In the matter of Specialty Mens Apparel Pty Ltd (Administrators Appointed)
[2019] VSC 40
•1 February 2019 (ex tempore)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 00385
IN THE MATTER of Specialty Mens Apparel Pty Ltd (Administrators Appointed) (ACN 149 766 307)
| BRENDAN RICHARDS and GAYLE DICKERSON (in their capacity as Joint and Several Administrators of Specialty Mens Apparel Pty Ltd) (Administrators Appointed) (ACN 149 766 307) | Plaintiffs |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 1 February 2019 |
DATE OF JUDGMENT: | 1 February 2019 (ex tempore) |
CASE MAY BE CITED AS: | In the matter of Specialty Mens Apparel Pty Ltd (Administrators Appointed) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 40 |
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CORPORATIONS – Company under external administration under Part 5.3A of the Corporations Act 2001 (Cth) – Application for extension of convening period of second meeting of creditors pursuant to s 439A(6) and s 447A – Administration of a complexity which requires a longer convening period than that prescribed by Part 5.3A of the Act – Application granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Fary | Norton Rose Fulbright Australia |
HIS HONOUR:
The plaintiffs, Gayle Dickerson and Brendan Richards (‘Administrators’) were appointed as joint and several administrators of Speciality Mens Apparel Pty Ltd (‘The Company’) on 15 January 2019 pursuant to s 436A of the Corporations Act 2001 (Cth) (‘the Act’).
By an originating process filed 30 January 2019, the Administrators seek orders for an extension of the convening period for the second meeting of creditors of the Company. The Administrators were appointed by the directors of the Company by an instrument of appointment dated 15 January 2019. Unless extended, the convening period ends on 13 February 2019. The application is supported by an affidavit of Brendan Richards sworn 30 January 2019.
The primary reason for seeking the extension of time is to allow the Administrators to explore the possibility of achieving a sale of the Company’s business, for a Deed of Company Arrangement (‘DOCA’) to be proposed, or both. Since the appointment of the Administrators they have been trading the Company’s business and liaising with potential purchasers and proponents of DOCAs.
On 1 February 2019, I made orders extending the convening period within which the Administrators must convene the second meeting of creditors of the Company to 20 May 2019, together with certain other ancillary orders. I indicated on the occasion of making those orders that I would publish my reasons for doing so.
The Company was incorporated in 2011 and is a clothing retailer specialising in men’s suits, apparel and accessories under the ‘Ed Harry’ brand. Mr Richards deposes that of recent times, the Company has fallen into financial difficulty which it attributes to the challenging retail environment over the last 12 months, margin pressures in the form of higher costs of goods sold, underinvestment in the Company’s e-commerce platform, together with increased competition from both local ‘bricks and mortar’ retailers and online shopping.
Prior to going into administration, the Company pursued various options to address its financial predicament including attempts to raise capital and to sell the business. Sales and stock discounting programs were implemented in late 2018 in order to raise cash and working capital. Because of the unsuccessful capital raising program, and a weaker than expected Christmas trading period, the board decided to appoint Administrators to the Company.
As of the date of Mr Richards’ affidavit, the directors were yet to complete a report as to affairs however the books and records reveal as at the date of the appointment of Administrators the Company had debts totalling approximately $13 million to $13.5 million. Of that sum, approximately $4 million was owed to secured creditors, employee entitlements totalled approximately $1,422,000 (applying the capped liability amounts pursuant to s 566), or in the absence of such capped liability, $1,837,000. The Company has unsecured creditors totalling approximately $7.7 million, $5.3 million of which is owed to trade creditors, while approximately $2.4 million is owed to the landlords in respect of all 87 retail store leases and the lease of the head office premises from which the Company operates its business. The amounts referred to are subject to revision and are only estimates.
The secured creditors consist of the Commonwealth Bank of Australia, which is owed approximately $2.349 million; Austico Apparel Pty Ltd, owed approximately $264,000; Brightview Group Pty Ltd, owed approximately $928,000; Expedition Apparel Pty Ltd, owed approximately $223,000; and Marketlend Pty Ltd, owed approximately $220,000. The liability to landlords consists of rent and arrears outstanding as at the date of the Administrator’s appointment, anticipated make good costs and break fees required to be paid on termination of some of the leases. The amounts owing to employees predominately consist of accrued annual and long service leave.
