640 the Esplanade Pty Ltd v Splash Bay Pty Ltd
[2016] FCA 1079
•30 August 2016
FEDERAL COURT OF AUSTRALIA
640 The Esplanade Pty Ltd v Splash Bay Pty Ltd [2016] FCA 1079
File number: QUD 851 of 2015 Judge: MARKOVIC J Date of judgment: 30 August 2016 Catchwords: PRACTICE AND PROCEDURE – Application for adjournment of hearing of application to wind up – where the application was made on the morning of the hearing – where no sufficient explanation for delay and the effect on creditors as a whole is unclear – application dismissed Legislation: Companies (New South Wales) Code s 431
Corporations Act 2001 s 547
Federal Court Act of Australia 1976 (Cth) s 37M
Cases cited: Aon Risk Services Australia Limited v Australian National University (2009) 239 CLR 175
New South Wales Rugby League v United Telecasters Sydney Ltd (1991) 4 ACSR 510
Wilson v PLT Pipetech Pty Ltd (1988) 14 ACLR 697
Tamaya Resources Limited (in liq) vs Deloitte Touche Tohmatsu (A firm), in the matter of Tamaya Resources Limited (in liq) [2015] FCA 1098
Tamaya Resources Limited (in liq) vs Deloitte Touche Tohmatsu (A firm) (2016) FCAFC 2
Date of hearing: 30 August 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 23 Counsel for the Plaintiff: Mr C F O’Meara Solicitor for the Plaintiff: Hillhouse Burrough McKeown Solicitors Counsel for the Defendant: Mr N J Shaw Solicitor for the Defendant: Johanson Lawyers ORDERS
QUD 851 of 2015 BETWEEN: 640 THE ESPLANADE PTY LTD ACN 161 057 638
Plaintiff
AND: SPLASH BAY PTY LTD ACN 158 274 723
Defendant
JUDGE:
MARKOVIC J
DATE OF ORDER:
30 AUGUST 2016
THE COURT ORDERS THAT:
1.The defendant’s application for an adjournment of the hearing is refused.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MARKOVIC J
INTRODUCTION
Before me is an application to wind up the defendant, Splash Bay Pty Limited. The application was filed by Christopher Rosch on 14 September 2015. 640 The Esplanade Pty Ltd was substituted as plaintiff by an order made on 10 December 2015. It had served a statutory demand dated 21 August 2015 seeking a total amount of $511,080.58 on the defendant’s registered office. The defendant did not comply with that demand and took no steps to have it set aside.
In this proceeding, the defendant says that it is not indebted to the plaintiff in the amount claimed or at all. Orders have been made for the preparation of this matter for hearing including orders for the filing by the parties of their evidence. In particular, on 14 March 2016, Edelman J made an order that on or before 4 pm on Monday, 11 April 2016, the defendant was to file any additional affidavit material as to solvency that it intended to rely upon at the hearing. On 18 May 2016, Edelman J ordered, among other things, that the matter be listed for trial for two days commencing today.
This morning, when the matter was called on for hearing before me, the defendant made an application for an adjournment of the hearing. The purpose of that adjournment was said to be two fold. First, to enable the defendant to convene a meeting pursuant to s 547 of the Corporations Act 2001 (Corporations Act) of its creditors in order to put to those creditors a proposal about the refinancing of the company and to ascertain the level of support of those creditors for that proposal, and secondly, in the time of the adjournment to provide admissible evidence of the views of those creditors and evidence on the question of solvency. The plaintiff opposes the application for an adjournment.
