other mutual releases. 3In conformity with the terms of the settlement agreement, Mr Gerard gave an undertaking to the court on 13 December 2013, conditional on the proceedings being dismissed on 19 December, that from and including 13 December and pending the liquidation of Sales Express none of Sales Express and its nine subsidiaries would divest itself of any assets. On 19 December 2013, the court made orders, including for the dismissal of the proceedings, "upon the undertaking of Matthew Gerard given to the court on 13 December 2013", and noted that the undertaking given by Mr Gerard continued. In these proceedings, Rank Arena says that it would not have entered into the settlement agreement nor consented to the dismissal of the prior proceedings had it been proposed that Sales Express go into administration rather than liquidation, but I do not think that this subjective view of Rank Arena is material in the context that there is no application to rescind the settlement agreement, which plainly remains on foot. 4Some time in late December 2013, Sales Express contacted Mr Heard, an insolvency practitioner, and it appears formed the intention to go into administration. 5On 12 February 2014, Gerard Corporation Pty Ltd, a related company of Sales Express that had until then purported to provide financial support to Sales Express, gave notice that from 22 February 2014 it would no longer do so. This had the consequence that Sales Express was unable to pay Rank Arena's judgment debt when it fell due on 22 February. As a result, when Sales Express' accounts were prepared during February 2014, they recorded that the company would not be able to pay its debts as and when they fell due on or after 22 February 2014. Financial statements for the company had not previously been prepared for 2011, 2012 or 2013, but were brought into existence and audited in February 2014. On 17 February 2014, Mr Gerard resolved that the accounts for all three financial years should be signed and he signed them that day, which was also the date of the auditor's certificate. While the 2011 and 2012 accounts were prepared on the going concern basis - because despite an apparent deficiency of funds in excess of $50 million, reliance was placed on the ongoing support of Gerard Corporation, notwithstanding that the company did not trade after 2010 - the 2013 accounts were prepared on the liquidation basis in view of the withdrawal of that alleged support. On 20 February 2014, Mr Gerard, as director of Sales Express appointed the administrators, who are the second defendants in the proceedings. 6Sales Express has two shareholders, Brightwood and Holdings Pty Ltd as to 50.1%, and Gerard Corporation Pty Ltd as to 49.9%. 7The financial position of the company as at 20 February 2014 appears to show assets comprising a bank balance of $5,833 (which the administrators have recorded, loans to related entities of $13.693 million which are provided for as impaired in full); and investments of $544,000 (which are also provided for as impaired in full), showing net recoverable assets of $5,833. The reported liabilities are a judgment debt of $1.64 million (being Rank Arena's judgment) and unsecured loans of $47.180 million (in respect of funds said to have been advanced by related entities to enable the company to continue to be in a position to pay its debts as and when they fell due). While the personal property security register disclosed a registered security interest over the company's assets of the date of the appointment of the administrators, that security was discharged on 24 February 2014. 8On 4 March 2013, the date of the first meeting of creditors, Mr Gerard proposed a deed of company arrangement, to be in full satisfaction and release of the debts owing to the unrelated creditors of the company, by the distribution of the fund to be made available - which fund was not quantified, but was said to be an amount that would ensure that unsecured creditors receive a greater dividend than in the event of a liquidation. 9This proceeding was commenced on 6 March 2014. On 11 March 2014, a revised proposal for a deed of company arrangement was propounded on behalf of Mr Gerard, providing for payments by the director of $95,000 and the administrator's reasonable costs of the administration. This was said to produce a dividend to Rank Arena of six cents in a dollar, which, so it was said, would represent a substantially higher return than would otherwise be payable (if there were any return at all) in a liquidation. 10I have referred to the circumstance that the assets of the company apparently include loans to related entities of $13.693 million, against which provision was made for impairment in full. Prior to 20 March 2014, the administrators made a demand on the debtor companies Clever Home Products Proprietary Limited and Jubilation Investments Proprietary Limited, which appear to be indebted to Sales Express for $2.643 million and $11.050 million respectively. Both those corporations are corporations in the Gerard Group in which Mr Gerard and his solicitor Mr Builder are the ultimate shareholders. While the administrators have been informed that Clever Home Investments is a modestly profitable distributor of electrical appliances and homewares, and that Jubilation Investment is a dormant company, public statements by Mr Gerard include that 2013 has been a "fantastic year for Clever Home Products". 