Re First Netcom Pty Ltd

[2000] NSWSC 1045

Reported Decision: [2000] 35 ACSR 615
[2001] 19 ACLC 324

New South Wales

Supreme Court

CITATION:	Deputy Commissioner of Taxation: In the matter of First Netcom Pty Limited [2000] NSWSC 1045 revised - 10/11/2000
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3760/00
HEARING DATE(S):	1 November 2000
JUDGMENT DATE:	1 November 2000
PARTIES :	Deputy Commissioner of Taxation (Plaintiff) First Netcom Pty Limited (ACN 067 043 145) (First Defendant) Telstra Corporation Limited (Second Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	M R Aldridge, SC (Plaintiff) B A Coles, QC/C R C Newlinds (First Defendant) L G Foster, SC (Second Defendant)
SOLICITORS:	Australian Government Solicitor (Plaintiff) John Walsh & Partners (First Defendant) Mallesons Stephen Jaques (Second Defendant)
CATCHWORDS:	CORPORATIONS — s440A(2) adjournment — Relevant considerations — Deed of Company Arrangement.
LEGISLATION CITED:	Corporations Law, s440A(2); s566
CASES CITED:	Creevey & Anor v Deputy Commissioner of Taxation (1996) 19 ACSR 456
DECISION:	Adjournment granted to enable meeting.

_

REVISED — 10 November, 2000
IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 3760/00
In the matter of FIRST NETCOM PTY LIMITED (ACN 067 043 145)
Deputy Commissioner of Taxation
Plaintiff
First Netcom Pty Limited
First Defendant
Telstra Corporation Limited
Second Defendant
JUDGMENT — Ex Tempore

Wednesday 1 November 2000

INTRODUCTION

1 HIS HONOUR: In my judgment of 23 October 2000 I set out the salient facts which I will not repeat but can be taken as incorporated in this judgment; see para 1. 2 The outcome of that judgment was a short adjournment of the Plaintiff's winding up application to today to enable a draft of Notice to Creditors and attached report and a sufficient description of material terms of the proposed Deed of Company Arrangement to be made available. 3 This was to cover matters identified in my earlier judgment as requiring further substantiation, that being understood as meaning such substantiation as could reasonably be expected of an administrator only recently appointed. 4 That process has occurred as has opportunity for notice to produce and subpoenas to be issued and dealt with. Accordingly, when the matter came back to me today, the parties were in a position to test whether the applicant met the onus upon it to satisfy the court "that it is in the interests of the company's creditors or the company to continue under administration rather than be wound up". That is what is required, if an adjournment of the winding up application is to be granted under s440A(2) of the Corporations Law.

RESOLUTION OF APPLICATION

5    Clearly enough what is required to satisfy the relevant onus is directly affected by the timing and length of the adjournment sought as well as the circumstances bearing upon any ultimate return to creditors by one course or another. 6    The latter consideration comes into direct focus where, unlike the previous application, I am to consider an adjournment for a Deed of Company Arrangement to be put to creditors with consequential legal effect if an affirmative creditors’ vote satisfying the relevant requirements were achieved. 7    Naturally, one cannot on this point predict the outcome of the meeting, unlike some circumstances where it is clear that the meeting is either doomed to failure or inevitably likely to approve the Deed. 8    In argument, the question was raised whether it is ever open to the court to frame an adjournment of the application, if granted, by reference to the likely composition of creditors participating in the voting outcome and in particular to disregard, if that be appropriate, a vote which was actuated by, for example, a concern to avoid recapture of a preference. 9    The answer to that question is that the discretion exercised by the court under s440A does not admit of such considerations, as by making an order conditioning the extension depend upon the voting outcome and composition of the votes. 10    Clearly if the court is of the view that the likely circumstances of the voting are such as to make any Deed of Company Arrangement, if adopted, highly suspect, that may be a consideration which the court may take into account, in declining at the outset the application for adjournment. That circumstance has not presented itself here so I need say nothing further about it. 11    For present purposes, I am content to adopt the test enunciated by the Queensland Court of Appeal in Creevey & Anor v Deputy Commissioner of Taxation (1996) 19 ACSR 456. McPherson JA with the concurrence of Davies and Pincus JJA put the test in these terms:

“The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other.
In order to satisfy the court of the matter referred to in s440A(2) of the Corporations Law , one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.”

