Re DST Project Management and Construction Pty Ltd
[2021] VSC 108
•9 March 2021 (ex tempore); revised 10 March 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 00207
| REDHILL BRICKLAYING PTY LTD (ACN 137 822 729) | Plaintiff |
| v | |
| DST PROJECT MANAGEMENT AND CONSTRUCTION PTY LTD (ACN 623 076 031) | Defendant |
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JUDICIAL REGISTRAR: | Steffensen JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 3 March 2021 |
DATE OF RULING: | 9 March 2021 (ex tempore); revised 10 March 2021 |
CASE MAY BE CITED AS: | Re DST Project Management and Construction Pty Ltd (ACN 623 076 031) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 108 |
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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 restructuring plan proposed to use creditors ‘friendly’ to the company to pass the restructuring plan to the detriment of trade creditors – Where creditor claims there are reasons to doubt the information provided to the restructuring practitioner – Restructuring practitioner’s obligations to make reasonable inquiries into and take reasonable steps to verify the company’s business, property, affairs and financial circumstances – ‘best interests of the creditors’ – ‘excluded creditor’ – Corporations Act 2001 (Cth) Pt 5.3B – Corporations Regulations 2001 (Cth) regs 5.3B.18, 5.3B.21.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr B Devanny of Counsel | Tisher Liner FC Law |
| For the Defendant | Mr M Lhuede, Solicitor | Piper Alderman |
JUDICIAL REGISTRAR:
This proceeding concerns an application pursuant to s 453Q of the Corporations Act 2001 (Cth) (‘Act’) to adjourn the plaintiff’s winding up application on the basis that the defendant, DST Project Management & Construction Pty Ltd (‘Company’) is in restructuring pursuant to the recently enacted Part 5.3B of the Act.[1] The Company relies upon the affidavit of its restructuring practitioner, Adam Bernard Preiner filed on 27 February 2021. The plaintiff opposes the application for an adjournment, and seeks that the Company be wound up. In respect of its opposition to the adjournment application, the plaintiff relies upon the affidavit of its director, Gerrard McDevitt filed on 2 March 2021.
[1]Part 5.3B was introduced by the Corporations Amendment (Corporate Insolvency Reforms) Act 2020 (Cth), and came into force on 1 January 2021.
The Company operates a project management, building and construction business in Greater Melbourne, Victoria. The plaintiff, Redhill Bricklaying Pty Ltd is a sub-contractor of the Company. The plaintiff and the Company have been involved in several legal proceedings in New South Wales and Victoria since December 2018 regarding the payment of outstanding invoices, misleading conduct, defective workmanship and rectification work costs. The plaintiff has taken various steps in enforcement of its debt, including obtaining a garnishee order, and a freezing order from the Magistrates’ Court of Victoria in respect of the Company’s assets up to the value of its judgement debt.
On 4 January 2021, the plaintiff served a statutory demand on the Company by ordinary post. The demand is for $12,315.57, which comprises a judgment debt obtained in the Local Court of New South Wales of $52,976.90, less subsequent payments received and an offsetting claim of $48,308.57 brought by the Company against the plaintiff in separate proceedings commenced in the Victorian Civil and Administrative Tribunal.
On 2 February 2021 the plaintiff filed an Originating Process seeking that the Company be wound up in insolvency due to its failure to comply with the statutory demand. The Originating Process was listed for hearing before me on 3 March 2021. It is common ground that if an adjournment is not granted, the plaintiff’s winding up application is ready to proceed. The Company’s solicitor indicated that it will not oppose the winding up should the adjournment not be granted.
On the same day that the Originating Process was filed, Mr Preiner was appointed as the restructuring practitioner of the Company under s 453B(1) of the Act. The parties agree that the Company meets the eligibility criteria for restructuring under s 453C of the Act and that Mr Preiner has been validly appointed.
The objects of Part 5.3B are stated in s 452A to be ’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.’
As described in the Explanatory Memorandum to the Corporations Amendment (Corporate Insolvency Reform) Bill 2020 (‘EM’), the restructuring process is intended to provide a simpler, less expensive restructuring option for eligible small businesses. The EM states that ‘the ultimate aim of restructuring is to have a plan in place which sets out an approach to repayment of the company’s existing debts, thereby enable the company to stay in business and avoid being wound up’.[2]
[2]Explanatory Memorandum, 13 [1.4].