As to the secured creditors, a number of security interests have been registered on the Personal Property Securities Register. The Administrators have been in communication with parties who have such security interests. The security interests consist of those registered over all of the Company’s present and after acquired property (PAAP security interests) or purchase money security interests (PMSIs) registered over specific goods. In addition, there are non-PMSI security interests registered over goods and store fit-outs supplied or leased to the Company.
Mr Richards states that upon the Administrator’s appointment, the Company had assets of a book value totalling approximately $16 million; those amounts are subject to revision of the amount realized after any sale of the business or the price discounting necessary during a wind-down phase. The proceeds from the sale of the inventory insofar as they are subject to perfected security interests are required to be applied in reduction to the amounts owed to the secured parties and will not be available to employees or unsecured creditors. The other non-current assets relate to deferred tax assets.
The leases relate to 87 premises located in all states of Australia (except Tasmania) together with the Northern Territory and the Australian Capital Territory as well as the Company’s head office. Mr Richards deposes that the landlords have been kept informed of the progress of the administration. To date, none of them have expressed any objection or concern regarding the continuing lease of the various premises by the Company. The landlords have not, however, been formally given notice of this application and this will be discussed further below. In the course of communicating with the landlords, they have been able to reduce rental payments during the administration period for 14 of the leases and there are ongoing negotiations in respect of rental reductions for all the other leases.
Following the appointment, Administrators commenced a stock clearance sale and engaged the services of Hilco Merchant Australia Pty Ltd (‘Hilco’) to act as the Administrator’s agent for the purpose of selling the inventory and any furnishings, trade fixtures, plant and equipment. Approximately 11 per cent of the inventory has been sold as of 28 January for a price of $2,278,846. It is intended that the ongoing sale of stock will be a source of cash which will be applied to pay employee entitlements and creditors pending a sale of the business or an orderly closing down. Consideration has been given to whether it is in the best interests of the creditors to order additional stock.
The Company has 498 employees of whom 16 have resigned since the appointment of the Administrators. The Administrators have employed 4 casual staff to replace those who have resigned. Entitlements such as redundancy pay and payment in lieu of notice will only arise if an employee’s employment is terminated. It is not known what the exact figure will be for such entitlements and it will depend upon the outcome of the administration process. If the Company ceases trading on 20 May 2019 with the employees having their employment being terminated as at that date, Mr Richards estimates that the total employment entitlements will be approximately $3.3 million including notice, annual leave, redundancy, long service leave entitlements, together with superannuation obligations.
Mr Richards states that one of the reasons for seeking an extension of time is to allow the Administrators to explore a possible sale of some of the Company’s business or assets including determining the appropriate form of any sale such as whether all or only part of the business is to be sold, whether the Company’s assets are to be sold or whether the shares in the Company are to be sold. The sale may also involve or be effected through a DOCA. The sale discussions will necessarily involve concurrent negotiations with the landlords and the Company’s secured creditors. Mr Richards deposes that the response of the public and employees of the Company to the stock clearance sale has increased the possibility of a buyer for the Company or its business as a going concern coming forward. Five expressions of interest have been received with all five of these interested parties currently progressing with their due diligence procedures having signed confidentiality agreements.
Mr Richards details in his affidavit the tasks undertaken by the Administrators to date. This evidence reveals that it is a complex administration which would not lend itself to the time constraints imposed by the Act for the convening and holding of the second meeting of creditors and preparation of a report under s 439A prior to that. It is obvious that the Administrators have been heavily engaged during the period of the time of their appointment.
On 24 January 2019, the first meeting of creditors required to be convened under s 436E of the Act took place. Only nine creditors attended in person, one via telephone conference. No committee of inspection was appointed and as the Administrators had not received any nominations from any alternative administrators, the appointment of the Administrators was confirmed. At the first meeting, the Administrators raised the prospect of making an application to extend the convening period by up to three months and none of the creditors opposed the extension application.
