Re Gold Road No 2 Pty Ltd (rec & mgr apptd) (admin apptd)
[2021] VSC 495
•9 August 2021 (given ex tempore, revised)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2021 02616
IN THE MATTER of GOLD ROAD NO 2 PTY LTD (RECEIVER & MANAGER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 608 874 273)
APPLICATION BY:
| RICHARD TRYGVE ROHRT IN HIS CAPACITY AS ADMINISTRATOR OF GOLD ROAD NO 2 PTY LTD (RECEIVER & MANAGER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 608 874 273) | Plaintiff |
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JUDGE: | Hetyey AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 9 August 2021 |
DATE OF JUDGMENT: | 9 August 2021 (given ex tempore, revised) |
CASE MAY BE CITED AS: | Re Gold Road No 2 Pty Ltd (rec & mgr apptd) (admin apptd) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 495 |
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CORPORATIONS – Corporations Act 2001 (Cth) – Part 5.3A – Insolvency – External administration – Deed of company arrangement – s 444B(2) – Application for extension of time to execute deed – Whether extension warranted – Short extension granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S R C Cromb | Capstone Koroneos Legal |
| For Mr Rodney Elliott as proponent of deed of company arrangement and interested party | Mr M Lhuede, solicitor | Piper Alderman |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Background......................................................................................................................................... 1
Procedural history.............................................................................................................................. 5
Statutory provisions and legal principles..................................................................................... 6
Consideration...................................................................................................................................... 9
HIS HONOUR:
Introduction
Gold Road No 2 Pty Ltd (Receiver & Manager Appointed) (Administrator Appointed) (‘the Company’) operated in the residential building industry and was established in October 2015 as a special-purpose vehicle for the development of apartments in Werribee. On 28 May 2021, Mr Richard Rohrt was appointed as administrator of the Company (‘the administrator’) pursuant to s 436A of the Corporations Act 2001 (Cth) (‘the Act’). By originating process filed on 26 July 2021, the administrator seeks an order pursuant to s 444B(2)(b) of the Act extending the time by which the Company is to execute a deed of company arrangement (‘DOCA’) approved by its creditors. The application initially sought an extension of time up to and including 30 September 2021, although, as a result of matters I will set out below, the requested period of extension has now been abridged.
The application is supported by affidavits sworn by the administrator on 26 July 2021 and 6 August 2021 (together with their respective exhibits), along with written submissions dated 6 August 2021 and 9 August 2021.
Background
At the time of the appointment of the administrator, the Company was already in receivership. A secured creditor, Payton Capital Ltd, had exercised its rights pursuant to a registered security interest over the assets of the Company and appointed Mr Costas Nicodemou as receiver and manager of the Company.
The first meeting of the Company’s creditors was held on 9 June 2021 (‘the first meeting’) and the second meeting of creditors to decide the Company’s future was held, in accordance with s 439A of the Act, on 5 July 2021 (‘the second meeting’). At the second meeting, it was unanimously resolved by a vote of 27 creditors with combined claims of over $14 million (including the Australian Taxation Office in respect of an admitted proof of debt of over $643,000) that the Company enter a DOCA (‘the DOCA resolution’) proposed by the Company’s director, Mr Rodney Elliott (‘the DOCA proponent’). Under the terms of the proposed DOCA, the participating unsecured creditors are expected to receive a return of 1 to 3 cents in the dollar, as opposed to a nil return in the event the Company was placed into liquidation. The DOCA proposal also entailed the sum of $100,000 to be provided by way of a deed fund and guaranteed by the DOCA proponent (with an associated indemnity provided by a related company), and for the administrator to be appointed as deed administrator.
Prior to the first meeting, the administrator exchanged correspondence with Mr Paul Vartelas, the deed administrator of KPD Knight Pty Ltd (subject to deed of company arrangement) and KPD Portogallo Pty Ltd (subject to deed of company arrangement) (‘the KPD entities’). The correspondence partly concerns the question of whether the KPD entities are debtors or creditors of the Company. A Report on Company Activities and Property in respect of the Company suggested the KPD entities as having an outstanding debt to the Company in the amount of $584,794.90, but did not list the KPD entities as creditors. On 8 June 2021 (immediately prior to the first meeting), Mr Vartelas asserted in an email that the KPD entities were not debtors of the Company but creditors in the amount of at least $1.5 million in relation to claims concerning the sale of land. The relevant land is located at 116 Watton Street, Werribee (‘the Werribee land’) which was later to be developed by the Company. I note here that the administrator’s report to creditors dated 25 June 2021 (‘the report') confirms that Mr Vartelas has lodged a caveat over the relevant property but that the Company has a valid claim under a loan and set-off arrangement which has resulted in the KPD entities becoming net debtors of the Company. At any rate, the report to creditors describes these matters as being the subject of dispute.