EVIDENCE IN SUPPORT OF THE ADJOURNMENT APPLICATION
In support of the application, the defendant relies on the evidence of its sole director, Charles Stanley Richards (Mr Richards), as well as evidence from four of its creditors. In summary, Mr Richards’ evidence is that:
(1)the defendant’s sole business is the holding and developing of land as trustee of the Splash Bay unit trust. It does not trade except to the extent that it engages professional advisors associated with that development;
(2)the land comprises four lots situated at Hervey Bay and Urangan in Queensland. Initially, the defendant proposed to develop the land into a water theme park, but when funding for this became unattainable, it decided to focus on development of the land as a residential townhouse development;
(3)in March of this year, the defendant changed its focus and it decided to pursue the development of the land as a relocatable home park. On 22 June 2016, the defendant received approval from the relevant council for its proposed development of the land as a relocatable home park (the DA);
(4)this approval now permits the defendant to arrange for refinance of its debts so that it can proceed with the development. Mr Richards previously instructed the defendant’s solicitors to request more time for the filing of evidence about its solvency but that time passed before the development approval came through;
(5)the defendant has nine major creditors including the plaintiff. The total amount claimed by creditors is approximately $20 million. Of the nine creditors listed, leaving aside the plaintiff to this proceeding to which the defendant says it has no indebtedness, Mr Richards says that the defendant has issues with the claims of two other creditors: Mr Rosch and Gold Coast Protection & Collection Services Pty Limited. Mr Richards says that the defendant also has an issue with a loan provided by Nana Finance Limited (Nana Finance). The current amount claimed by that creditor is just in excess of $3.7 million but the defendant only acknowledges that it is indebted to it in the amount of $1.9 million;
(6)there are sundry service providers that are owed approximately $135,000 by the defendant which includes rates and land tax. Mr Richards says that all consultants engaged in the pre and post DA works for the DA have been paid and that in the past six months the defendant has paid in excess of $600,000 in interest and consultant payments funded by its unit holders;
(7)the defendants’ only significant asset is the land it holds which was valued, as to part, in September 2014 and, as to the other part, in October 2013. The combined value as at those dates was approximately $10.9 million;
(8)since the approval of the DA in June 2016 it seems the defendant has been discussing the possibility of finance for the development with several banks including Westpac which previously approved a facility for the development of 12 townhouses on part of the land for approximately $4.2 million. However, that bank is currently reassessing its funding options given the change in development approval; and
(9)on 22 August 2016, Mr Buckeridge, who is a unit holder in the Splash Bay unit trust, informed Mr Richards that he had received interest in funding for the defendant from Mr Martin Scanlan who is proposing to invest approximately $2 million with the advance to be made in about October this year. The proposed funding from Mr Scanlan is conditional on reaching satisfactory arrangements with the existing creditors and Mr Richards and Mr Buckeridge have been working with the creditors to secure their support for the new funding arrangement.
I turn then to the position of the creditors in light of the proposed funding from Mr Scanlan and in the context of the current adjournment application. As I have previously noted, there are affidavits filed by or on behalf of four of the nine major creditors named in Mr Richards’ affidavit. They are Holtex Pty Limited (Holtex), through a director, Graham Buckeridge, which is owed approximately $1.6 million, Nana Finance, through its authorised attorney, Rodney Johanson, which is owed approximately $3.7 million and Hagit Pty Limited (Hagit), through its director Graeme Efron, which is owed approximately $550,000. Each of these creditors has been informed that the defendant is in discussions with a person who has expressed a willingness to loan $2 million towards reaching a satisfactory settlement of all loans, other than the loan to the first mortgagee of the land, and that the funds will only be available if all mortgagees agree to an acceptable repayment plan. On that basis, each of those creditors is willing to defer any obligation on the part of the defendant to pay the debt owed to it. However, in the case of Hagit, it is only willing to defer that obligation for a period of two weeks from 29 August 2016, that is, until 12 September 2016.
Cajavi Pty Limited (Cajavi), through its director Stephen Bennett, has also been provided with the same information. It is owed approximately $575,000. It is willing to defer any obligation on the part of the defendant “…to pay the debt due to [it] to allow negotiations for a mutually acceptable repayment of the debt to be completed and formally documented”.
