Re Dessco Pty Ltd
[2021] VSC 94
•26 February 2021 (ex tempore); revised 1 March 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 00079
| JOHN PATRICK DAVEY | Plaintiff |
| v | |
| DESSCO PTY LTD ACN 072 755 590 AS TRUSTEE FOR THE DESSMANN FAMILY TRUST | Defendant |
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JUDICIAL REGISTRAR: | Irving JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 24 February 2021 |
DATE OF JUDGMENT: | 26 February 2021 (ex tempore); revised 1 March 2021 |
CASE MAY BE CITED AS: | Re Dessco Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2021] VSC 94 |
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CORPORATIONS – Winding up – Application to adjourn hearing of an application for an order to wind up a company pursuant to Corporations Act 2001 (Cth) s 453Q – Where creditor opposes application on basis of eligibility – ‘best interests of the creditors’ – Eligibility criteria for restructuring – Where restructuring practitioner formed an estimate of the total liabilities of the company – Where creditor contends that the estimate of the restructuring practitioner is erroneous – Where director of company provided document called restructuring plan to creditors – Where creditor rejected plan – Whether company has proposed a restructuring plan – Corporations Act 2001 (Cth) Pt 5.3B – Corporations Regulations 2001 (Cth) regs 5.3B.03 and 5.3B.14 – Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | John Davey | |
| For the Defendant | Ron Silverstein |
JUDICIAL REGISTRAR:
The Plaintiff, Mr Davey, has brought an application to wind up Dessco Pty Ltd (ACN 072 755 590) (‘Dessco’). Other than the grant of an extension of time for the lodgement of the ASIC notification, Mr Davey’s winding up application is ready to proceed.
Mr Davey’s application is based on Dessco’s failure to comply within the relevant statutory period with a statutory demand served by ordinary post on Dessco on 6 July 2020.
Mr Davey’s statutory demand is based on Magistrates’ Court orders made on 5 June 2020. The terms of those orders require Dessco to pay Mr Davey the sum of $81,748.29 and interest in the sum of $35,344.32. Relevantly, the orders also require the defendants (being Dessco and its director, Mr Dessmann) to ‘compensate the plaintiff Davey based on the Practitioners Remuneration Order (‘PRO’) in respect to the whole of [the] proceedings as it relates to each of them jointly and severally.’ The orders also make a Mr Elvin and Mr Silverstein jointly and severally liable for that compensation.
On 6 July 2020 Mr Davey provided Dessco with a Compensation Bill in the amount of $607,951.19 said to represent the compensation aspect of the Magistrates’ Court order. That bill is the subject of proceedings in the Costs Court and another Supreme Court proceeding.
On 15 February 2021, Dessco filed and served an interlocutory application in which it seeks:
(a) an adjournment of 50 days pursuant to s 453Q of the Corporations Act 2001 (Cth) (‘the Act’);
(b) costs be reserved; and
(c) liberty to apply.
On 17 February 2021 I adjourned the hearing of Dessco’s application for a week to allow the parties to file further evidence and submissions. In particular, I indicated the need for Dessco to provide material from the Small Business Restructuring Practitioner, Mr McDermott, going at least to Dessco’s eligibility for restructuring under s 453C of the Act.
On 26 February 2020 I ruled that Dessco’s application for an adjournment should be allowed. I delivered ex tempore reasons and indicated that, as per the request of the parties, I would provide short written reasons in the coming days. These are those reasons.
Section 453Q of the Act forms part of the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth) that commenced operation on 1 January 2021. Those reforms introduce a new Part 5.3B into the Corporations Act 2001 (‘the Act’).
Section 452A of the Act states that the objects of Part 5.3B are:
to provide for a restructuring process for eligible companies that allows the companies:
(a)to retain control of the business, property and affairs while developing a plan to restructure with the assistance of a small business restructuring practitioner; and
(b) to enter into a restructuring plan with creditors.
Section 453Q(1) provides that:
The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under restructuring and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under restructuring rather than be wound up.
Section 453A provides that restructuring under Part 5.3B of the Act commences when a restructuring practitioner is appointed under s 453B of the Act.
Section 453B in turn provides that a company may, by writing, appoint a small business restructuring practitioner for the company if:
(a) it meets the eligibility criteria (contained in s 453C of the Act and reg 5.3B.03 of the Corporations Regulations 2001 (‘the Regulations’)); and
(b) the company’s board makes relevant resolutions.