11Prior to 20 March 2014, a further amended proposal for a DOCA was submitted to the administrators, which inserted a provision: The deeds consideration is in full and final satisfaction of the debts due by Clever Home Products Proprietary Limited and Jubilation Investments Proprietary Limited which debts are of no value. 12The administrators convened the second meeting of creditors on 20 March 2014 by notice of meeting of that date accompanied by the s 439A report. In that report, the administrators assessed that on the worse case, nothing was recoverable in respect of the related party loans from Jubilation Investments and Clever Home Products, and that on the best case a total of $425,903 was recoverable. That assessment was based on information provided by the director and the chief financial officer of the Gerard Corporation regarding the recoverability of those debts, and the best case estimate represented what would be available to the company should those debtors distribute all their assets to the creditors. However, the administrators observed: The actual recoverable value of these debtors is yet to be determined as the realisable value of these company's assets is unknown and it may be that Clever Home Products Pty Ltd as a trading entity has some capacity to pay a portion of this loan out of future profits. We have made demand on the companies requiring payment in full of the balances outstanding and to date are yet to receive a response. 13The administrators also investigated whether there were voidable transactions and whether there was a prospect of recovery from the directors for insolvent trading. In both cases, they appear to have concluded that there was little prospect of success, essentially because the company appeared to be solvent until the support of one of its holding companies was withdrawn in early 2014. 14In the context of a deficiency of funds of in excess of $50 million, and the "withdrawal of support" in the light of the company being faced with a judgment debt of a mere $1.64 million, questions might be raised and explored as to whether, notwithstanding the professed support of Gerard Corporation referred to in accounts brought into existence on the eve of and in contemplation of the administration, there was nonetheless insolvency at a significant earlier date. 15The administrators observed that they were aware that the company owned a number of trademarks that were transferred many years prior to their appointment, and that their inquiries confirmed that there had been no transfer of any intellectual property owned by the company or its subsidiaries after 1 January 2011. However, the evidence adduced in these proceedings indicates that shortly before that date, in December 2010, the company transferred a large number of trademarks - perhaps seventy in all - to GSM Holdings Limited, a subsidiary of the Gerard Corporation, and that those transfers are not reflected in the company's 2011 accounts, the 2011 balance sheets incorrectly showing that Sales Express did not own any trademarks in 2010. 16In the pendency of the present application, the Court by consent on 24 March 2014, upon the plaintiff's usual undertaking as to damages, extended the convening period to 30 May 2013, and restrained the administrators from holding a second meeting of creditors until that date. Because the creditors comprise on the one hand Rank Arena's judgment debt for $1.64 million, and on the other the loans by related entities being essentially the Gerard Corporation as to $46.7 million and Snapdragon Investments as to $437,000, on any vote at the second creditors' meeting, the plaintiff's vote would be swamped by those of the related creditors if they were exercised, and the related creditors have indicated that they do intend to vote, and to vote in favour of the proposed deed of company arrangement. 17The administrators have recommended that it would be in the interest of creditors to resolve that the company execute a deed of company arrangement in the terms of the proposal. The reasons they advance for that are: first, that a liquidation would rely on successful recoveries to improve creditors' prospects of receiving a dividend, and they do not currently view any such recoveries as likely; secondly, that the deed contribution would be received relatively quickly, in comparison to liquidation recoveries; thirdly, that there is certainty with respect to the deed contribution, when compared to the potential value of liquidation recoveries; fourthly, that related creditors would not compete with the unrelated creditors' dividend under the DOCA, which would improve the dividend return; and fifthly, that the return to the unrelated creditor is estimated at between 4.8 cents and 6.1 cents in the dollar under the proposed DOCA, compared to an estimated return in the event of a liquidation between nil and 0.8 cents in the dollar. 18The plaintiff submits that the Court should make an order, primarily pursuant to s 447A(2)(b) that the administration should end because provisions of Pt 5.3A are being abused, or alternatively pursuant to subparagraph (c) for some other reason. 