I should also add that Cajavi, Nana Finance and Holtex each note that resolution of payment of their respective claims may require a negotiated reduction of the amount claimed or a conversion of some or all of their respective debt to equity in the defendant.
As to the balance of the creditors, Mr Richards gives evidence that:
(1)Gokyo No 2 Pty Limited (Gokyo), which is owed approximately $5.4 million, has a first registered mortgage over the land and which has served a notice of exercise of power of sale, does not intend to exercise its rights in relation to its securities on the basis that the defendant continues to meet the agreed monthly instalments of $40,000. Gokyo also notes that it has no interest in the liquidation of the defendant and is unable to see the benefit of such an action;
(2)he had contact with Brian Clarke, the director of Anscape Pty Ltd which is owed $1.1 million. At the time of the discussion, Mr Clarke did not have access to his files but said that he was not pursuing the loan within the next three weeks and agreed that he would be negotiating the terms and conditions of settlement with Mr Richards during that time; and
(3)no agreement could be secured with Mr Rosch or Gold Coast Protection & Collection Services Pty Limited who collectively claim approximately $6.9 million nor, as is evidenced by its opposition to this application, with the plaintiff in this proceeding.
CONSIDERATION
The defendant submitted that it could only put on evidence as to solvency once the DA was approved. It contended that it would use any time allowed by an adjournment to put a proposal to creditors at a meeting convened pursuant to s 547 of the Corporations Act and it would also use that time to further negotiate with its lenders. It submitted that there was a dispute about the plaintiff’s debt and that, at its highest, the plaintiff’s debt did not approach the majority of creditors’ debts, but that the majority of creditors both in quantum and by number supported an adjournment.
The defendant relied on two judgments of Young J in the Supreme Court of New South Wales. The first was the judgment in Wilson v PLT Pipetech Pty Ltd (1988) 14 ACLR 697 in which his Honour was prepared to order that a meeting be convened pursuant to the former s 431 of the Companies (New South Wales) Code, which was in substantially the same terms as s 547 of the Corporations Act, but upon specific terms.
In that matter, his Honour noted that the defendant company was hopelessly insolvent. However, he also noted that it was one of a group of companies that was purchased by an individual, Mr Elzinga, who had sent a letter to all creditors telling them that he would see that their debts were paid in nine months or so and that a large number of creditors had sent back forms to show that they agreed to that arrangement. His Honour found that this was a case where, despite the insolvency of the defendant, the relevant section to convene a meeting should be brought into play because:
[T]he commercial reasons which would activate a man of business into accepting the proposal as against a liquidation may very well mean that the court should, in its discretion not make the order that the plaintiff and the supporting creditor would otherwise be entitled to.
His Honour then turned to consider the form of the meeting and whether there should be a provisional liquidator appointed in the meantime.
The second judgment relied on by the defendant was New South Wales Rugby League v United Telecasters Sydney Ltd (1991) 4 ACSR 510 (NSW Rugby League). That matter also involved an application to wind up the defendant where there was no dispute that the defendant was insolvent and where the evidence required before a winding up order could be made showed that such an order should be made. However, the company and its secured creditors opposed an order being made and sought an adjournment of four months to enable the receivers for the secured creditors to realise the business being carried on by the company to its best advantage. At 512, his Honour said that what was required was to consider whether “the matters raised by the secured creditors outweigh the normal rule of policy?” His Honour went on to say:
The right to wind a company up has often been said to be a class right, that is, a right to be exercised in the interest of creditors as a whole. Accordingly, if one has opposition to the application by creditors the court must take into account the view of those creditors. If it appears that the majority of the same class of creditors as the applicant is against the winding up, whether that fact is discerned from a meeting of creditors or otherwise, then the application may be dismissed but, on the other hand, it might not be because the court may well think it unfair that one creditor does not get its debt paid. Where, however, the opposition is not be creditors of the same class, but an application on behalf of unsecured creditors is resisted by secured creditors, the court will, on the authorities, discount that opposition. Secured creditors will usually have some property against which they can claim, whereas the unsecured creditors only have their right to secure a proper winding up.