In short, Part 5.3B of the Act and its associated regulations set out in the Corporations Regulations 2001 (Cth) provides for a regime where the Company may propose a restructuring plan to its affected creditors[3] via a restructuring practitioner. The restructuring practitioner is required to undertake reasonable enquiries into and verify the Company’s business, property, affairs and financial circumstances, for the purpose of assessing the accuracy and completeness of the information provided by the Company in the restructuring plan and proposal statement. It is an offence under reg 5.3B.18(4) for a restructuring practitioner to fail to do so.
[3]Being those creditors who would have had admissible debts or claims admissible to proof under s 553(1) of the Act, if the company were wound up, as at the date of the appointment of the restructuring practitioner. (See definitions of ‘affected creditor’ and ‘admissible debt or claim’ in regs 5.3B.01 and 5.3B.29(2))
Affected creditors who are not ‘excluded creditors’ are invited pursuant to reg 5.3B.21(2) to provide a statement in writing to the restructuring practitioner advising whether or not the restructuring plan should be accepted (‘Restructuring Vote’). In addition, creditors are invited to verify the Company’s assessment of the value of their debt or claim, or alternatively, dispute it in accordance with reg 5.3B.22.
The Restructuring Vote must be provided within the ‘acceptance period’, being a period of 15 business days from the proposal of the plan.[4] If at the end of the acceptance period a majority in value of those creditors who have provided Restructuring Votes accept the plan, the restructuring plan is ‘made’[5] and it is then binding upon all creditors with admissible claims or debts as at the date the restructuring practitioner was appointed.
[4]Corporations Regulations 2001 (Cth) reg 5.3B.21, unless extended by 5 business days by reason of a creditor disputing the value of their debt.
[5]Ibid regs 5.3B.25 to 5.3B.29.
‘Excluded creditors’ are not permitted to cast a Restructuring Vote.[6] Regulation 5.3B.01 defines ‘excluded creditor’ to mean a related creditor, the restructuring practitioner or a related entity of the restructuring practitioner. A ‘related creditor’ means a person who is both a creditor of the Company and a related entity of the Company (as defined in s 9 of the Act). Accordingly, the value of debts and claims of related creditors is not taken into account when determining if a restructuring plan is accepted by the Company’s creditors.
[6]Ibid reg 5.3B.21(2).
The Court has powers under regs 5.3B.61 to 63 to vary, void, validate or terminate a restructuring plan on the application of an affected creditor.
On 3 February 2021, Mr Preiner issued his initial report to creditors, which amongst other things, enclosed his declaration of independence, relevant relationships and indemnities, provided information about the restructuring process, and invited creditors to complete their debt notifications by 12 February 2021. Mr Preiner’s independence has not been challenged by the plaintiff.
The Company’s evidence is that the restructuring was caused by a reduction in work and revenue arising from the COVID-19 pandemic lockdowns giving rise to insufficient cash flow to meet its liabilities. The Company and Mr Preiner believe that having regard to the recent turnaround in the building industry, the Company will be able to trade successfully into the future provided it undertakes an appropriate restructure.
On 23 February 2021, Mr Preiner provided a report to creditors. In compliance with reg 5.3B.21, this report provides creditors with the Company’s proposed restructuring plan. There is no suggestion that the Company’s proposed restructuring plan and Mr Preiner’s report do not comply with the various requirements set out in Part 5.3B of the Act and its associated regulations.
As contemplated by Part 5.3B, the restructuring plan provides for payment of a dividend in respect of the Company’s existing debts, thereby enabling the Company to continue in business and avoid being wound up. In essence, the restructuring plan provides for the distribution of the $66,000 plan fund to the Company’s creditors. The plan fund is comprised of $45,000 funded by one of the Company’s directors, Mr Sun together with a further $21,000 to be funded from the Company’s trading profits on or before 1 May 2021. Mr Sun’s contribution has been paid into Mr Preiner’s trust account pending any acceptance and making of the restructuring plan.
Mr Preiner’s report details his preliminary investigations into the operations of the Company. Based on those investigations he concludes that it is possible the Company was experiencing insolvency from at least August 2020. Mr Preiner has identified payments since August 2020 totalling $89,086.12 which may be unfair preferences and voidable if the Company is wound up. His investigations have not extended to the recoverability of those amounts from the recipients. No other voidable transactions have been identified by Mr Preiner.