Under ss 439A(1) and 439A(5) of the Act, the Administrators are required to convene the second meeting of creditors by no later than 13 February 2019 and to hold that meeting by 20 February 2019. By operation of Rule 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth), the Administrators are also required to prepare and provide a report about the Company’s business property affairs and financial circumstances and are to express an opinion about whether it would be in the interests of the Company’s creditors for the administration of the Company to end and the control to be returned to the Directors for the Company to execute a DOCA or for the Company to be wound up. The report must express reasons for that opinion and provide such information to enable the creditors to make an informed decision.
Mr Richards deposes that to ensure that the Administrators are able to provide the required opinion about the best outcome for creditors, a number of tasks are still required to be carried out. These include:
(a) continuing to trade the business and to pursue the stock clearance sale with the assistance of Hilco if a sale of business does not eventuate;
(b) regularly assessing and re-assessing the value of the company’s assets in light of the progress of the stock clearance sale;
(c) holding discussions with interested parties and facilitating the conduct of due diligence by those parties;
(d) reviewing and considering expressions of interest and any offers to purchase the company of its assets;
(e) quantifying any claims the company might have;
(f) assessing the recoverability of any claims the company might have;
(g) investigating the events which the directors say led to the company’s financial difficulties and the administrator’s appointment; and
(h) regularly assessing the ongoing realisation strategy for the company to ensure we deliver the best outcome for creditors.
The Administrators are presently continuing to trade the Company’s business and if an acceptable offer to purchase the Company or its business is not received then, based on current sales progress and advice received from Hilco, they expect they will need to continue trading for another 8-12 weeks in order to clear the Company’s existing stock. In order to allow for any unforeseen delays in the stock clearance process and to finalise other administration tasks, they seek a three month extension of the convening period to 20 May 2019. They contend that they have made a concerted effort to ensure that the landlords are kept informed as to the progress of the administration and none of them have raised any objection or concern as to the Company continuing to trade from its various leased premises during the administration period.
It is expected that by 15 February 2019, the Administrators will know whether a sale of the Company’s business is likely to go ahead and whether they will continue trading from all 87 physical stores. If not, it is likely that some of the stores will be closed and any remaining stock moved to other premises. During the current period they are also dealing with parties who have expressed an interest in purchasing some or all of the business or assets of the Company and who have entered into confidentiality deeds with the Company and the Administrators.
Mr Richards states that the Administrators require more time before convening the second creditors meeting to consider any DOCA proposals that might be received.
If an order for an extension of the convening period is made, the Administrators strategy includes continuing trading in order to maximise returns from the sale of the stock, exploring the viability of the sale of the business, completing the investigation process, considering any DOCA proposals and determining, for the purposes of the required report to creditors, what the future of Company should be.
As regards to the prejudice to the stakeholders, the Administrators state that the landlords will continue to be paid while the business continues to trade and the Company occupies the leased premises. If the business is sold, that will involve the assignment of some, if not all, of the leases to the purchaser which will benefit those landlords. If the Administrators are unable to sell all or part of the business then they will proceed with an orderly wind-down of the Company which will involve vacating the various premises when they are no longer required. Once the Company is no longer in possession of the premises, then the Administrators will likely give consent for the purposes of s 440B of the Act to the landlords to retake possession and to lease the premises to other parties. In this regard, they contend that the landlords will be in no worse position than if there is no extension of a convening period and that as such the landlords are not unfairly prejudiced by the extension of the moratorium.
As regards employees, the Administrators are personally liable for employees’ wages during the period of the administration and they anticipate that during the period of the administration, the revenue to be generated by continuing to trade the business will be sufficient to cover all accrued and current employee entitlements so that there should be no need for the Commonwealth’s Fair Entitlements Guarantee Scheme (‘FEG’) to be called upon if the Company eventually goes into liquidation. The Administrators state that they will continue to pursue a sale of the business which, if achieved, will maximise the prospects of the employees retaining their employment, whereas all employees would ultimately be made redundant if they are unable to sell the business as a going concern.