19It is clear from s 447A(2)(b) that the Court may make an order that an administration end, if the administration provisions of the Corporations Act are being abused. In Workers Compensation Nominal Insurer v Perfume Empire Proprietary Limited [2011] NSWSC 379, Barrett J, as his Honour then was, observed (at [22]) that the cases in which the Court had intervened under that provision to terminate a voluntary administration were cases in which there had been what might be termed as some ulterior element or purpose. His Honour referred to cases in which the directors had put the company into administration not for a purpose envisaged by the legislation but with a view to installing an administrator who might be more compliant than the provisional liquidator already in office [Aloridge v Christianos (1994) 13 ACSR 99]; where a secured creditor had imposed an administrator when an appeal by the company was pending against the dismissal of its application for an order setting aside a statutory demand served by that creditor, [Spacorp v Australia Pty Ltd v Fitzgerald [2001] VSC 61; (2001) 19 ACLC 1979]; where a sole director imposed voluntary administration with a view to the adoption of a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value, which would bar particular claims already being litigated against the company [Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2007) 47 ACSR 391; and where an administrator was imposed by the sole director in the face of a pending winding up application, in order to manipulate the relation-back day to his own personal advantage [St Leonards Property Pty Limited v Ambridge Investments Pty Ltd (2004) 210 ALR 265; (2004) 50 ACSR 443; [2004] NSWSC 851]. His Honour distinguished (at [25]) the case then under consideration from one in which there had been an attempted distortion or manipulation or one where any enhancement of the return to creditors generally would be at the expense of persons who had been innocent bystanders in the event leading to voluntary administration and ultimate winding up. 20In the present case, the only unrelated creditor is opposed to the administration continuing. This is of itself significant, because were the second meeting of creditors to resolve in favour of entering into the proposed deed of company arrangement, nonetheless it would be open to the dissentient creditor, being the only unrelated creditor, to apply to the Court for a review of that decision. 21Moreover, this is a case where, even if one looks at the interest of creditors generally, there is nothing in the proposed deed of company arrangement for the benefit of the related creditors who propose to vote in favour of the deed. The only apparent benefit in the deed is for the unrelated creditor, who does not support it. 22The significance of this feature was referred to by Lindgren J in Deputy Commissioner of Taxation v Alternative Business Solutions (AUST) Pty Limited) [2006] FCA 400, in which related creditors totalling some $932,000 in value had agreed not to participate in the deed fund, leaving only the Commissioner (for $240,000) and another arm's length creditor Sensis (for $4,000) to participate. His Honour said: [8] If we put aside Sensis, the only creditor who stands to benefit from the proposed DCA is the Commissioner, yet he opposes the adjournment of his application for a winding up of the company. There is no suggestion that he will change his stance between now and tomorrow. The question that arises under s 440A, therefore, is whether it is in the interests of creditors that the seven creditors mentioned should be able to subject the Commissioner and Sensis to the proposed DCA regime, and that the Commissioner and Sensis should be subjected to that regime. [9] When s 440A speaks of 'the interests of creditors' it is referring to the creditors' interests as creditors, that is to say, to their interests in recovering what is owed to them, not to 'interests' arising from family relationships, friendship or emotional attachment. For some reason, the seven creditors to whom $932,200 is owed in total, are willing to support the DCA and to forego recovery of the debts owed to them. This may well be due to family or other relationships between them, or members of them, and Mr and Mrs Brickwood. There is nothing untoward in this, but the fact remains that, so far as the evidence reveals, it is not in their financial or commercial interests to forego their debts, and the only creditor whose interests remain to be considered (leaving Sensis to one side) is the Commissioner, who prefers that the Company be wound up. This is a weighty consideration. 23Those observations apply (and, for reasons to which I shall come, all the more strongly) in the present case. It is not in the financial or commercial interests of Snapdragon and Gerard Corporation to forego their debts. The only creditor whose interests remain to be considered is Rank Arena which prefers that the company be wound up. But whereas in the case to which I have just referred, Lindgren J observed that there was "nothing untoward" in family or other relationships dissuading the related creditors to forego participation in the deed fund, in this case, there are unsatisfactory aspects to the decision of those creditors to support the deed of company arrangement. As I have said, it is not in their financial or commercial interests as creditors to do so. One asks then, why would they do so? Of course, they are controlled by the same persons who controlled the company, Mr Gerard. Mr Gerard gave an undertaking to the Court that pending liquidation of Sales Express it would not divest itself of any assets. 