In the matter of SWC Management Pty Ltd (ACN 160 491 707) (Administrators Appointed)

[2020] VSC 38

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2020 00160

IN THE MATTER of SWC Management Pty Ltd (ACN 160 491 707) (Administrators Appointed)

SWC MANAGEMENT PTY LTD (ACN 160 491 707) (Administrators Appointed) and ORS (according to the attached schedule) Plaintiffs

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JUDGE:	Gardiner AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	17 January 2020
DATE OF JUDGMENT:	17 January 2020.  Reasons revised 5 March 2020
CASE MAY BE CITED AS:	In the matter of SWC Management Pty Ltd (ACN 160 491 707) (Administrators Appointed)
MEDIUM NEUTRAL CITATION:	[2020] VSC 38

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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 M P Costello	Norton Rose Fulbright Australia

HIS HONOUR:

1. On 17 December 2019, Mr Andrew Knight and Mr Craig Shepard were appointed as joint and several administrators (‘Victorian administrators’) of various companies in Victoria (‘Victorian Companies’) pursuant to s 436A of the Corporations Act 2001 (Cth) (‘Act’).[1]

   [1]These companies are identified in  schedule 1 to these  reasons.

1. On 17 December 2019, Messrs Knight, Shepard and Mr Scott Langdon were also appointed as joint and several administrators (‘the New South Wales administrators’) of Baron Forge Contractors (NSW) Pty Ltd, Baron Forge (NSW) Pty Ltd (‘NSW Companies’). 

1. On the same day, Messrs Knight, Shepard, and Mr Jarrod Villani were appointed as the joint and several administrators of Baron Forge (QLD) Pty Ltd (‘Baron Forge Qld’) (‘Queensland administrators’).  In these reasons I shall refer to the Victorian Companies, New South Wales Companies and Baron Forge (Qld) collectively as SWC Group. I will also refer to the Victorian administrators, the New South Wales administrators and the Queensland administrators collectively as ‘administrators’.

1. By originating process filed 14 January 2020, the administrators seek orders for the extension of the convening period for the second meetings of creditors for each of the members of the company’s administration of SWC Group to 23 April 2020 pursuant to s 439A(6) of the Act (‘application’).

1. The administrators also seek an order pursuant to s 447A(1), commonly known as a Daisytek order, that s 439A(2) of the Act operates in relation to each of the companies to enable meetings that must be convened under s 439A to be convened at any time during the convening period as extended or within five business days thereafter.[2]

   [2]See In the matter of Daisytek Australia Pty Limited (2003) 21 ACLC 1140.

1. The administrators also seek relief in the nature of directions in  the originating process as to the operation of the administration accounts. As a result of the discussion which occurred at the hearing of the application, that part of the application will, if necessary, be considered and determined at a later date.

1. This application is supported by an affidavit of Craig Shepard sworn 15 January 2020, and an affidavit of Lee Pascoe sworn 17 January 2020. Mr Shepard deposes in his affidavit that he has discussed the need for the application with his co appointees, all of whom agree that the making of the application is in the best interests of the creditors  of the companies in SWC Group.

1. Ms Pascoe’s affidavit deposes to the notice given to the lessors of premises who will be affected by the statutory moratorium imposed on them to take possession of their property if the orders sought are made.[3]  Ms Pascoe also  exhibits minutes of a meeting of the committee of inspection of SWC Group convened on 16 January and chaired by Mr Shepard. At the meeting, the committee of inspection were informed of the  reasons for the seeking of the extension of the second meetings of creditors.

   [3]The extension of the convening period will result in the continuation of the moratorium on lessors’ rights imposed by s 440B of the Act.

1. Unless the convening periods are extended, the second meetings of creditors must be convened by 24 January 2020 and held by 3 February 2020.  The administrators are seeking an extension of those dates because, first, the affairs of SWC Group are complex and intertwined and, secondly, additional time is needed to negotiate a sale or sales of the companies’ key assets at a higher price than would likely be achieved in a liquidation scenario. 

