Mi Design P/L v Dunecar P/L and 1Ors

[2000] NSWSC 995

CITATION:	MI Design P/L v Dunecar P/L & 1Ors [2000] NSWSC 995 revised - 27/10/2000
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4011/00
HEARING DATE(S):	25 October 2000
JUDGMENT DATE:	25 October 2000
PARTIES :	MI Design Pty Limited (Plaintiff/Second Cross-Defendant) Dunecar Pty Limited (ACN 083 651 781) (First Defendant/First Cross-Defendant) Commonwealth Bank of Australia (ACN 123 123 124) (Second Defendant/Cross-Claimant) Sean Patrick O'Connell (Third Cross-Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	M Hayter (Solicitor) (Applicants - Administrators of Plaintiff/Second Cross-Defendant) L J Aitken (First Defendant/First Cross-Defendant) F Kunc (Second Defendant/Cross-Claimant)
SOLICITORS:	Gordon & Johnstone (Applicants - Administrators of Plaintiff/Second Cross-Defendant) Colbron & Associates (First Defendant/First Cross-Defendant) L E Taylor (Second Defendant/Cross-Claimant)
CATCHWORDS:	CORPORATIONS — Contested application for extension of time for second creditors’ meeting by Administrator under s439A(6) — Relevant considerations — Costs where contested.
LEGISLATION CITED:	Corporations Law, s439A(6), s440A(2)
CASES CITED:	Brien v Australasian Memory Pty Limited (2000) 34 ACSR 158
DECISION:	Application granted.

REVISED — 27 October, 2000
IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 4011/00
MI Design Pty Limited
Plaintiff

Dunecar Pty Limited (ACN 083 651 781)
First Defendant
Commonwealth Bank of Australia (ACN 123 123 124)
Second Defendant

Commonwealth Bank of Australia (ACN 123 123 124)
Cross-Claimant

Dunecar Pty Limited (ACN 083 651 781)
First Cross-Defendant
MI Design Pty Limited
Second Cross-Defendant
Sean Patrick O’Connell
Third Cross-Defendant

JUDGMENT — ex tempore

25 October 2000

introduction

1 This is an application by an experienced Administrator in a joint administration for the extension of the convening period for the second meeting of creditors, made pursuant to s439A(6) of the Corporations Law. 2    It is opposed by one of the unsecured creditors, being the lessor company to the company in administration in circumstances where a judgment is imminent as to whether or not the lessor was entitled to take possession or purport to do so of a leased premises upon which an hotel business is conducted. The Bank, being the Second Defendant in the current proceedings, Commonwealth Bank of Australia, supports the extension of time sought which is to 10 December 2000, on the assumption that the judgment anticipated is handed down promptly. That assumption can be taken as realistic. The length of the extension is to enable, if the tenant is reinstated, for thirty days or so, trading figures to be available in order to test the feasibility of a Deed of Company Arrangement, based on an assumption of continued profitable trading so tested.

RESOLUTION OF APPLICATION

3    The lessor being the First Defendant in the current proceedings opposes the application being granted on the basis that any extension will be a futility. That is to say, the only basis for an extension would be to enable a scheme to be propounded for the benefit of creditors as a whole in a Deed of Company Arrangement in which a number of critical elements have no certainty of fulfilment and where enquiries do not even allow of a tentative view as to feasibility. 4    Those critical elements are said to include:

(i) Whether the forthcoming judgment is in favour of the lessee, since if not it is highly doubtful whether any proposal would be forthcoming;

(ii) On the most favourable assumption that the forthcoming judgment would be such as to reinstate the lessee, any proposal presupposes:

(a) that the Bank will consent to a substantial discount on its debt as the only secured creditor, in circumstances where the Bank has not indicated its position or been asked to by the Administrator;
(b) that Mr O’Connell the principal of the Plaintiff will be able if reinstated to trade sufficiently profitably that some assurance can be given that, perhaps backed by a personal guarantee, trading profits will provide some return to unsecured creditors and the Bank; and
(c) that in circumstances where there is an existing expired statutory demand there is no successful application to wind up the company, taking into account the possibility entailed by some future application under s440A(2).