Mr Preiner’s report considers whether there may be claims against the directors of the Company for insolvent trading. However, he concludes that by reason of the safe harbour provisions enacted by the Coronavirus Economic Response Package Omnibus Act 2020 (Cth), any insolvent trading claim would be in respect of trading during the short period from 1 January 2021 and 2 February 2021 (the date of his appointment). Further, and in any event, he has not identified any significant assets held in the name of the Company’s directors which may be available to meet any insolvent trading claim should the Company be wound up.
As set out in Mr Preiner’s report, the Company has the following creditors:
Mr Preiner has conducted preliminary independent investigations with respect to the Company’s affairs and the matters of which its directors have informed him, including with respect to the veracity of the Company’s creditors. The investigative steps undertaken by him are detailed in sections 4.1 and 4.2 of his report. In particular, he states that he has ‘reviewed creditor claims and evidence of’ each of the Company’s creditors, save for its two smallest by value.
Mr Preiner’s report undertakes a comparison of the outcome to creditors under the restructuring plan as compared to a liquidation. Mr Preiner’s analysis estimates that the dividend creditors under the restructuring plan to be 7.62 cents in the dollar. In a hypothetical liquidation, Mr Preiner estimates the return to creditors to be between zero and 3.78 cents in the dollar, depending the value realised for the Company’s assets (estimated to be realised at between $11,966 and $79,466). Mr Preiner estimates the cost of the restructuring plan to be $3,000, as compared to between $24,750 and $48,400 for a liquidation.
Mr Preiner has provided the declaration required of him by reg 5.3B.18 that he believes on reasonable grounds that the Company is able to discharge the obligations in the restructuring plan when they become due and payable, and that all information required to be set out in the restructuring proposal has been set out in the statement.
Based upon his investigations, Mr Preiner is of the opinion that it is in the best interests of the creditors of the Company to enter the restructuring plan, which will lead to a greater dividend to creditors in a shorter amount of time as compared to what would be received if the Company is wound up and a liquidator appointed.
Whilst the acceptance period has not yet expired, as at 27 February 2021, the top three creditors by value had already voted in favour of the restructuring plan, being 85.26% of admissible debts. Downeys Group Australia (VIC) Pty Ltd and the plaintiff, who together have 8.9% of admissible claims, do not accept the restructuring plan. Accordingly, should none of the creditors change their vote before the end of the acceptance period, the restructuring plan will be accepted and made.
The Company seeks an adjournment of the application for winding up pursuant to s 453Q of the Act until after the restructure acceptance period has ended on 15 March 2021, for the purpose of the Company continuing under the restructuring rather than being wound up.
The plaintiff submits that the restructuring plan has been proposed so as to use creditors ‘friendly’ to the Company to pass the restructuring plan to the detriment of trade creditors such as the plaintiff. The plaintiff submits that there are reasons to doubt the information provided to Mr Preiner by the Company’s directors. The plaintiff also submits that given the timing of the appointment of the restructuring professional, the court should approach the Company’s acts with a degree of scepticism as to whether the appointment is an attempt at a last resort to avoid the consequences of liquidation. The plaintiff considers that the creditors would benefit from the appointment of a liquidator who would be charged with investigating the affairs of the Company, including its receivables and creditors. The Company declined the opportunity to respond to the plaintiff’s evidence.
Section 453Q(1) of the Act states:
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.
The wording of s 453Q is identical to s 440A(2) of the Act where an application is made to wind up a company prior to the appointment of an administrator under Part 5.3A of the Act. The parties are in agreement that that the Court should look to authorities regarding s 440A(2) of the Act when considering an application under s 453Q.
In the context of s 440A, the Court must be persuaded by the Company that it ‘is in the interest of the company’s creditors for the company to continue under administration, rather than would-up, as distinct from the satisfaction that it may be so’.[7] This requires consideration of whether the creditors could hope to receive more in the administration as compared to a winding up. There must be sufficient possibility, as distinct from optimistic speculation, that the adjournment is in the interests of creditors. See Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 per Brereton J at [3]–[6]; Creevey v DCT (1996) 19 ACSR 456 at [457]; and Waste Recycling and Processing Services of New South Wales v Local Government Recycling Cooperative (1999) 32 ACSR 194 at 195.
[7]ReOffshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296, [6] (Brereton J) (emphasis in original).