As regards creditors, the Administrators intend that the closing down sale will raise as much cash as possible in order to pay out employees and creditors and if the sale of the business is achieved, there may be further funds available to pay creditor claims.
Mr Richards concludes that the Administrators are not currently in a position to prepare a report to creditors which adequately informs them about the options for the future of the Company or to hold a meeting of creditors to decide on the future of the Company. If the convening period is not extended and the second meeting of creditors is held, the Administrators will likely recommend that the meeting be adjourned, resulting in two meetings rather than one and two reports effectively being required under the Act, involving additional expenditure. The costs of convening such an additional meeting could be in the order of $50,000. The second meeting can only be adjourned for 45 business days, which is unlikely to be sufficient time for the Administrators to conclude all of the tasks yet to be completed.
The landlords have not been formally notified of the making of this application, nor have the secured creditors. Of course they are affected by the making of these orders and the consequent extension of the moratorium period but I consider that, rather than adjourn this application for the purpose of such notice being provided, that the interests of the landlords and the secured creditors can be adequately protected by reserving to them liberty to apply to set aside the order in whole or in part upon being served with notice of the orders. Because those orders have been made in their absence they face a low threshold to set aside such orders and I propose to adopt that course.[1]
[1]Re Vical NSW Pty Ltd [2014] NSWSC 1325, [8]-[9].
In considering whether to grant an extension of the convening period, the court should have regard to the general objectives of Part 5.3A of the Act.[2]
[2]See for example, Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 (‘Mann’) and Re Allbuild Construction Co Pty Ltd (Administrators Appointed); Ex Parte Featherby & Anor [2000] WASC 227.
There is a tension between the goal of voluntary administration, namely speedy resolution, and the overall object of Part 5.3A as stated in s 435A, namely, maximising the chances of the company or its business continuing in existence or achieving a better result for creditors than would be achieved in an immediate winding up.
An additional reason for expedition is that the statutory moratorium on the prosecution of proceedings against the company and enforcement of rights by secured parties, owners or landlords should not be prolonged without good cause.[3]
[3]Mann (n 2) 612; Re PH (Melbourne) Pty Ltd (administrator appointed); ex parte Sims [2002] FCA 637.
However, courts have recognised that the interests of creditors can be prejudiced not only by delay but also by the convening of premature meetings, where the administrator has been unable to obtain adequate information for the preparation of the report and statements required by s 439A(4)[4] in a form enabling creditors to make an informed decision.[5]
[4]Former s 439A(4) has been repealed (effective 1 March 2017) and is now replicated in rule 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth).
[5]Re Brash Holdings Ltd (admin apptd) (1994) 13 ACSR 793; Re Pan Pharmaceuticals Ltd (admins apptd) [2003] FCA 598.
In Re Riviera Group Pty Ltd (admins apptd) (recs and mgers apptd) (ACN 102 298 279) and others,[6] Austin J identified a number of broad categories of cases in which extensions of the convening period had been granted. In the context of this application the following factors are, in my view, particularly relevant:
the size and scope of the business: Re Lombe; Babcock & Brown Ltd (admins apptd) [2009] FCA 349 (Re Lombe Re Worrell; Storm Financial Ltd (recs and mgrs apptd) (2009) 69 ACSR 584; [2009] FCA 70 (Re Worrell Re ABC Learning Centres Ltd; Application by Walker (No 5) [2008] FCA 1947;
large number of employees with complex entitlements: Re S & D International Pty Ltd (in liq); Malhotra v Tiwari [2005] VSC 496; Re Ansett Australia Ltd and Korda; sub nom Ansett Australia Ltd (No 3) (FCR) (2002) 115 FCR 409 ; 40 ACSR 433 ; [2002] FCA 90;
the time needed to execute an orderly process of disposal of assets: Re Carter, SFM Australasia Pty Ltd (admin apptd) (No 2) [2009] FCA 419; Re ABC Learning Centres Ltd; Application by Walker (No 7) (2009) 71 ACSR 560; [2009] FCA 454;
the time needed for thorough assessment of a proposal for a deed of company arrangement: Silvia, Re Austcorp Group Ltd (admin apptd) [2009] FCA 636;
where the extension will allow sale of the business as a going concern: Re Lombe; Australian Discount Retail Pty Ltd [2009] NSWSC 110; Stewart, Re Kleins Franchising Pty Ltd (admin apptd) [2008] FCA 721; Re Uni-Aire Security Pty Ltd (admin apptd) [2006] FCA 1423;
more generally, that additional time is likely to enhance the return for unsecured creditors: Deputy Commissioner of Taxation v Scottsdale Homes No Pty Ltd (No 2) [2009] FCA 190; Re Fitzgerald; Primebroker Securities Ltd (admin apptd) (recs and mgrs apptd) [2008] FCA 1247; Re Vouris; Marrickville Bowling and Recreation Club Ltd [2008] FCA 622.