1. Mr Shepherd deposes that further investigations are required in order to properly compile the report required by s 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth).  A number of secured creditors are yet to respond to the inquiries made of them in relation to their registrations on the Personal Property Securities Register.  Any second meetings of creditors convened in accordance with the statutory timeframe would likely result in adjournments which would be costly and serve no good purpose.

1. SWC Group is a substantial enterprise generating approximately $160m in revenue in the financial year ending 30 June 2019.  Almost all the companies in SWC Group are subject to a deed of cross-guarantee registered with ASIC.  Based on reports lodged with the administrators, it appears that there are trade creditors totalling approximately $16m.  Of this, approximately $2m is owed to landlords, $1.6m to a supplier, Caesarstone. $1.7m is said to be owing to another supplier, Consentino Group.  There is a secured debt to the ANZ of $23.6m, a subordinated debt to Swiss Re of $4.6m and convertible notes and shareholder loans of approximately $12m.  There are 153 registered PPSI interests.

1. As at the date of the administrators’ appointment, SWC Group traded from 15 leased premises in five States and employed 369 staff.  All employees were terminated on the date of appointment although  52 have been rehired casually on a short-term basis to assist the administrators. 

1. The administrators say that the accounts of the companies in SWC Group are complex, not only because of the size of SWC Group, but because of the internal arrangements within the group.  In particular, complexity arises because: 

(a)        one company, SWC Management Pty Ltd (‘SWC Management’), undertook a treasury function on behalf of other SWC Group companies;

(b)       invoices have not been created in a way that readily identifies the company within SWC Group that is entitled to the funds; and

(c)        it is not clear which companies employed which staff, with the result that the administrators have not yet been able to ascertain the extent to which each entity has outstanding employee entitlements.  The committee of inspection was informed on 16 January 2020 that there is evidence that five members of SWC Group employed personnel working for SWC Group. 

1. In his affidavit, Mr Shepard explains how the treasury function operated for SWC Group.  In summary, two of the companies, SWC Management and Nianiakas Pty Ltd (‘Nianiakas’), had trading bank accounts. Another entity within SWC Group, Omnifloor Australia Pty Ltd (‘Omnifloor’), to which other administrators, Messrs Juratowitch, Secatore and White, have been appointed, also had a trading bank account.  SWC Management transferred funds between its bank account and the accounts of Nianiakas and Omnifloor as required to manage cashflow. 

1. Mr Shepard states that it appears that funds received from invoices issued by companies in SWC Group were paid into SWC Management’s bank account.  Intercompany loans were used to account for treasury transactions in the books and records of the relevant companies.  In addition, an intercompany management fee was charged by SWC Management to members of SWC Group.  It will be necessary for the administrators to properly investigate and understand the operation of the treasury function with a view to gaining an understanding of the assets and liabilities for each SWC Group company.

1. Mr Shepard deposes that the invoicing practices of the SWC Group companies are such that it is not immediately obvious which particular SWC Group company is entitled to the funds received in payment of any particular invoices.  This is because many invoices bear the name of more than one SWC Group entity. 

1. The committee of inspection were informed that the debtor books of SWC Group indicated debts owed to SWC Group of $22m.  It will be necessary for the administrators to better understand which entity is entitled to the funds received from payment of invoices in order to determine whether the transactions effected by the treasury function reflect the factual position. 

1. As to the identity of employers, Mr Shepard deposes that the administrators’ investigations to date  reveal confusion as to which of the companies within SWC Group was the employer of each former employee.  The administrators were initially advised by management that all employees were employed by one of four members of SWC Group but it has  subsequently become known that some employees may have been employed by SWC Management. 

1. Many employees worked across various companies within SWC Group and it appears that some employees were paid by entities for whom they did not undertake work.  The administrators have formed the view that it will be  necessary to physically review each employment contract and that doing so will take considerable time.  It may be that intercompany loan entries will need to be journaled to reflect the true position in this regard.