In his 8 June 2021 email, Mr Vartelas also made various allegations against the administrator, the Company and its directors, suggesting that:
(a) there was a level of awareness about the status of the KPD entities as creditors;
(b) the administrator lacked independence in his role because of an alleged long‑standing relationship with Mr Elliott (it is unclear whether this was a reference to the current director of the Company and DOCA proponent, Mr Rodney Elliott, or his son, Mr Michael Elliott, who resigned shortly prior to the Company going into external administration); and
(c) the Company, through its directors, had artificially inflated its costs and intentionally reduced its profits in relation to the development of the Werribee land
(together, ‘the allegations’).
Insofar as the allegations relate to the administrator, they have been denied.
On or about 25 June 2021, the administrator caused to be issued to the known creditors of the Company a circular which included notice of the second meeting and the report which detailed the results of the administrator’s investigations and set out the nature of the dispute with the KPD entities. The report identified the KPD entities as having the status of contingent creditors. The report also annexed the proposed DOCA.
However, it transpired that Mr Vartelas and the KPD entities were inadvertently not provided with a copy of the circular to creditors and accompanying material in anticipation of the second meeting. The administrator accepts that the KPD entities were therefore deprived of the opportunity of raising the allegations at the second meeting, and bringing any relevant matters to the attention of creditors before they passed the DOCA resolution. The administrator first became aware of the error after receiving correspondence from Mr Vartelas on 12 July 2021 when he requested a copy of the report to creditors.
On 15 July 2021, the administrator apologised to Mr Vartelas in relation to the error which had occurred and explained that, on the administrator’s calculations, even if the KPD entities had voted against the DOCA proposal at the second meeting of creditors, the vote would still have carried in favour of the DOCA proposal because a majority of creditors in number and value would still have voted for it. The administrator also suggested there be a further meeting of creditors to deal with the concerns expressed by the KPD entities and to consider any further resolutions in relation to whether the DOCA should be varied or terminated.
On 20 July 2021, the administrator received a telephone call from Mr Mitch Knight, a director of the KPD entities, in which he asserted that the KPD entities were creditors of the Company not in the sum of $1.5 million as previously suggested, but in the vicinity of between $6 million to $8 million. The administrator calculated that if the KPD entities were admitted as creditors for $6 million or more, the estimated return to unsecured creditors under the DOCA would be substantially reduced from 1 to 3 cents in the dollar to around half a cent in the dollar. Under that scenario, the administrator expressed the view that creditors of the Company ought to be given the opportunity to reconsider the DOCA and, if necessary, to vote to vary or terminate the DOCA (if executed) and place the Company into liquidation.
Further correspondence between the administrator and Mr Vartelas ensued. On 22 July 2021, Mr Vartelas sent the administrator an email indicating that the KPD entities would likely make an application to the Court to terminate the DOCA and have the Company placed into liquidation. It was also suggested that costs would be sought against the administrator personally and a complaint made to the Australian Securities and Investments Commission.
As a consequence of the above matters, the administrator suggested in his initial affidavit that an extension of the statutory period for the execution of the DOCA would enable the following to occur:
(a) the convening of a further meeting of creditors, and inviting representatives of the KPD entities to attend and be heard;
(b) communication by the administrator with Mr Vartelas in an attempt to address the concerns that had been raised;
(c) a further opportunity for any resolutions for the administrator’s removal to be proposed and voted upon. (I note as an aside that no such resolutions were proposed at the first meeting of creditors);
(d) the receipt and consideration of any proofs of debt and supporting material from the KPD entities; and
(e) the provision of an updated report to creditors to enable them to make a fully informed decision regarding the future of the Company.