24The proposal that his contribution of $95,000 to the deed fund procure a release of the indebtedness to the company of Clever Home Products and Jubilation Investments would be inconsistent with that undertaking, since that release would involve the company divesting itself of the debts owed to it by those debtor companies. That would be a result that would be for the benefit, indirectly if not directly of Mr Gerard. In addition, the prospect of those debts being recovered for the benefit creditors would be lost, in circumstances where Clever Home Products is a trading company, with the prospect not only that funds might be recovered directly from it, but also that if they cannot be fully recovered, there may be some recovery from its director for insolvent trading. If there were a substantial recovery against the total debts shown in the accounts of $13.7 million, then - even allowing that the related creditors would prove in the liquidation - that could generate a dividend of as much as twenty-five cents in the dollar or thereabouts. 25Moreover, it has been suggested that a liquidator would be able to investigate the circumstances surrounding the transfers of the trademarks in December 2010. Initially, it was suggested that those transfers might be liable to be set aside as voidable transactions pursuant to Corporations Act s 588F(4). While that would be so only if the company was insolvent at the time of those transactions, given the enormity of the deficiency of funds in 2011, it is not impossible that that could be established, notwithstanding the claims of reliance on support from Gerard Corporation in the accounts produced in February 2014. 26It was also suggested that apart from an insolvency, the transactions might be voidable pursuant to s 588FE(6A) as unreasonable director related transactions entered into during the four years ending on the relation-back day. However, it seems to me that there would be some difficulties in establishing that the transactions were unreasonable director related transactions within the s 588FDA(1)(b), as the transferee - while a company with which Mr Gerard was associated - does not fall within the definition of "a close associate" in subparagraph (ii). While the matter is not beyond argument, there is doubt as to whether a payment to a company in which the director has a substantial interest falls within the concept of a payment to a person "on behalf of or for the benefit of" the director within subparagraph (iii). But even if the transfers were not liable to be set aside as voidable transactions, the liquidator might well have a remedy against Mr Gerard personally for breach of director's duties, in respect of which a six-year limitation period applies under s 1317K. 27That review of the position reveals that the only person who will benefit from the deed of company arrangement is in substance Mr Gerard, who will avoid the prospect of companies in which he has a very substantial interest from being pursued for debts owed to Sales Express; he will also avoid examination of his conduct in connection with the transfers of the trademarks; and he will avoid any investigation of the solvency of the company and when in truth it became insolvent. It can only be to procure substantially those benefits for him that the related creditors under his control would endeavour to foist the deed of company arrangement on the unrelated creditor Rank Arena. 28The provisions of Pt 5.3A were not intended to enable directors, through their control of the majority of creditors, to avoid having their conduct of the affairs of the company scrutinised, at least where the unrelated creditors desire that to happen. That is not to say that the interests of related creditors are necessarily to be disregarded: they may have as valid and proper an interest in the outcome of an insolvency as an unrelated creditor. But as in Alternative Business Solutions and in this case, where they wish to vote in favour of a deed of company arrangement which offers no benefit for them and which the unrelated creditors do not wish to have imposed on them, generally speaking the interests of the unrelated creditors will prevail. 29For those reasons, I am satisfied that the provisions of Pt 5.3A are being abused in the relevant sense, and accordingly that the administration should end. 30I am satisfied that Sales Express is insolvent. That conclusion is supported at least by the opinion of the administrators in their s 439A report; by the statement to that effect in the most recent financial statements of the company, by the failure of the company to pay Rank Arena's judgment debt of $1.64 million as and when it fell due; and by an examination of the balance sheet of the company which, as I have said, discloses a deficiency of funds of some $48.814 million. 31The consent of Richard John Hewson and Nicholas Harwood, official liquidators, to act as liquidators has been given. 32The notice of the application that the company be wound up has been published on the ASIC website in accordance with the rules. 33Accordingly, the Court orders that: (1)Pursuant to s 447A(2)(b) of the Corporations Act the administration of the first defendant, Sales Express Proprietary Limited is to end. (2)The first defendant Sales Express Proprietary Limited be wound up in insolvency and Richard John Hewson and Nicholas Harwood of level 25 to 26 Riverside Centre, 123 Eagle Street, Brisbane, Queensland be appointed liquidators. 34The Act provides that the plaintiff's costs of the winding up proceedings be paid out of the assets of the company. 35I do not think sufficient grounds has been shown to disturb the costs order made by Black J, in respect of 24 March. 36For the purposes of s 466(2), the costs payable to the plaintiff are to include the plaintiff's costs in connection with the application to terminate the administration as well as the costs of the winding up itself. ********** 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: 29 July 2014