In the matter of Polar Agencies Pty Ltd
[2019] VSC 43
•8 February 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2018 02269
IN THE MATTER of POLAR AGENCIES PTY LTD (ACN 130 636 869)
| LOVELLTEX PTY LTD (ACN 613 329 276) | Plaintiff |
| v | |
| POLAR AGENCIES PTY LTD (ACN 130 636 869) | Defendant |
---
JUDICIAL OFFICER: | Matthews JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 6 February 2019 |
DATE OF JUDGMENT: | 8 February 2019 |
CASE MAY BE CITED AS: | In the matter of Polar Agencies Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 43 |
---
CORPORATIONS – Winding up application – Defendant appointed administrator on the day prior to the hearing – Application for adjournment of winding up proceedings refused – Administration of defendant company terminated – Defendant company wound up – Corporations Act 2001 (Cth), s 440A(2), s 447A.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr O Bigos | Thomson Geer Lawyers |
| For the Administrators of the Defendant | Mr S Wang, solicitor | Tisher Liner FC Law |
JUDICIAL REGISTRAR:
This proceeding is an application by the plaintiff that the defendant be wound up in insolvency pursuant to s 459P and s 459Q of the Corporations Act 2001 (Cth) (‘the Act’). At the hearing of the application on 6 February 2019, the Court was informed that Gideon Isaac Rathner and Matthew Brian Sweeny had been appointed as administrators of the defendant on 5 February 2019 pursuant to the Act. The administrators sought an adjournment of the winding up application.
After reviewing the materials and hearing submissions and standing the proceeding down to consider the position, at the resumption of the hearing I refused the application for an adjournment. I then made orders terminating the administration of the defendant which had commenced on 5 February 2019, followed by orders that the defendant be wound up, that Hamish Alan McKinnon be appointed as liquidator for the purposes of the winding up, and that the plaintiff’s costs (including costs reserved on 19 December 2018) be costs in the winding up. I indicated that I would publish my reasons on 8 February 2019, and these are those reasons.
The proceeding was commenced by an originating process filed on 16 November 2018.
The basis of the plaintiff’s application is the failure by the defendant to comply with a statutory demand served on the defendant by the plaintiff by post sent on 18 October 2018. The demand is in respect of debts totalling $558,508.56 for goods supplied by the plaintiff to the defendant and invoiced in the period March to August 2018.
The defendant made no application to set aside the statutory demand, nor did it meet the demand for payment. The defendant thereby failed to comply with the demand in about mid‑November 2018 giving rise to a statutory presumption of insolvency under s 459C(2)(a) of the Act.
This proceeding first came on for hearing on 19 December 2018. On that occasion, the plaintiff appeared and the defendant did not. The Court was informed that negotiations were underway. Directions were made that any request for a further adjournment was to be supported by an affidavit to be filed and served by 4 February 2019, and the hearing was adjourned to 6 February 2019.
The defendant did not file any affidavits in compliance with those orders, nor did it file a notice of opposition to the application.
On the morning of the hearing, a notice of appearance was filed by Tisher Liner FC Law (‘Tisher Liner’), as solicitors for the administrators. Mr Rathner and Mr Sweeny were appointed as administrators of the defendant on 5 February 2019 by the directors of the defendant, that is, the day before the hearing. An affidavit sworn on 6 February 2019 by Sining Wang, a solicitor of Tisher Liner, was filed on the morning of the hearing (‘Wang Affidavit’).
At the hearing on 6 February 2019, Mr Wang appeared for the administrators and sought an adjournment of the winding up application until 20 March 2019, by when the administrators would have prepared their report to creditors for the second meeting of creditors of the defendant required to be conducted under s 439A of the Act.
The Wang Affidavit refers to a meeting held between the administrators, Mr Wang, Simon Abraham (another solicitor from Tisher Liner), and the two directors of the defendant, being Michael Arvanitakis and Antonio Prochilo, on 5 February 2019 (‘Meeting’). It goes on to describe what the directors stated at the Meeting about the defendant’s business and financial position, and their proposal for a deed of company arrangement (‘DOCA’).
In relation to the defendant’s business, the Wang Affidavit says that the defendant is in the business of supplying linen, primarily to the healthcare and hospitality sectors, and has been trading for over 10 years. It earns income primarily through the commissions it earns on linen stock sold to its customers, and it has two large customers who are long-term customers of the defendant.
