In the matter of Mosman Rowers Limited (Admin Apptd)

[2018] NSWSC 1729

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Mosman Rowers Limited (Admin Apptd) [2018] NSWSC 1729
Hearing dates:	5 September 2018
Decision date:	05 September 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The time for the Defendant to execute the Deed of Company Arrangement approved at the meeting of creditors on 13 August 2018 is extended to 5pm on 28 September 2018 pursuant to s 447A of the Corporations Act 2001 (Cth). This order has no effect unless, by 4pm on 6 September 2018, the Plaintiff delivers to the voluntary administrators a bank cheque in the amount of $13,500 to be applied to the costs of the voluntary administration in the period to 30 September 2018.
Catchwords:	CORPORATIONS – external administration – application for extension of time to execute a deed of company arrangement – where creditors would receive more favourable return if the deed of company arrangement is performed in accordance with its terms – where extension of the voluntary administration will expose the voluntary administrators to additional costs – whether extension of time to execute a deed of company arrangement should be granted subject to condition
Legislation Cited:	- Corporations Act 2001 (Cth) ss 444B, 447A
Category:	Principal judgment
Parties:	Timothy Charles James (Plaintiff) Mosman Rowers Limited (Admin Apptd) (Defendant)
Representation:	Counsel: T C James (Solicitor) (Plaintiff) M Callanan (Solicitor) (Defendant)   Solicitors: Gary Cassim & Associates (Plaintiff) Rankin Ellison Lawyers (Defendant)
File Number(s):	2018/267895

Judgment – ex tempore (REVISED 11 SEPTEMBER 2018)

1. By Originating Process filed on 31 August 2018, and initially made returnable on that date, Mr Timothy James sought, broadly, an order that the time for the Defendant, Mosman Rowers Limited (admin apptd) (“Company”), to execute a Deed of Company Arrangement (“DOCA”) approved at a meeting of creditors on 13 August 2018 be extended to 5pm on 28 September 2018. That application was supported by Mr James' affidavit dated 30 August 2018. When the application was first heard, I noted that the application plainly affected the interests of the lessor of the premises previously occupied by the Company, Roads and Maritime Services ("RMS"), and indicated that the application should be served on RMS to allow it an opportunity to be heard in respect of the application. By a further affidavit of Mr James read today, Mr James establishes that the application was served on RMS, at offices in Rozelle and Milsons Point, on 3 September 2018, and was also served by email, in accordance with an order that I had made, on an officer dealing with the matter at RMS. RMS has not, however, appeared to make any submission or lead any evidence in respect of the application.

2. When the matter was before me on the last occasion, Mr James indicated that he understood that the voluntary administrators did not oppose the application brought by him, and members of the Company with which he is associated. I indicated that I would be assisted by an appearance by the voluntary administrators, and Mr Callanan, solicitor, has appeared on behalf of the voluntary administrators today. An affidavit of Mr Morgan Kelly, who is one of the two persons appointed as voluntary administrators of the Company, has been read in respect of the application.

3. As will emerge, this case is a hard case, in the classic sense of that term, and I have been assisted by thoughtful and balanced submissions made both by Mr James and by Mr Callanan, which have together emphasised the difficulty of the present application. By way of background, as set out in Mr James' affidavit dated 30 August 2018, Messrs Kelly and Gothard of Ferrier Hodgson were appointed as voluntary administrators of the Company on 7 May 2018, necessarily on the basis that the Company was insolvent or likely to become insolvent.

4. The Company has occupied premises at Mosman, New South Wales, since 1911 and, during that period, has occupied those premises under lease from RMS and its predecessors. Part of the site is also leased from Mosman Council. Mr James refers to creditors of the Company, in the order of $310,000 and to steps which were taken by the voluntary administrators to seek to negotiate, on the one hand, the provision of a new lease for the Company in circumstances that its previous lease had expired in 2014 and the Company has since been occupying the premises as a month-to-month tenant. Mr James leads evidence, and commercial probability suggests, that the nature of the Company’s tenure of those premises would have been an obstacle to its securing capital and other commitments in respect of its continuing operations.