5    The Administrator’s response is that he has been appointed only since 6 October 2000 and the very circumstance that a successful arrangement will require a favourable decision reinstating the lessee as one sine qua non means that the Administrator has not been able to take matters as far as he might otherwise have done. 6    Furthermore, he points to the fact that a Deed of Company Arrangement is generally instigated not by the Administrator but by the principal behind the company in administration and he has only to-day had the chance for discussion with Mr O’Connell of any substance in relation to the bare bones of such a proposal — a discussion interrupted by the need to attend court for to-day’s application. 7    In addition, the Administrator reminds the Court that typically in arrangements embodied in Deeds of Company Arrangement a number of elements have to be negotiated. In the present case, in the nature of things, these elements could not meaningfully be pursued unless and until the lessee is reinstated and some trading record established. The Administrator points to his assessment of unaudited figures in his earlier role as investigating accountant that the business was traded profitably ignoring cost of capital. He also points to figures which disclose under the present management, said to be expert, which indicate a lower level of trading and marginal profit at best. 8    Essentially the Administrator puts to the Court that if a favourable decision is handed down for the lessee’s reinstatement he is reasonably confident that there is enough prospect that a scheme can be propounded, that he wants the opportunity to investigate its feasibility. He offers no certainty of a favourable outcome for that investigation and readily concedes that the Bank’s co-operation would be essential. No doubt also an investigation would be needed as to whether Mr O’Connell would have any assets to stand behind any personal guarantee. 9    But in all of this he emphasises that if no extension is given there is the virtual certainty that unsecured creditors will get nothing and sufficient prospect that some arrangement may be feasible that at least he should have the chance to test that outcome. 10    The Bank strongly supports the extension and has some stake in a successful outcome to the administration. As earnest of the Bank’s desire to at least bring about the first stage of that testing process, the Bank has at the earlier hearing stated that it will guarantee rental and other outgoings from the time that the lessee is reinstated to the time of the second creditors’ meeting, with a further 30 days thereafter contingent upon the business being either sold following that meeting or a decision to trade on being made, in each case by the Administrator. 11    The Bank also grants an indulgence not to require any debt service in relation to its facility during that same period but not so as to waive its entitlement to receive that money after the moratorium period.

CONCLUSION

12 I hesitated as to whether the extension of time should be dependent upon whether a favourable or unfavourable decision were made about reinstating the lessee. However, on balance I consider that a favourable decision should be made and that it should not depend upon the decision favouring the lessee. This is because if the decision is unfavourable to the lessee, it is open to the Administrator if the circumstances warrant, to make an application to abridge the time for the second meeting, a decision that can be made in the light of what is then known including the Bank’s likely attitude. 13 I have also considered the prospect of an application to wind up the company may elicit an application pursuant to s440A(2) to adjourn the hearing, where 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. However it would be quite wrong to attempt to second guess what the Court would do in that contingency. One option, but again an option which I express no view about in terms of its appropriateness, is for a limited adjournment pending further information.

ORDERS

14    I make orders in terms of paragraphs 2 and 3 of the Notice of Motion of 25 October 2000 filed for the Applicants, James Shaw and Alan Lewis, who are the Administrators of the Plaintiff.

COSTS

15    The Administrator notwithstanding paragraph 4 of the Notice of Motion has sought costs be paid pursuant to paragraph 5 by the Court ordering that the Administrator’s costs be paid by the First Defendant. The basis of that application is that what would have otherwise been a relatively routine application was extended by the First Defendant’s opposition to the orders sought and the manner in which that opposition manifested itself. 16    There is a point at which opposition becomes so adversarial that it should reverse the normal circumstances where the application by the Administrator, in one sense an indulgence sought, is met by the customary order that costs be paid out of the assets of the company under administration. In Brien v Australasian Memory Pty Limited (2000) 34 ACSR 158 I was satisfied that this point had been reached. It involved constitutional points, a lengthy contestation over several days and successive appeals to the Court of Appeal and the High Court. 17 Here, I am not so satisfied though I will turn to the Bank’s position in a moment. The opposition raised legitimate concerns which tested the appropriateness or otherwise of granting the extension. That it was raised as background with the current hotly contested proceedings concerning reinstatement of the lessee, does not alter that conclusion. Had the application been made in the normal course it would have been substantially cheaper. But these applications will, from time to time, yield opposition which may be perfectly legitimate though unsuccessful. 18 Turning to the Bank’s position, it gave the Court assistance and indeed assisted all the parties by making clear the extent to which it was prepared to give an extension to its earlier guarantees and undertaking. However, it is difficult to see any basis for giving the Bank the benefit of an order against the First Defendant even if the Bank foreshadowed that it would not be attending were the extension not to be contested of the convening period. The Bank makes clear in its fax of 24 October 2000 that its real concern was that it did not want counsel for the First Defendant to use the application as an opportunity for further submissions directed to the substantive application for relief against forfeiture. The First Defendant did not do that which the Bank apprehended. It also stopped short of any allegation of any impropriety on the part of the Administrator including as regards any relationship between the Administrator and the Bank. 19 In all the circumstances I make the following cost orders: 20 The costs of the Notice of Motion including that applicable to the Second Defendant as well as the other parties, be paid from the assets of the Plaintiff.

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Last Modified: 10/27/2000