In relation to the defendant’s financial position, the Wang Affidavit states that the estimates given by the directors at the Meeting included the following:
(a) the defendant has assets of approximately $114,000, which includes cash on hand of $10,000 and commissions owed and other debtors of $55,000;
(b) the defendant owes approximately $1.65m to a secured creditor, National Australia Bank (‘NAB’);
(c) the defendant owes approximately $1.875m to unsecured creditors, comprising:
(i) $550,000 to the plaintiff;
(ii) $75,000 to trade creditors;
(iii) $150,000 in rent;
(iv)$750,000 in shareholder loans; and
(v) Contingently, $350,000 in respect of a disputed claim;
(d) the difference between the defendant’s assets and liabilities is approximately $3.411m;
(e) the defendant earns about $570,000 per annum and its expenses are approximately $300,000 per annum; and
(f) there are no outstanding tax liabilities.
In relation to the directors’ DOCA proposal, the Wang Affidavit states that the directors said at the Meeting that they intended to propose a DOCA on the following terms:
(a) The directors will procure funds of $100,000 for the DOCA fund. $50,000 of this will be paid to the administrators’ trust account by 20 February 2019 and the balance by 8 April 2019, to be held by the administrators pending creditor approval of the DOCA;
(b) The defendant will continue to trade during the administration. The defendant must contribute $22,500 per month (equal to $270,000 per annum) from its surplus funds from trading, commencing in May 2019 for a period of 3 years;
(c) Both directors will agree not to draw a wage from the defendant for the duration of the DOCA (totalling $100,000 x 2 per annum, or $600,000 over 3 years). The profits of the defendant in this period will therefore be for the benefit of creditors participating in the DOCA;
(d) The directors will procure the consent of the shareholder creditors (totalling $750,000) not to claim in the DOCA;
(e) The directors will procure the support of NAB on the basis that it receives 50% of the total DOCA fund dividends, with the remaining 50% to be distributed to unsecured creditors; and
(f) Dividends shall be paid to unsecured creditors in the following manner:
(vi)The initial payment of $100,000 to be utilised as an initial dividend to unsecured creditors, subject to the administrators’ costs; and
(vii) Further dividends to unsecured creditors, arising from the surplus funds from trading, to be paid every 6 months for a period of 3 years.
The Wang Affidavit goes on to state that the administrators informed him, on the basis of the above information, that unsecured creditors would receive no return in a liquidation any may receive a total dividend of around 36 cents in the dollar if the DOCA is accepted.
Finally, Mr Wang deposes that as the administrators were only appointed on 5 February, they had not had time to thoroughly investigate the defendant’s affairs or prepare a s 439A report. He deposes that they seek a ‘short adjournment’ to allow them ‘sufficient time to investigate the matters … and to consider the DOCA proposal’.[1] He also deposes that the administrators informed him that they are not aware of any prejudice to creditors, other than the administrators’ costs, if the adjournment is granted.
[1]Wang Affidavit, [14].
Mr Wang made the application for an adjournment under s 440A(2) of the Act, which provides:
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.
Dr Bigos, counsel for the plaintiff, took me to the decision of Associate Justice Gardiner in Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd.[2] In that decision, his Honour stated as follows:[3]
[2][2012] VSC 60 (‘Gorst’).
[3]Gorst, [10] – [12].
The onus is on the defendant to show by “persuasive evidence” that it is in the interests of the company’s creditors that the administration continue rather than liquidation ensue.[4] The question of whether an administration should continue is related to the further question of whether the creditors could hope to get more by way of payment of their debts from administration than from liquidation.[5]
In Waste Recycling and Processing Services of New South Wales v Local Government Recycling Cooperative[6] Santow J observed:
There must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors.
In Re First Net Com Pty Ltd: Deputy Commissioner of Taxation v First Net Com Pty Ltd[7] Santow J described the test as requiring “a real prospect” as opposed to a “mere speculative possibility”, but not necessarily “comfortable satisfaction” of a higher return to creditors if the application was adjourned.
[4]See Creevey v DCT (1996) 19 ACSR 456, 457.
[5]See Creevey at 457.
[6](1999) 32 ACSR 194, 195.
[7](2000) 35 ACSR 614.