Young J then considered the relevant factors put to him against the background that, prima facie, the company should be wound up and, if insolvent, wound up immediately. In the circumstances of that matter, the Court ordered that the company be wound up.
The evidence that is before me in support of the adjournment application, in my view, rises no higher than evidence that there is a potential for finance to be provided to the defendant in the sum of $2 million in the event that satisfactory arrangements are reached with all existing creditors. There is no evidence of what constitutes satisfactory arrangements. Further, the evidence is that arrangements have not been reached with all creditors.
There is no evidence before me that gives me any comfort that an adjournment would allow such arrangements to be reached, given the total amount of the debts claimed by creditors and that the current conditional finance is only for $2 million. Any further finance to be provided by a bank lender may or may not be forthcoming. At present, the evidence is only of a very nascent interaction between potential bank lenders and the defendant.
The defendant submits that I should take into account the interest of all creditors and not just the plaintiff’s interests in determining whether the adjournment should be granted. However, as Young J said in NSW Rugby League, if there is opposition to the adjournment application by creditors, I must take into account the view of those creditors. While the plaintiff might be the only creditor who has made submissions to oppose the adjournment, there is clearly no arrangement in place with two additional creditors of the company and their interests too should be taken into account.
Further, it is relevant to note that a purpose of the application for adjournment is to allow the defendant to put before the Court evidence as to solvency. However, orders were made as far back as March of this year for the defendant to do just that. While the defendant says it was not in a position to put on that evidence until the DA was approved, that approval came through two months ago on 22 June 2016.
In my view, the principles enunciated by the High Court in Aon Risk Services Australia Limited v Australian National University (2009) 239 CLR 175 (Aon) should also be considered in the context of this application. While this is not an application to amend, as was the case in Aon, it is an application to adjourn proceedings that were set down some time ago so that, among other things, the defendant can put before the Court further evidence. The principles set out in Aon were summarised by Gleeson J in Tamaya Resources Limited (in liq) vs Deloitte Touche Tohmatsu (A firm), in the matter of Tamaya Resources Limited (in liq) [2015] FCA 1098 at [127]. That part of her Honour’s decision was subsequently approved by a Full Court of this Court in Tamaya Resources Limited (in liq) vs Deloitte Touche Tohmatsu (A firm) (2016) FCAFC 2 at [125].
Relevantly, I should consider, first, the extent of the delay and any costs associated with, in this case, the application to adjourn and put on further evidence; secondly, the prejudice that might be assumed to follow from this application; thirdly, the explanation for any delay in applying for the adjournment; fourthly, the parties’ choices to date in the litigation and the consequences of those choices; fifthly, the detriment to other litigants in the Court; and sixthly, the potential loss of public confidence in the legal system which can arise where a Court is seen to accede to applications made without adequate explanation or justification.
In my opinion, the delay is significant. This application was made on the morning of the hearing. The costs associated with the delay would extend to paying the costs of the plaintiff thrown away by reason of the adjournment. The plaintiff submitted that those costs ought be made payable as a condition of the adjournment. While no particular prejudice has been identified, it is unclear what the effect would be on the creditors as a whole, given this adjournment application is made in the context of a winding up application where arrangements could not be reached with all creditors. No sufficient explanation has been given for the delay in applying for the adjournment.
The defendant says it could not put on evidence of its insolvency until there was approval of the DA, but some time has passed since then and there is a paucity of evidence as to what has occurred in that intervening period. This matter has been set down for hearing for some time. It is not appropriate that the hearing be adjourned at this late stage and that other litigants be left to wait in the queue in circumstances where time was allocated to this matter. In coming to my view I have also taken into account the provisions of s 37M of the Federal Court Act of Australia 1976 (Cth).
CONCLUSION
In the circumstances, I refuse the application for an adjournment.
I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic. Associate:
Dated: 19 September 2016
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