In this case it is not in contention that Dessco’s board made the relevant resolutions on 15 February 2021 and appointed Mr McDermott to be the restructuring practitioner on the same day. Mr McDermott has consented to be the restructuring practitioner.
Mr Davey opposes the adjournment. As I have understood him, he says:
(a) Dessco is ineligible for restructuring because the level of its liabilities exceeds the statutory maximum; and
(b) Dessco is not in restructuring because its restructuring proposal does not meet the statutory requirements and, in any event, he has already rejected Dessco’s proposal.
Following the hearing of Dessco’s application, Mr Davey contacted the Court by email, seeking to make a further argument: that s 459S(1) of the Act operates to prevent Dessco from raising restructuring in opposition to the winding up proceeding, as it could have raised that issue before the expiration of the statutory demand on 6 January 2021.
Dessco sought that I delay delivery of this ruling in order to allow it time to respond to Mr Davey’s additional argument. The Court indicated that it would not be assisted by further submissions on this issue.
In support of its interlocutory application, Dessco relies upon:
(a) the affidavit of Peter Patrick Dessmann sworn 15 February 2021;
(b) the supplementary affidavit of Peter Patrick Dessmann sworn 16 February 2021;
(c) the affidavit of Peter Patrick Dessmann sworn 22 February 2021 which exhibits the report of Ross McDermott to creditors dated 22 February 2021;
(d) written submissions dated 16 February 2021; and
(e) written submissions dated 22 February 2021.
In opposition to the application, Mr Davey relies upon:
(a) written submissions dated 21 February 2021;
(b) the affidavit of John Patrick Davey affirmed 22 February 2021; and
(c) written submissions in reply dated 23 February 2021.
Section 459S
Section 459S has no application to Dessco’s application for an adjournment of the winding up application. An application for an adjournment of the winding up application because a company is in restructuring cannot be characterised as a company opposing the winding up application on a ground that the company could have relied upon ‘for the purposes of an application by it for the demand to be set aside’ under s 459G of the Act. Dessco’s application does not seek to oppose the winding up; rather, it seeks an adjournment of the winding up proceeding.
Eligibility
Section 453C of the Act relevantly provides that the eligibility criteria for restructuring are met if, on the day the restructuring practitioner is appointed, the test for eligibility based on the liabilities of the company contained within the regulations is satisfied.
Regulation 5.3B.03 provides that for the purposes of paragraph 453C(1)(a) of the Act, the test for eligibility is that the total liabilities of the company on the day the restructuring begins must not exceed $1million. Relevantly, this regulation also defines liability to mean any liability to pay an admissible debt or claim.
Admissible debt or claim is defined in Reg 5.3B.01 to mean:
… a debt or claim that would be admissible to proof against the company under s 553(1) of the Act if:
(a) the company were wound up; and
(b) the relevant date were:
(i)if the company is under restructuring—the beginning of the restructuring…
Section 553(1) of the Act provides that:
Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present, future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
On the question of eligibility, Dessco relies on the report of Mr McDermott. Mr McDermott is a qualified liquidator and the restructuring practitioner appointed to Dessco. He has had, albeit for only a relatively short period, access to Dessco’s books and records. In his report Mr McDermott estimates that the admissible debts or claims against the company as at 15 February 2021 total $750,592. In Mr McDermott’s view Dessco therefore satisfies the level of liabilities component of the requirements for eligibility under Pt 5.3B of the Act.
In reaching his figure of $750,592, Mr Dermott has allowed a sum of $200,000 for contingent liabilities. Contingent liabilities refers to Mr Davey’s claim of $607,951.19 in respect of the Magistrates’ Court orders of 5 June 2020 that requires Dessco to pay damages.
Mr McDermott considers Mr Davey’s claim in paras 5.27 to 5.46 of his report. In summary, in Mr McDermott’s opinion:
(a) Mr Davey’s claim contains addition errors that inflate the total by approximately $60,000;
(b) the rates of charges appear to be a mixture of GST inclusive and GST exclusive amounts;
(c) a high percentage of work has been charged at an hourly rate that is above the rates provided for in the relevant costs agreements;
(d) some of the work described in the claim could have been conducted by a more junior staff member at a less expensive rate;
(e) adjusting the claim by subtracting only the amounts quantified by Mr McDermott to date would reduce Mr Davey’s claim to $468,528; and
(f) his best estimate of the amount Dessco would rationally pay to settle the obligation to Mr Davey is $200,000.