5. Mr James refers to a report of the voluntary administrators and a supplementary report of the voluntary administrators, and to the conduct of the second meeting of creditors, at which a proposal for a DOCA put by Mr James, implicitly with the support of other members of the Company, was put to creditors. Mr James also refers to negotiations which had been undertaken with a third party with catering expertise to take over the operation of the Company’s catering facilities. Mr James points out that the draft DOCA, which he proposed, was conditional upon a lease being obtained from RMS, and it appears that RMS has offered a lease of a period of ten years, whereas the third party that would potentially conduct catering operations requires a lease for a significantly longer period in order to make those operations commercially viable.

6. Mr James fairly referred, in his first affidavit, to a letter dated 29 August 2018, the day before the application was brought, from RMS. RMS there acknowledged the Company’s longstanding history and occupation of the premises at Mosman and noted that it had engaged in discussions regarding a potential new lease with the voluntary administrators, but noted that no agreement had been reached. I pause to note that that appears to reflect the difficulty that the term offered by RMS, and the term sought in order to make the third party’s catering operations viable, were not coincident. RMS indicated that it had given consideration to the DOCA that was considered and approved at the second meeting of creditors and indicated that it did not consider that, from a commercial and probity perspective, it could agree to the 20-year lease term, substantial rent relief or rent-free periods and capital contributions which were sought by the DOCA. It indicated various factors to which it had regard in reaching that decision. Mr Callinan has indicated that Mr Kelly, one of the voluntary administrators, has reconfirmed RMS's position with RMS today and has been advised that there is no prospect of a change of RMS's position in that respect. Mr James fairly accepted that I could treat that submission as accurately reflecting what had been said in that conversation.

7. Mr James in turn sets out, in his affidavit dated 30 August, matters which lead him to believe that there is a possibility that RMS should, and implicitly would, grant the relevant lease or vary the decision set out in its earlier letter. Mr James noted that there were matters in that letter to which members of the Company would wish to respond; that members of the Company had not themselves participated in earlier discussions with RMS; that government policy suggested that a direct negotiation could reasonably proceed in the circumstances, implicitly involving members of the Company; and that the Company, or at least its members, were now in discussions with the Minister and ministerial staff with a view to attempting to further negotiate a lease with RMS, and those should be allowed to conclude.

8. Mr James also expressed the view that the membership of the Company and the broader community were concerned about RMS's decision and should have a right to be heard on it. Mr James also noted a legal issue relating to ownership of the premises, although, as the hearing has proceeded today, it appears that that question will largely be determined by the operation of the lease, in circumstances of a termination of the lease or an event of default under it. I pause to note that the difference between RMS on the one hand and the views expressed by Mr James on the other reflects questions of policy, including the weight to be given to the matters to which RMS has had regard, and to the historical operations of the Company at the relevant premises over a considerable period.

9. Mr Kelly, one of the voluntary administrators, has given evidence by an affidavit dated 4 September 2018, which identifies relevant documents and provides a helpful and balanced analysis of relevant considerations. Mr Kelly notes that, at the time of his appointment, the Company was operating on a month-to-month lease arrangement with RMS, in circumstances that, as I noted previously, its lease had expired. He notes that, since the appointment of the voluntary administrators, the Company has ceased to trade and that RMS provided the voluntary administrators with a draft lease on 7 June 2018 for a term of ten years, with a five year option. Mr Kelly refers to discussions which have been commenced with the third party to which I referred above as to the operation of catering services at the Company and to the view expressed by that operator that a 20-year lease was required to make the venture viable.