Procedural history
Following the filing of the originating process, the matter was brought on for a mention on 28 July 2021 to consider, amongst other things, whether notice of the application should be given and, if so, to whom and by what means. I made orders at the mention requiring the administrator to inform all known creditors (including persons claiming to be creditors and contingent creditors) of the making of the application and to serve on the creditors a copy of the material filed in the proceeding by circular posted on any website maintained by the administrator, by sending such information by email containing an operable link to the documents and by certain other means. Any creditor who wished to be heard in relation to the application was required to file and serve a notice of appearance as an interested party and any material upon which they intended to rely by 4 August 2021. Provision was also made for the administrator to file and serve (on any creditors who had filed an appearance) submissions and any further affidavit upon which the administrator relies.
On 29 July 2021, the administrator caused a circular and operable link to the application documents to be sent to all known creditors of the Company and separately forwarded the circular and material to Mr Vartelas, with a request that those materials be forwarded to the directors of the KPD entities. On 4 August 2021, Mr Vartelas acknowledged in an email as having received the documentation and stated: ‘we do not have any comments pertaining to your application … We shall await for Court [sic] to make the various orders sought and we shall communicate with you on the matter further’. The administrator deposes in his second affidavit to then receiving a telephone call from Mr Vartelas who stated words to the effect that he and the KPD entities:
(a) would not be taking any steps in relation to the Court’s orders of 28 July 2021 and would abide by any orders of the Court; and
(b) no longer pressed any allegations with respect to the administrator but had ‘lingering issues’ in relation to Mr Michael Elliott (the former director of the Company).
The KPD entities have not filed an appearance in accordance with the Court’s orders of 28 July 2021 or sought to be heard today. Neither have any other creditors. However, a notice of appearance was filed by the DOCA proponent (as an interested party) who objects to the long period of extension sought by the administrator in the originating process and suggests that only a very short extension should be granted to enable the DOCA to be executed without further delay. It is submitted by the DOCA proponent that the administrator’s application is unnecessary and potentially misconceived and that the costs of the application should not be visited upon the creditors of the Company by being treated as costs of the administration.
Statutory provisions and legal principles
Section 444A(3) of the Act provides that where creditors resolve at a meeting convened under s 439A of the Act that the company execute a DOCA, ‘[t]he administrator of the company must prepare an instrument setting out the terms of the deed’.
Pursuant to s 444B(2) of the Act, where an instrument is prepared under s 444A, then:
(2) The company must execute the instrument within:
(a) 15 business days after the end of the meeting of creditors; or
(b)such further period as the Court allows on an application made within those 15 business days.
Section 444B(5) of the Act mandates that ‘[t]he proposed administrator of the deed must execute the instrument before, or as soon as practicable after, the company executes it’.
A combined reading of ss 446A(1)(b) and 446A(2) of the Act makes clear that if ‘a company under administration convenes subsection 444B(2) at a particular time’,[1] the company is taken ‘to have passed, at the time referred to in paragraph (1)(a) or (b) … a special resolution under section 491 that the company be wound up voluntarily’.[2] In other words, where the 15 business day period for execution of a DOCA expires, the company goes into liquidation automatically.[3] However, it is possible for the Court to extend time pursuant to s 447A of the Act where the application for an extension is made after the expiry of the 15 business day period.[4]
[1]Corporations Act 2001 (Cth) s 446A(1)(b).
[2]Ibid s 446A(2)(a).
[3]See Re Edward Gem Pty Ltd (2005) 141 FCR 408.
[4]Re Pleash [2012] FCA 1125.
It follows that where creditors have resolved that a company execute a DOCA at a meeting convened under s 439A, then, consistent with the policy underpinning Pt 5.3A of the Act, the administrator should move promptly to give effect to the wishes of creditors by complying with ss 444A and 444B(2) of the Act.[5]
[5]Mentha v Sydney Airports Corporation Ltd (2002) 120 FCR 310, 321 [55] (Goldberg J) (‘Mentha v Sydney Airports’).
The following principles emerge from the few authorities dealing with applications under s 444B(2) to extend the time within which a DOCA must be executed:
(a) it is the Court’s function to balance the benefits and detriments to be obtained from pursuing the DOCA against those which will flow if the period prescribed by s 444B(2) is allowed to expire without extension so that the company passes automatically into liquidation;[6]
[6] Re Sydney Ringtread Tyres Pty Ltd (admin apptd) (2001) 38 ACSR 221, 222 [4] (Barret J).