1. The administrators have received 46 expressions of interest in acquiring some or all of the companies’ assets within SWC Group and they have issued 22 non-disclosure agreements, 13 of which have been signed and returned.  Indicative non-binding offers were initially to be received by 31 December 2019 however, that deadline was later extended to 6 January 2020.  Offers have been received; many are for specific items of plant and equipment.

1. Mr Shepard says that the administrators considered the creditors’ interests will be best served and the best return achieved by the sale of each particular business or substantially the whole of its assets rather than the piecemeal sales of some items of plant and equipment.

1. Purchasers have been found for the assets of three members of SWC Group,  Nianiakas, Baron Forge (NSW) and Edge Glass (Aust) Pty Ltd and discussions are continuing with interested parties in respect of other members of SWC Group.  An extension of the convening period will allow the administrators to continue exploring a possible sale of some or all of the assets of the companies while the companies are still in administration and without having to vacate various premises. 

1. As has been mentioned, at the date of the appointment of the administrators, SWC Group was trading from 15 leased premises in five States. The administrators have since disclaimed four of those leases.  Leases are in the process of being assigned to the purchaser of Nianiakas.

1. The lessor of SWC Group’s head office, ED Brooklyn Pty Ltd, has served notices to vacate. The sole director of the lessor company, Mr Paz, is also a director of SWC Management.  The notices require the lessee to deliver possession by 12 February 2020.  The administrators have invited the lessor to withdraw the notice but that invitation has not been accepted.

1. The head office is not only the administrative centre of the group, but contains substantial plant and equipment.  The administrators do not believe it is possible to decommission the plant and equipment in time to comply with the notices to vacate.  In addition, there is a risk that if a potential purchaser was interested in acquiring the plant and equipment located at the head office it would not be possible to realise those assets if the lessor had already taken possession before the plant and equipment had been decommissioned.

1. Ms Pascoe’s affidavit deposed that notice of this application being made  was provided to the various landlords of the premises that remain occupied by SWC Group companies.  I am satisfied that the persons predominantly affected by the imposition of the moratorium which attends the making of these orders have been informed that this application is to be made. None have chosen to appear and oppose the making of the orders sought.

1. In Riviera Group Proprietary Limited administrators appointed, receivers and managers appointed (‘Riviera’),[4] Austin J collected the authorities which have dealt with applications of this kind. His Honour identified a number of categories of circumstances in which extensions of the convening period have been granted.[5]  To my mind, in the present context, the following  four factors mentioned are particularly prominent.

   [4](2009) 72 ACSR 352 (‘Riviera’).

   [5]Ibid [13].

1. The first of those is the size and the scope of the business.  SWC Group is a substantial and complex group of companies. In my view, it is not surprising that the administrators require more time to investigate SWC Group’s affairs, in particular, where the Christmas and New Year holiday periods intervened to delay engagement with stakeholders.

1. The second category which seems particularly apposite to consider is the large number of employees with complex entitlements.  At the date the administrators were appointed, the SWC Group companies employed 369 staff.  As has been mentioned, there are questions as to the identity of each employee’s employer and there are significant unresolved questions as to the employees’ outstanding entitlements. 

1. The third category which to my mind is particularly relevant is the time needed to execute an orderly process of disposal of SWC Group’s assets. Mr Shepard’s affidavit explained in some detail the work required to be undertaken to achieve sales of the business and assets. An extension of the convening period will allow the administrators to conclude those sales already agreed and to continue exploring a possible sale of assets while maintaining possession of the leased premises, in particular, the head office, without the commercial pressure of an impending requirement  to vacate the premises.

1. In this regard, the administrators considered that there is a material risk that the leases of the head office’s premises will terminate. This would cause a loss of access to the books and records of the companies, which are the only set to be used at that site, and result in almost immediate diminution in value of a significant proportion of the assets of the SWC Group companies, and an inability by the administrators to decommission the plant and equipment located at the head office.