[6](2009) 72 ACSR 352, 355 [13].
Mr Fary, counsel for the Administrators, stated that the Administrators seek the extension for the following reasons:
(a) for the primary reason of allowing the Administrators to explore the possibility of achieving a sale of the company’s business, a DOCA or both – noting that the Administrators are engaging with persons who expressed interest during an Expression of Interest campaign conducted by the Administrators;
(b) to allow them to continue to trade the business in order to maximise the return from the sale of stock (having an approximate book value of $10M) in order to help fund the administration and pay down employee entitlements;
(c) to enable the Administrators to receive a DOCA proposal;
(d) to enable the Administrators to consider a DOCA and prepare a report to creditors containing the opinions required by rule 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth);
(e) to maximise the return to the Company’s unsecured creditors; and
(f) avoid the cost (estimated at $50K) of conducting an adjourned meeting.
In my view, a sale of the Company’s business has the prospect of achieving a better outcome for creditors because it may:
(a) preserve the employment or some or all of the Company’s remaining employees;
(b) reduce the unsecured liabilities of the Company, in particular termination entitlements of employees and future lease obligations;
(c) maximise the return from:
(i) the sale of stock;
(ii) the plant and equipment (store fixtures and fitouts); and
(iii) any goodwill of the Company.
It seems clear that the interests of those involved in this administration including the employees, the unsecured creditors and the others to which I have referred are advanced by allowing an extension of the convening period. The administration is a complex one and the tasks required to be performed by the Administrators cannot be practicably carried out in the statutory time frames. The extension enables the inventory to be realised in a more orderly time frame which is likely to result in a better outcome for all creditors than if such stock was sold off in a liquidation warehouse scenario.
I consider that there are substantial reasons for the granting of the extension. The most significant material prejudice which potentially arises to those affected by the making of these orders is the extension of the moratorium period affecting the landlords. As I have said, I consider that that prejudice can be satisfactorily addressed by the provision of liberty to apply to those parties if they consider it appropriate to do so.
I will also make an order under s 447A to enable the Administrators to allow them to hold a second creditors meeting at any time within the convening period as extended or within five business days thereafter. This type of order, known as a Daisytek order, is commonly made in these types of applications to give administrators flexibility to perform their functions.
For completeness, I set out the orders that I pronounced on 1 February 2019.
THE COURT ORDERS THAT:
Pursuant to section 439A(6) of the Corporations Act 2001 (Cth) (Act), the convening period for the second meeting of creditors of Specialty Mens Apparel Pty Ltd (Administrators Appointed) (ACN 149 766 307) (Company) be extended to 20 May 2019.
Pursuant to section 447A of the Act, Part 5.3A of the Act is to operate in respect of the Company so that the second meeting of creditors of the Company may be held at any time during the convening period as extended under paragraph 1 of this order, or within 5 business days thereafter.
Liberty be granted to any person who can demonstrate sufficient interest to discharge or modify these orders on three business days' written notice to the plaintiffs.
Liberty be granted to the plaintiffs to apply for any further extensions of the convening period for the second meeting of creditors of the Company.
Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) of Schedule 2 of the Act, the plaintiffs may give notice of this order by publishing a copy on the website, within three business days of the date of this order.
The costs of this application be costs in the administration of the Company.
This Order be signed by an Associate Judge pursuant to Rule 60.02(1)(b) of the Supreme Court (General Civil Procedure) Rules 2015.
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