The Company agrees that the s 440A(2) authorities provide guidance, save that it submits that having regard to the purpose and objectives of Part 5.3B as compared to Part 5.3A of the Act, the threshold test by which the Court is satisfied is a lesser standard of satisfaction under Part 5.3A. In particular, Mr Lhuede for the Company drew attention that level of investigation required of the restructuring practitioner in respect of the Company’s affairs is less than that required under Part 5.3A. There is some force to this argument, however, in the context of this application, where the proposed return to creditors under the restructuring far exceeds that available on a best-case scenario liquidation, the test pursuant to the authorities on s 440A(2) is met, and it is not necessary for me to determine whether any lesser standard ought to be applied.
The plaintiff’s evidence of the ‘friendly creditors’ unfairly using their voting power is directed at the Company’s largest three creditors.
The largest creditor is SQW Pty Ltd (‘SQW’) in the amount of $525,855.88. SQW is a company controlled by Mr Sun’s wife. Mr Sun informed Mr Preiner that SQW was a secured creditor, however, Mr Preiner’s investigations revealed that SQW did not have any registered security interest, and that therefore, its debt is unsecured. It is also common ground that SQW is not an excluded creditor within the meaning of the Act, and such, is able to cast a Restructuring Vote and the value of its debt is able to be counted in favour of the of the restructuring proposal. Accordingly, given the legislative scheme for exclusion of related creditors set out in Part 5.3B, it is not appropriate to second-guess whether this debt should be counted in favour of the restructuring plan.
The plaintiff questions whether the Company’s second largest creditor, DG Plastering Pty Ltd is a legitimate creditor, on the basis that it has not been able to identify a public presence of this company, and that the sole director is a person who may, by reference to the ethnicity of his name, be associated with Mr Sun. With respect to the third largest creditor, Trinity Capital Investment Pty Ltd, the plaintiff relies upon the fact that one of its three directors has the same surname as Mr Sun, but provides no other cogent evidence as to the relationship between this creditor and the Company, nor information that calls into question whether it is a legitimate creditor of the Company.
On the other hand, Mr Preiner, whose independence is not in question and who is under a duty to make reasonable enquiry, has reviewed each of these creditor’s claim and associated evidence, and has not raised any concern as to their veracity. It is apparent from Mr Preiner’s report that he has not simply accepted Mr Sun’s claims on face value. Rather, in accordance with his duties, he has investigated the affairs of the Company exercising an independent mind, within the constraints of his role.
In further support of its claim that the material provided to Mr Preiner is not reliable, the plaintiff relies upon asserted material misstatements by Mr Sun in other proceedings between the plaintiff and the Company, concerns regarding the Company’s compliance with the Magistrates’ Court of Victoria freezing order and associated obligations of disclosure, and concerns as to whether the receivable position has been properly disclosed by reference to the purported termination of a building contract.
I am not in a position to assess the veracity of the plaintiff’s claims, which are made in the context of a chequered history between the plaintiff and defendant aired through multiple proceedings. An application for adjournment of a winding up proceeding is not the appropriate forum for the Court to assess such matters. To the extent that the plaintiff’s claims concern the conduct of the Company and Mr Sun in separate proceedings, those separate proceedings provide the appropriate forum in which the plaintiff may pursue its claims. It is also open to the plaintiff and any other affected creditor to exercise their rights pursuant to regs 5.3B.61 to 63 should they consider it appropriate to do so, whether before or after a restructuring plan is made.
Further, and in any event, the plaintiff’s evidence is not of sufficient cogency for me to be satisfied that the material provided to Mr Preiner, and the investigations he has undertaken are not reliable.
On the information available to me, I am satisfied that it is in the interests of the creditors for the Company to continue under restructuring rather than be wound up. The restructuring plan provides for certainty of a dividend to creditors through receipt of the restructuring fund, the majority of which is not funded from the Company’s assets or trading. Mr Preiner’s investigations have not identified any significant claims available to a liquidator which would lead to an increase in the amount available to be distributed to creditors should the Company be wound up. Further, it is not readily apparent from the concerns raised by the plaintiff that further investigations by a liquidator will increase the return to creditors. The costs of a winding up also far exceed the restructuring, leaving less for the distribution to creditors.
Accordingly, having regard to the better to return to creditors under the proposed restructure plan, and that the majority of creditors are in favour of the restructuring plan, I am satisfied that it is appropriate to adjourn the winding up application so as to allow restructure acceptance period to expire.
I will adjourn the further hearing of this matter to 17 March 2021, being two days after the acceptance period will have expired.
I will also order that costs be reserved.
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