Mr Davey says that, by virtue of s 553(1) of the Act, contingent claims form part of Dessco’s liabilities. So much may be accepted. Mr Davey concedes the addition error referred to by Mr McDermott but otherwise does not accept the discounting of his damages claim/order to $200,000. This, he says, is a cynical attempt by Dessco, assisted by Mr McDermott, to bring Dessco’s total liabilities to under $1m so that Dessco is eligible for restructuring.
In particular Mr Davey submits that:
(a) other than the addition error, the basis for Mr McDermott’s deductions are not accepted – for example, the charge rates are not incorrect and Mr McDermott has not had regard to the PRO despite the terms of the Magistrates’ Court order;
(b) Mr McDermott has impermissibly had regard to the Australian Accounting Standards Board’s Accounting Standard AASB 137 in assigning a value to Mr Davey’s claim;
(c) section 553(1) obliges Mr McDemott to use the full amount of Mr Davey’s claim (adjusted for the addition errors) in the calculation of Dessco’s liabilities;
(d) Mr Davey has other contingent claims against Dessco that Mr McDermott has not taken into account including a claim and counterclaim in VCAT collectively worth an additional $595,000; and
(e) when all of these matters are taken into consideration, Dessco’s liabilities as at 15 February 2021 are well in excess of $1m.
In my view an application for an adjournment of a winding up proceeding cannot be the appropriate forum to quantify a contingent liability of a company. This is particularly the case when there are separate proceedings on foot for exactly such a purpose.
I accept Mr Davey’s submission that the definition of admissible debt or claim in the regulations, by virtue of its incorporation of s 553(1) of the Act, has the effect that Mr Davey’s contingent debts must be considered when ascertaining Dessco’s total liabilities for the purpose of determining its eligibility to restructure. That, however, does not mean that a restructuring practitioner, particularly in the very early stages of the process, is obliged to accept the quantification of the contingent debts contended for by the creditor for the purposes of calculating the company’s total liabilities.
What is required of a restructuring practitioner forming a view on a company’s eligibility at this stage of the process is that they make a just estimate of the value of the claim based on the factual material available from the claimant and the company. The restructuring practitioner must have reasonable grounds for ascribing a particular figure to the claim but is not, at this very early stage, required to carry out a comprehensive detailed enquiry. In formulating a just estimate it is entirely appropriate that a restructuring practitioner have regard to relevant accounting standards.
I have reached this view because:
(a) the parties agree that, at this stage, Mr Davey’s damages claim is unquantified and will remain so until a taxation is performed in the Costs Court – in that sense it can be described as contingent;
(b) Mr Davey’s other claims in VCAT are similarly contingent;
(c) as is the case with other insolvency administrations, the inclusion of contingent claims in the restructuring process is intended to ensure that all of a company’s financial affairs can be considered in the formulation of a restructuring plan;
(d) the timeframes provided for restructuring in the Act are very short and so the time available to a restructuring practitioner to quantify the liabilities of a company for the purposes of assessing eligibility at this preliminary stage is limited;
(e) the regulations establish a separate process for a creditor to challenge a company’s assessment of the amount claimed by a creditor:
(i) Regulation 5.3B.21 envisages that the restructuring plan provided to creditors will include ‘the company’s assessment of the amount of the creditor’s admissible debts or claims’;
(ii) Regulation 5.3B.22 sets out a process for a creditor to dispute the company’s assessment of the creditor’s admissible debt or claim;
(iii) Regulation 5.3B.60 gives the Court certain powers in respect of such disputes on the application of the company or a creditor of the company; and
(f) The ‘just estimate’ approach that I have described is consistent with the requirements of s 554A of the Act for a liquidator to value claims of uncertain value in a winding up.
In this matter I have had particular regard to Mr McDermott’s views because he is a qualified liquidator with obligations under the Act.[1] In my view, having regard to the information provided in his report, Mr McDermott has provided a just estimate of the value of Mr Davey’s claim that appears to have a reasonable basis in the material available to him at this stage of the restructuring process. This does not mean that Mr Davey is not free to dispute Dessco’s assessment of his claims at the appropriate time under the regulations outlined above.
[1]Section 453E of the Act sets out the functions, duties and powers of the restructuring practitioner. Regulation 5.3B.08 sets out the powers of the restructuring practitioner, including the power to investigate the company’s financial circumstances to decide whether to terminate the restructuring. The restructuring practitioner has the power under s453J of the Act to terminate restructuring if they believe on reasonable grounds that the company does not meet the eligibility criteria for restructuring.