10. Mr Kelly refers to the circumstances in which the DOCA had been proposed, and the voluntary administrators had then expressed the view that the execution of the DOCA would likely provide a better return to creditors than a liquidation of the Company. I note that the DOCA was approved by a majority of creditors with RMS voting against that approval. Mr Kelly also refers to the letter from RMS dated 29 August 2018, indicating RMS's position that it would not enter a lease with the Company, or at least that it would not do so on the terms contemplated by the DOCA. Mr Kelly indicates that the voluntary administrators are no longer able to recommend that the Company enter into the DOCA, by reason of his assessment that the DOCA cannot proceed without the support of RMS, as lessor of the relevant premises; that RMS have indicated that they would not enter into a long-term lease with the Company, and that makes the third party proposal for operation of the Company unworkable; that there may be a question whether the amount contemplated by the DOCA can be raised within a reasonable timeframe; and that a former employee has lodged a claim which may affect the return to unsecured creditors. Mr Kelly expresses an understanding of Mr James' wish for more time but indicates his view that the Company should now be placed into liquidation, which will, of course, occur if the period for execution of the DOCA is not extended and it is not executed this week.

11. Mr James in turn relies upon a further affidavit of Mr Warwick Lamb dated 5 September 2018, who is a member of the Company and a creditor of the Company in a significant amount. Mr Lamb indicates his support for the extension of time that is sought, on the basis that he would like to see the Company given every reasonable opportunity to execute the DOCA, and does not believe that the extension of time sought by the Company is prejudicial to his interests.

12. I pause there to note that there is a significant degree of common ground between Mr James’ and Mr Kelly's analysis of the relevant position. Each of them appears to broadly accept that the logic of events is such that matters largely turn upon the position taken by RMS. If RMS holds to its present position, that it will not grant a longer lease, then I do not understand Mr James to contend the DOCA is viable. If RMS alters its position, and is prepared to grant a longer lease, and make other concessions sought by the DOCA, then the DOCA may be viable, and the third party operating proposal may also be viable. The difference between the parties in turn depends upon their assessment of the likelihood that RMS will change its position, within the period of now some 23 days which is sought by Mr James as an extended period to enter into the DOCA.

13. When the matter was before me on 31 August 2018, I extended the period for entry into the DOCA to 5pm this Friday, 7 September 2018, significantly less than the period that Mr James had initially sought, on the basis that that would allow an opportunity for RMS to be served and to have the opportunity to make submissions. I also noted the factors that were relevant to an order for extension of time to enter into a deed of company arrangement, under s 444B of the Corporations Act 2001 (Cth), which required a balancing of the benefits and detriments to be pursued, by comparison with the position where a company passes into liquidation. I noted that that calculus may present differently where, as here, the Company has performed a community function over a considerable period rather than being a trading entity. I also noted the likelihood that, because of the terms of s 444B of the Act, the Court would not be able to further exercise a power to extend the time for execution of the DOCA today, but that power would be available to it under s 447A of the Act, if the Court was satisfied that an extension of that time would promote the interests of Part 5.3A of the Act, including the possibility of a more favourable result to creditors or other interested persons than a liquidation of the Company.

14. I noted above that this case is, in the traditional sense, a hard case. I have been troubled by the outcome, and there are competing considerations. On the one hand, the evidence before me suggests that, given reference to a troubled history of dealings between RMS and the Company, including at least some arrears of rent, and the factors to which RMS has referred in its letter, there may be little realistic prospect that RMS will change its position within the next 23 days. That is the assessment that the voluntary administrators have formed. The voluntary administrators also refer to the possibility of detriment to at least some employees, where an extension of the time that the Company remains in voluntary administration will prevent them claiming under the Fair Entitlements Guarantee regime for entitlements which could not be met in an insolvency.

15. On the other hand, the period for deferral that is sought by Mr James is relatively short and Mr Callinan fairly accepted that an assessment of that detriment to employees would depend upon their individual circumstances, which are not in evidence before me. There are plainly both narrower and wider detriments to the Company, its creditors, and its members, from the Company now passing into liquidation. The wider detriments, on which Mr James placed considerable emphasis, reflect the understandable distress of members of the Company that its long history should come to an end in that way. There are also economic detriments, so far as the execution of the DOCA, without RMS's cooperation, the occurrence of an insolvency event or the termination of the lease each have consequences for the premises of the Company, involving a potential vesting of those premises in the Crown, or an obligation to remove those premises, each of which would involve complexities in circumstances that the property is, I have been informed, a heritage listed property of considerable age and historical significance.