12    The question therefore is whether on the Creevey test the applicant has provided the “persuasive evidence” that should enable the court to be satisfied that, were assets to be realised under the proposed Deed of Company Arrangement (“DCA”), it would produce a larger dividend, or at least accelerated dividend for the creditors, than were liquidation to ensue. 13    The administrator, Mr Andrew Wily, is highly experienced and has produced a report to creditors in relatively rapid time. This was in circumstances where I am satisfied he has done more than merely accept the say so of directors and staff of the applicant company, though in many instances that has been necessarily the primary source of the information. 14    That this is so is not surprising since in the nature of the legislative scheme, it could not be expected that an administrator will wish to put at risk the funds he is administering in an exhaustive scrutiny of the information provided to him, as distinct from a reasonable level of scrutiny within the tight time parameters within which the administrator inevitably operates. Thus, I do not consider much weight should be given to the criticism that might be levelled at the report as being too dependent upon information provided by those with an interest in continuing the administration. It is of course a question of degree; the Administrator must do better than a “once over lightly”. 15    No doubt in the case of the Second Defendant Telstra there is an interest in the outcome also having regard to on-going litigation in the Federal Court against and by Telstra. But that should not preclude the validity of points of attack mounted by Telstra either. 16    In my previous judgment I identified (at para 5) some of the matters which needed to be probed by the administrator if he was to put forward a DCA and recommend it ahead of liquidation with any credibility. 17    The report provides a break down of debtors into four categories (page 4). It outlines the reasons why this experienced administrator considers that the likely recoverability of debtors would be reasonably and relatively conservatively estimated at 70 to 80 per cent (see annexure D) and why costs of recovery could reasonably be estimated at 36 per cent. He also explains why he considers that the likely success of realisation of trade debtors, which is really the company's principal asset apart from the speculative outcome of the Telstra litigation, would be more likely of success under administration than with a liquidator. 18    The reasons are essentially that the existing staff are familiar with the debtor situation and they have had considerable success in realisation in the past in recovering some six million dollars; though as against that, the cost of recovery has certainly been higher than the 36 per cent estimated; see page 13 of the report. 19    While therefore there is room for argument, I find prima facie persuasive the contention by the administrator, backed in the report by his reasons, that the recovery of debtors is likely to be substantially more successful under an administration. That said, if creditors form another view, they are in a position to vote against the Deed of Company Arrangement at a creditors meeting. 20    Other advantages cited by the administrator for a Deed of Company Arrangement as compared to liquidation, are summarised at p17 and earlier in slightly more detail at pp14 and 15. I set out the summation that appears at p17 noting that he refers to "polarised" in point 4 which is to be understood as meaning "quarantined".

“1. Employees will stay on under a deed whilst under liquidation they have all indicated that due to the short term nature of liquidations and the lack of guaranteed employment for any length of time they would more than likely move on, effectively making the collection of debtors very difficult.
2. The recovery rate and return to creditors under a deed is likely to be higher than under liquidation, due to the higher rate of return on the debtors and the non participation of related creditors.
3. The control of the worksite will be secure under a deed.
4. The debtors are polarised under a deed and can not be used for the funding of the Telstra case, this is not the case under a liquidation.
5. Historically any attempt to collect debtors in any other format has been very poor (particularly with debt collection agencies a standard method under liquidation).
6. The Optus debt will not crystallise under the proposal.
7. The secured creditor will not push his claim against debtors of the company under the Deed, thereby increasing the return to creditors.”

21 While the difference between return upon liquidation as against the more favourable return estimated under a Deed of Company Arrangement is likely to vary according to critical matters such as the cost of recovery and the percentage recovered, when one compares four cents in the dollar on liquidation to fifty one cents in the dollar under the Deed of Company Arrangement, the administrator certainly identifies a substantial advantage even on his worst case. 22 That said, again creditors may form a different view. They will, if I grant the adjournment sought, have the opportunity to make as informed a decision as is feasible in the circumstances and certainly not a decision where there has been no reasonable level of scrutiny on the underlying facts and assumptions. 23 I should add that the administrator Mr Wily was cross-examined both by the Plaintiff, being the Deputy Commissioner of Taxation, and the Second Defendant Telstra. As his report attests the administrator showed a clear grasp of the critical issues that he had investigated and did not profess to know more than in fact he did. That gave his answers credibility. 24 He in his report fairly acknowledged that the consequence of a Deed of Company Arrangement, if liquidation is not to ensue, is that there will not be recovery for any insolvent trading as may have occurred, though I make no finding as to that, nor of any preferences including the one transaction he does identify, namely a floating charge in favour of a secured creditor in the amount of $234,193.73; see s566 of the Corporations Law and page 9 of his report. 25    However, as the applicant fairly put, while an established circumstance of a foregone recovery for a preference or insolvent trading is a factor to be weighed in the balance, the mere fact that there will be the consequence that no recovery will occur in relation to insolvent trading or preferences, could not of itself preclude the exercise of discretion in favour of an adjournment. 26    The whole frame of the legislation is that, in a rather rough and ready fashion, creditors are invited if they adopt a Deed of Company Arrangement to trade that kind of recovery for the usually relatively greater certainty of what is offered under the DCA or, as sometimes occurs, as here. 27    Again that is a decision open to the creditors to make and one which I am satisfied that they should be able to make rather than the court to pre-empt that possibility.

CONCLUSION

28 I am satisfied that the application under s440A(2) to adjourn the hearing of the application for an order to wind up the First Defendant should be granted until 10 November 2000 at 11 am before the Registrar. I so order. 29 As to costs, I order that the Plaintiff and the Second Defendant pay the costs of the First Defendant's application.

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Last Modified: 11/13/2000