It follows that I am satisfied that, at this stage, Mr McDermott’s assessment of Dessco’s eligibility for restructuring should be accepted.
Has a restructuring plan already been proposed and rejected or lapsed?
On 15 February 2021 Dessco’s director, Mr Dessmann, prepared a document entitled ‘Restructuring Plan – Approved Form’ which was provided to Mr Davey.
Upon receipt of this document Mr Davey wrote to Dessco indicating that he did not agree to the ‘Plan’.
Under reg 5.3B.02, restructuring ends if the company’s proposal to make a restructuring plan lapses which, under reg 5.3B.20, occurs if the restructuring plan is not accepted. Mr Davey argues that by preparing this document and providing it to him, Dessco has proposed a restructuring plan which he has not accepted, causing Dessco’s proposal to make a plan to lapse in accordance with reg 5.3B.20 of the Regulations.
Section 455A of the Act provides that the regulations may prescribe the time at which the company is taken to have proposed a restructuring plan to its creditors, for the purposes of determining when the company became insolvent under the terms of that section.
Reg 5.3B.14(2) states that, for the purposes of the above section, ‘the company is taken to have proposed the restructuring plan on the day the company’s restructuring practitioner does the thing mentioned in paragraph 1(d)’, i.e. ‘the restructuring practitioner gives a copy of the restructuring plan, restructuring proposal statement and declaration in accordance with subregulation 5.3B.21(1)’.
It is not in contention in this case that Mr McDermott has not provided the creditors with the documents required by sub-reg 5.3B.21(1).
As this is the case, it is my view that Dessco has not yet provided a valid restructuring plan to creditors, through its restructuring practitioner, Mr McDermott. As no valid plan has yet been provided, Mr Davey’s written rejection of the 15 February 2021 document does not cause Dessco’s restructuring plan to lapse or mean that Dessco is not in restructuring.
Best interests of the creditors
In my view the ‘best interests of the creditors’ test under s 453Q is analogous to the test under s 440A(2) of the Act, dealing with the adjournment of winding up applications in circumstances where the company is placed under administration.
In the context of s 440A, the authorities establish that the best interests of the creditors relates to whether creditors could hope to get more by way of payment of their debts from administration than from liquidation.[2] This assessment must be based on a sufficient possibility as distinct from mere optimistic speculation.
[2]Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60, [10]-[12].
In the case of restructuring, the task is made more difficult because until a restructuring plan is developed it is difficult to ascertain the likely return to creditors if the company is allowed to restructure.
Dessco submits that their business is viable and that Mr McDermott is of the opinion that allowing the company to restructure is in the interests of all creditors.
Mr McDermott expresses his opinion that it is in the interests of all creditors to allow the company to restructure because if it is wound up:
(a) Dessco’s legal costs in the winding up will exceed its assets;
(b) creditors will be unpaid;
(c) its two and a half employees will be terminated; and
(d) if Dessco is allowed to restructure, Mr Dessman will have a job from which he may be able to contribute to meeting the costs orders made in the Magistrates’ Court in Mr Davey’s favour.
Mr Davey submits that it is not in his interests as a creditor to allow Dessco to restructure because:
(a) Dessco appointed a restructuring practitioner at a very late stage in the winding up application;
(b) an adjournment would allow an insolvent company to keep trading; and
(c) his experience of Dessco’s director, Mr Dessmann, gives him no confidence that he will receive any payment.
In my view, allowing Dessco to continue the restructuring process will give creditors the best chance of receiving some payment of their debts. Dessco has indicated that it intends to offer a dividend of 5 cents in the dollar to creditors. It is not in contention that winding up Dessco will not deliver any return to creditors. I am satisfied that it is in the interests of the company’s creditors for the company to continue under restructuring rather than being wound up. I will therefore allow an adjournment.
If Dessco is allowed to continue with the restructuring process, the next steps will be that the Director and Mr McDermott will finalise the restructuring plan for distribution to the creditors. On my calculations, absent any extension, this would occur by 15 March 2021.
Creditors will then have up to 15 business days to vote on the plan and try to resolve any disputes relating to proofs of debt. By my calculation, this would occur by around 5 April 2021.
I will adjourn the further hearing of this matter to 7 April 2021 at 10:30 am.
I will also order that costs be reserved.
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