1. The fourth consideration is that additional time is likely to enhance the return for unsecured creditors.  Mr Shepard has deposed that, in his experience, there is a general perception that stock, plant and equipment are more easily sold at a higher margin while the company remains in administration as compared with a sale of assets of a company in liquidation.  Equally, there are higher returns on debtor recoveries during a period of administration.  As has been mentioned, the debtor recovery book  contains debts in excess of $20m. 

1. In my view the prescribed statutory times provided for in the Act for the convening of the second meeting of creditors are certainly not apt in the context of an administration of this complexity. The authorities demonstrate the courts will ordinarily exercise their discretion to extend the convening period where there is a substantial issue in relation to any one of the categories to which Austin J has identified in Riviera.[6]  In my view there is a substantial reason for granting an extension based on the  four  categories identified above.

   [6]Ibid.

1. Further, Mr Shepard indicates that the timeframes prescribed by the Act will not allow a report of the required standard to be compiled for the information of creditors for consideration of any meetings which would otherwise need to be convened. The authorities indicate that an application for extension of a convening period will be appropriate where necessary to enable the administrators to arrive at an opinion and provide the report required by the Insolvency Practice Rules (Corporations) 2016 (Cth). 

1. If that is not provided for, the creditors will not receive the information to which they are entitled and which the administrators are obliged to provide before the creditors decide what course to take in respect of the companies at the second meetings.  As I have said, if an order of the type sought is not made, there will be meetings required to be convened and an adjournment is likely to follow, for which a considerable cost will be incurred for no purpose.

1. I consider this is a clear case in which an extension of convening period should be granted.  It is a relatively modest extension in the circumstances, approximately three months.  SWC Group is a group of companies which carried on an enterprise of some commercial complexity.  A number  of issues will need to be considered and dealt with by the administrators before the holding of the second meetings and for those reasons I propose to award the extension which is sought by the administrators to 23 April 2020.

1. I will order as follows:

1 Pursuant to section 439A(6) of the Corporations Act 2001 (Cth) (Act), the period in which the Administrators are required to convene the second meetings of creditors of each of the first to thirteenth plaintiffs (Companies) pursuant to section 439A(1) of the Act be extended to 23 April 2020.

2 Pursuant to section 447A of the Act, that section 439A of the Act is to operate in relation to each of the Companies so that the meetings of creditors of the Companies to be convened under section 439A of the Act may be convened at any time during the convening period as extended by Order 1, or within 5 business days thereafter.

3         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 administrators of the company (Administrators).

4         Liberty be granted to the Administrators to apply for any further extensions of the convening period for the second meetings of creditors of the Companies.

5         The costs of this application be costs in the administration of each of the Companies.

6 Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) at Schedule 2 of the Act (the Schedule), the Administrators may give notice of this order by publishing a copy on the website, within three business days of the date of this order.

7         Any further affidavit in support of Order 3 to the Originating Process be filed by 7 February 2020.

8         The Originating Process be listed for further hearing on 20 February 2020 at 10:30am.

SCHEDULE 1 – VICTORIAN COMPANIES

SWC Corporate Entity	ACN	Company Abbreviation	Annexure/ Exhibit
SWC Management Pty Ltd	ACN 160 491 707	SWC	Annexure ‘A’
Baron Forge Constructions Pty Ltd	ACN 111 990 606	Baron Forge	CPS-1
Baron Forge Contractors Pty Ltd	ACN 160 547 035	Baron Forge Contractors	CPS-2
Roman Glass Pty Ltd	ACN 617 160 880	Roman Glass	CPS-3
The Edge Glass (Aust) Pty Ltd	ACN 602 393 126	Edge Glass	CPS-4
Baron Forge Equipment Pty Ltd	ACN 160 483 705	Baron Forge Equipment	CPS-5
Essential Stone Pty Ltd	ACN 162 823 369	Essential Stone	CPS-6
GFA Enterprises Pty Ltd	ACN 161 276 482	GFA	CPS-7
Nianiakas Pty Ltd	ACN 098 945 996	Nianiakas	CPS-8
Paz Stone Pty Ltd	ACN 120 341 166	Paz Stone	CPS-9