(b) the discretion under s 444B(2) should not be exercised ‘for the purpose of prolonging the administration in order to avoid a result which execution of the deed may bring about’;[7]
[7]Mentha v Sydney Airports (n 5) 322 [60], 323 [64] (Goldberg J).
(c) instead, the focus of the exercise of the discretion ‘should be to enable the administrators to finalise the drafting, preparation and execution of the deed’;[8]
[8]Ibid 322 [60] (Goldberg J).
(d) where there is some complexity of the arrangements consequent upon the execution of the DOCA, an extension may be appropriate to enable the working through of those arrangements.[9] For example, where there has been a delay in the making of contributions to a fund which was a condition precedent to the execution of a proposed DOCA, this may be a factor in favour of an extension of time;[10]
(e) in considering the period of a requested extension, regard should be had to the time between the filing of an application to extend time and the hearing and determination of that application.[11] That is because where the application to extend time is made within the 15 business day period, the applicant has the benefit of an automatic extension until the application is ultimately determined by the Court; and
(f) parties to a DOCA should not proceed on the basis that they can adopt a ‘leisurely pace’ in their efforts to finalise and execute the DOCA and its related documentation, on the assumption that if an extension is granted under s 444B(2), a further extension of time would be available if requested.[12]
[9]Hurt v Ausroc Metals Ltd [2017] WASC 169 [19] (Pritchard J) (‘Hurt v Ausroc’).
[10]Re Hi-Fi Sydney Pty Ltd (admin apptd) [2015] NSWSC 781 [25] (Black J) (‘Re Hi-Fi Sydney’).
[11]Mentha v Sydney Airports (n 5) 324–5 [69] (Goldberg J); Re Hi-Fi Sydney (n 10) [19] (Black J).
[12]Hurt v Ausroc (n 9) [19] (Pritchard J).
To those principles, I would add that the application must clearly set out what steps, actions or matters the administrator intends to undertake, investigate or pursue in the event the extension were granted. Plainly, there must be a logical nexus between the requested extension of time to execute the DOCA and the purported reason or reasons for the extension. Where the matters said to necessitate the extension are not in aid of the execution of the DOCA, or could ultimately be resolved or determined without an extension of time, an extension will not be justified.
Consideration
I am satisfied that the present application has been made by the administrator on the last day of the 15 business day statutory period following the second meeting. Accordingly, the Court has jurisdiction under s 444B(2) to make the orders sought. Because the application is within time, no order is required under s 447A of the Act to enable the application to be made after the mandated time has expired.
It was apparent at the hearing today that a number of the purported reasons for the extension of time set out in the administrator’s first affidavit are no longer advanced as grounds in favour of the extension. Instead, the reasons now identified in support of the extension of time are: to enable the DOCA to be finalised and executed; for the liquidation to be avoided; and for the wishes of creditors of the Company (as evidenced by the DOCA resolution and reaffirmed by an absence of opposition by any creditors to this application) be honoured. According to the administrator, a draft of the DOCA has now been prepared and is being considered. A shorter period of an extension is now sought by the administrator for a period of one week instead of a period of almost 10 weeks, as contemplated in the originating process.
Mr Lhuede, solicitor for the DOCA proponent, argues that the application is at best unnecessary and at worst misconceived. In particular, it is said that the administrator has proceeded on the erroneous assumption that the DOCA was capable of being revisited, varied or terminated at a further meeting of creditors. The provisions dealing with the variation, termination and avoidance of DOCAs are set out in Pt 5.3A Div 11 of the Act and make clear that there must be a DOCA in existence before the provisions have operation. I accept Mr Lhuede’s analysis that there is nothing to vary or set aside until such time as the DOCA is executed and becomes binding on creditors. I also accept that any further meeting of creditors initially proposed by the administrator would not be a meeting for the purposes of s 439A of the Act to decide the Company’s future,[13] although resort might be had to s 447A of the Act to validate a determination of creditors made at any further meeting to execute a revised deed.[14]
[13]See Re Kruger Engineering Pty Ltd (2006) 60 ACSR 191, 194 [10] (Barrett J).
[14]Ibid 197 [25] (Barrett J).