16. A further difficulty arises because the voluntary administrators fairly point out that the extension of the voluntary administration will expose the voluntary administrators, and indirectly creditors, to additional costs, including insurance for the next three months in an amount of $4,500, one month's rent which would now be claimed, or potentially claimed, by RMS of about $3,300, and the likelihood that the voluntary administrators would incur further costs in the voluntary administration when it continues. It is not unreasonable that the voluntary administrators should anticipate that result, particularly since, if Mr James is successful in causing RMS to engage with the proposals which have been put, in a way which it may not have done to date, then it is almost inevitable that further work will need to be done by the voluntary administrators in respect of those proposals.

17. Doing the best that I can in these difficult circumstances, and with real hesitation, it seems to me that the Court should extend the period in which to execute the DOCA for a further short period, as Mr James seeks. Notwithstanding that there seems to me to be real force in the voluntary administrators' assessment of the position, there is a prospect that events may develop more favourably to the Company, as Mr James hopes they will develop; that there may be some change in RMS's position; and that that change would, in turn, allow the respective interests of RMS, a commercial operator of the catering facilities, and the Company’s members to be accommodated. It seems to me that there is an advantage to creditors, who would receive a more favourable return if the DOCA was performed in accordance with its terms, in allowing that opportunity to be progressed.

18. The short extension of time which Mr James proposes will provide the clearest test of that possibility, since it either will or will not be possible to change RMS's present position in that period. It does not, of course, follow that any further extension of time would be available on this basis. As matters stand, a pessimist would think, as the voluntary administrators do think, that there is little possibility of bridging the gap between the relevant parties. If in 23 days’ time, nothing has happened to change that position, then experience will have taught that the pessimist is right, and Mr James is, sadly, unduly optimistic in the circumstances. While one can have sympathy for the position of the Company and its members, and for the sad result that will arise from a liquidation, these matters will likely not provide a justification for any longer or further extension of time to execute a DOCA, if it emerges that the parties’ differences cannot be resolved in that period.

19. The extension should only be permitted subject to conditions that will minimise any detriment to the voluntary administrators and creditors of the Company from that extension. I recognise that the condition that I will impose, in respect of the costs of the voluntary administration, involves something of a compromise, being less than the amount that the voluntary administrators have sought and more than Mr James contemplated could be achieved. It seems to me that that is the best that can be done to accommodate the respective interests, without imposing the voluntary administrators and creditors to unreasonable risk. It may be, given Mr James' comments in submissions, that the Company’s members will not be able to accede to that condition, but that will ultimately be a matter for their choice, in the relevant circumstances. They will have been given the opportunity to do so, and if they do not do so, then events will no doubt take their course.

20. I will also reserve the position of employees to apply, in case any individual employee is in a position of significant hardship which would be adversely affected by the short extension that is proposed, and the inability to apply under the Fair Entitlements Guarantee regime during the period of that extension.

21. For these reasons, I make the following orders:

1. Pursuant to s 447A of the Corporations Act 2001 (Cth), subject to paragraph 2 below, extend the time for Mosman Rowers Ltd (admins apptd) to execute the Deed of Company Arrangement approved at the meeting of creditors on 13 August 2018 to 5pm on 28 September 2018.

2.    The extension of time ordered in paragraph 1 will have no effect unless, by 4pm on 6 September 2018, Mr James delivers to Messrs Kelly and Gothard, as voluntary administrators, a bank cheque in the amount of $13,500 to be applied to the costs of the voluntary administration in the period to 30 September 2018.

3.    There be liberty to any employee of the club who is affected by the orders made today, to apply.

4.    The voluntary administrators' costs of this application be costs in the voluntary administration.

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Decision last updated: 16 November 2018