The plaintiff opposed the adjournment application and sought to proceed with the winding up application. In summary, the plaintiff submitted that:
(a) Although the administrators have not yet verified the information contained in the Wang Affidavit, that information shows that the defendant was hopelessly insolvent;
(b) The proposed DOCA was nothing more than optimistic speculation, and the administrators have not established on the tests summarised in Gorst that an adjournment is justified;
(c) The return to creditors of 36 cents in the dollar under the proposed DOCA depends on profitable trading by the defendant for 3 years, which does not appear to be supported by its historical performance;
(d) Profitable trading relies on trading continuing, and there is nothing to say that suppliers and customers will continue to do so;
(e) The Wang Affidavit says nothing about potential claims by a liquidator against the directors, who apparently have three properties;
(f) The plaintiff has about 50% of the unrelated unsecured debt, is unlikely to support the DOCA, and wishes to proceed with the winding up application; and
(g) Creditors may be prejudiced by an adjournment if it affects the relation-back date.
The administrators submit that this situation is different to Gorst, as in the latter case there were assets which could be realised in a liquidation, whereas here there were no realisable assets as its business is selling products for commission. Further, in this instance the directors have put the details of the DOCA proposal, it is not just that there may be a DOCA proposal (as was the situation in Gorst), although Mr Wang said that it was possible that this may not be the final proposal.
Mr Wang relied on In the matter of Bobos Engineering Australia Pty Ltd,[8] where Brereton J stated:[9]
on an application under s 440A(2), the Court must be satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up, and that mere speculation that such a course may be in their interests is insufficient. However, as Campbell J pointed out in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377, the extent of proof that can result in the requisite level of persuasion differs with the circumstances in which this litigation comes before the Court and, in the context of a short adjournment made very soon after the appointment, less may be required than in the context of a longer adjournment, the practical effect of which would be to defeat the winding up application.
[8][2015] NSWSC 2027 (‘Bobos’).
[9]Bobos, [5].
In that case, a two week adjournment was granted.
Mr Wang acknowledged that the matters in his affidavit had not been verified by the administrators, but said that this was because they had only been appointed the day before.
Mr Wang submitted that after the winding up application had been filed, the defendant made a payment of $25,000 to the plaintiff. There was no evidence of that, but even if there had been, I would give it little or no weight given the size of the debt owed to the plaintiff.
Mr Wang also submitted that the administrators expected suppliers and customers to continue to trade with the defendant in the DOCA period. I note that there was no evidence to support this.
Mr Wang referred to Minister for Environment v Eclipse Resources Pty Ltd (Administrator Appointed),[10] where the possibility of a liquidator taking proceedings regarding uncommercial transactions was discussed. In that instance, the Supreme Court of Western Australia did not regard that possibility, in an unfunded liquidation, when balanced with a proposed DOCA, as being a reason not to adjourn the winding up application.
[10][2017] WASC 318. See [12]-[13] in particular.
In my view, the Wang Affidavit does not contain persuasive evidence that it is in the interests of the defendant’s creditors that the defendant continue under administration rather than be wound up. At most, I would characterise the assertions made in that affidavit in the same way as described by Gardiner AsJ in Gorst, that is, the assertions are ‘optimistic speculation’ that at some time in the future such evidence may possibly be obtained. This conclusion is despite the factual differences between Gorst and this case as referred to by Mr Wang.
The affidavit relied on by the administrators has been sworn by a solicitor, not by the administrators or by the directors. No explanation has been provided as to why the administrators or the directors have not gone on affidavit so as to give what may be considered as more substance to some of the matters deposed to – in particular, the directors presumably could have given direct, first-hand evidence of the financial position of the defendant and of the DOCA proposal. True it is that affidavits in support of an interlocutory application, such as an adjournment application, can be made on information and belief, and the Wang Affidavit properly conforms to the requirements for such affidavits, but it does affect the weight I am prepared to give to it. It is ‘persuasive evidence’ which is required, and for the reasons set out below, I do not find it to be persuasive.
In particular, in relation to some aspects of the proposed DOCA, I note the following:
(a) The proposal involves a modest, when compared to the defendant’s debts, injection of cash for the DOCA of $100,000, around half of which will be for the administrators’ fees.[11] Given that the proposal means that NAB would receive $50,000 of this $100,000,[12] in effect there is no benefit other than covering the costs of administration in this cash payment for unsecured creditors;
[11]The Wang Affidavit estimates, based on information provided by the administrators, administration costs of $50,000: Wang Affidavit, [11].
[12]Wang Affidavit, [11].