Mr Lhuede further submitted that the real reason for the delay in the execution of the DOCA was unnecessary hesitancy and conservativism on the part of the administrator. It is suggested that the administrator has, by his application, pre‑empted what might happen in the event the DOCA was subsequently challenged, whilst ignoring the wishes of creditors who have proved their claims and resolved at the second meeting that the Company should execute a DOCA. The DOCA proponent also queries whether the KPD entities have in fact been prejudiced by not being afforded the opportunity to vote at the second meeting. It is argued that the KPD entities are unlikely to be contingent creditors in circumstances where their alleged debt is disputed by the Company and they have not lodged a proof of debt.
There is some force to these arguments. Strictly speaking, the administrator might have simply executed the DOCA and later dealt with any argument brought by the KPD entities about whether the resolution was valid and whether the DOCA should be terminated. Further, I accept that there may be some doubt about the characterisation of the KPD entities as contingent creditors. In the context of a corporate insolvency, a contingent creditor is someone to whom a company owes an existing obligation in respect of which a liability to pay a sum of money may arise upon the occurrence of a future event, which may or may not happen.[15] Here, it is unclear what event the alleged obligation to the KPD entities is contingent upon.
[15]See Michael Murray and Jason Harris, Keay’s Insolvency: Personal and Corporate Law and Practice (Thompson Reuters, 10th ed, 2018) [11.215], citing Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455.
Nevertheless, I accept the submission of Mr Cromb for the administrator that the requested extension will ultimately facilitate the finalisation and execution of the DOCA in a fair, proper and transparent manner. The administrator cannot be criticised for sitting on his hands until the last moment prior to the expiry of the statutory period to execute the DOCA before making this application. It is appropriate to infer from the material before the Court that a not insignificant amount of time has been spent during the statutory period considering the validity of the DOCA resolution and engaging in correspondence with the deed administrator of the KPD entities. That is time which would otherwise have been spent drafting, finalising and executing the DOCA.
On one view, the application as originally framed suggested a disconnect between the extension of time that was sought and the reasons propounded for the extension. For example, it is not apparent how a further meeting of creditors to allow the KPD entities to ventilate their various allegations and/or to seek the removal of the administrator are matters sufficiently connected with, or likely to facilitate, the process of executing the DOCA.
However, the application has brought to a head issues which were unable to be resolved prior to the culmination of the 15 business day period. As already noted, the KPD entities have not sought to be heard in relation to this application, nor submitted a proof of debt since the application was made. Although it cannot be guaranteed, it may be that the KPD entities will no longer carry out their threat to seek to terminate the DOCA upon its execution. Until the administrator was able to obtain a degree of clarity in relation to the position of creditors and the KPD entities, it was open to the administrator to have sought additional orders (perhaps under s 447A of the Act and/or s 90-15 of the Insolvency Practice Schedule (Corporations) found at Schedule 2 of the Act) to bring about the convening of a further meeting of creditors to consider a varied DOCA proposal. That has ultimately proved unnecessary. Whilst it is easy to criticise the administrator with the benefit of hindsight, I accept that he has ultimately acted prudently in bringing this application and avoiding the drastic consequences of the expiry of the statutory period set by s 444B(2) and the automatic entry of the Company into liquidation by force of ss 446A(1)(b) and 446A(2) of the Act.
The benefits associated with the granting of a short extension include the finalisation and execution of the DOCA which was unanimously approved by creditors, and the avoidance of a liquidation which would likely deliver a worse return for unsecured creditors than under the DOCA. The support of creditors for the DOCA in its current form has been reaffirmed as a consequence of this application and no creditors oppose the relief sought. Indeed, Mr Lhuede has referred to various communications with the body of creditors who remain overwhelmingly in favour of the current DOCA, notwithstanding the position of the KPD entities. An affidavit by Mr Michael Elliott, the former director of the Company, was provided shortly after this morning’s hearing and confirms that to be the case.
I have mentioned that the administrator now seeks a shorter extension of time for a period of one week. The DOCA proponent suggests the DOCA should be executed without further delay. Having regard to the relatively advanced status of the drafting process, and the period of time which has already elapsed since this application was filed on 26 July 2021, it is appropriate that the administrator be afforded a further three business days to finalise the document. There will be an extension for the period of time to execute the DOCA until 4:00pm on 12 August 2021.
It follows from what I have said that the administrator, having obtained the relief sought (albeit for slightly different reasons to those initially put forward), should not be denied his reasonable costs of this application.
I will hear from the parties further in relation to the precise formulation of the orders to give effect to these reasons.
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