(b) There is no evidence that the directors have the financial capacity to make the $100,000 payment. Here, I note that the Wang Affidavit says that the directors stated that they ‘will procure’ these funds: it does not say how they will procure the funds or even that the directors had the funds;
(c) Apart from the $100,000 payment, which for the above reasons is of little or no benefit to unsecured creditors, any other value from the DOCA in terms of further cash contributions is completely reliant on the defendant continuing to trade, and trade profitably, for 3 years. There was no persuasive evidence to support the contention that the defendant has been trading profitably or will be able to continue to do so. In this regard:
(viii) by way of example it is somewhat concerning to see what appears to be a substantial debt owed in respect of rent, as one would expect the ongoing availability of premises to be a requirement for the defendant’s business;
(ix) there was no explanation as to how the defendant had come to be in a position where it had substantial debts to unsecured creditors (especially in respect of the plaintiff’s debt and for rent) which on the face of the material it was unable to pay. In other words, there was no explanation given for the present insolvency, let alone an explanation which may have explained it by reference to events outside the usual trading patterns of the defendant.
(x) finally, from the plaintiff’s invoices attached to the statutory demand, it appears that it is a supplier of goods to the defendant. From the unsecured debts described in paragraph 12(c) above, it appears that the plaintiff was a large supplier to the defendant when contrasted with the other trade creditor debts referred to. I do not attach much weight to this last aspect, as I do not know whether there are other suppliers who may have been paid;
(d) There is no evidence as to whether the defendants can make good on the commitment to procure the consent of the shareholder creditors not to claim in the DOCA;
(e) Not only is there no evidence that the directors can procure NAB’s support on the basis of NAB receiving 50% of the DOCA fund, when one considers that the secured debt is $1.65m, one can only regard that prospect as optimistic speculation. Further, there is no evidence or submission as to how that is in the interests of unsecured creditors; and
(f) The directors foregoing wages over the 3 year period of the DOCA, which is said to have a value of $600,000, is not a contribution of $600,000. It may have little or no value to creditors if the trading is not profitable in that period.
As noted above, Mr Wang properly acknowledged that much of the information in his affidavit had not been verified by the administrators. He attributed that to the administrators only having been appointed the day before. However, I do not regard an explanation based on the timing of the appointment of the administrators to be at all persuasive, when that timing was completely within the hands of the directors of the defendant.
I do not regard the possible prejudice to creditors of the adjournment having an effect on the relation-back date to be important in determining the adjournment application, as the submissions on this point were not fully developed and it appears that any possible prejudice in this regard could be dealt with.
On the evidence presented, there is a ‘mere speculative possibility’ that it is in the interests of creditors for the administration to continue rather than the defendant be wound up. In my view, it is not appropriate to adjourn the winding up application so that this mere speculative possibility can be turned into persuasive evidence that there is a real prospect of it being in the interests of creditors for the administration to continue. This is particularly the case where the only reason needed for the extra time is due to the last minute appointment of the administrators which, as I have already noted, was within the directors’ control.
Therefore, the timing of the appointment of the administrators is a relevant factor in this determination. The originating process was filed on 16 November 2018. There was a hearing on 19 December 2018, where the winding up application was adjourned to 6 February 2019. The administrators were appointed at the death knell, just before that adjourned hearing. The defendant had been on notice since mid-October 2018 that the plaintiff was pursuing its debt.
In Gorst, Gardiner AsJ said:[13]
While the interests of creditors are of course the paramount consideration in determining whether the administration should continue, I also take the view that, in addition to the absence of persuasive evidence that the administration should continue because it would be in the interests of creditors, the appointment of the administrator yesterday amounts to an abuse of the processes of Part 5.3A of the Corporations Act2001.
[13]Gorst, [14].
In my view, the same comments can be made here. Further, I observe that no explanation has been given to me as to why that appointment was only made the day before the hearing.
Brereton J stated, in In the Matter of Offshore & Ocean Engineering Pty Ltd,[14] that:
Finally, 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.
[14][2012] NSWSC 1296, [15].
I would make the same observation here.
In the circumstances referred to above, I refused the application for an adjournment. I first ordered that the administration of the defendant which commenced on 5 February 2019 be terminated forthwith pursuant to s 447A[15] of the Act. I note that s 447A(2) provides that the Court may order that the administration of a company should end if the court is satisfied that provisions of Part 5.3A are being abused and I am so satisfied in that regard.
[15]See schedule 2 and schedule 2A to the Supreme Court (Corporations) Rules 2013. This proceeding was referred to me for hearing and determination by order made on the Court’s own motion, pursuant to r 84.04 of the Supreme Court (General Civil Procedure) Rules 2015.
As a separate and distinct set of orders, I then ordered that the defendant be wound up in insolvency under the Act and that Hamish Alan McKinnon be appointed liquidator for the purposes of the winding up. I also ordered that the plaintiff’s costs, including costs reserved on 19 December 2018, be costs in the winding up.
0
2
0