Re LED Builders Pty Ltd (admin apptd)

[2008] NSWSC 633

CITATION:	In the matter of L.E.D. Builders Pty Ltd (admins apptd); L.E.D. Builders Pty Ltd (admins apptd) & Ors [2008] NSWSC 633
HEARING DATE(S):	10, 11 June 2008
JURISDICTION:	Equity
JUDGMENT OF:	Austin J
EX TEMPORE JUDGMENT DATE:	11 June 2008
DECISION:	Convening period extended by four weeks.
CATCHWORDS:	CORPORATIONS - voluntary administration - second creditors' meeting - extension of convening period - applicable principles - whether there should be evidence of views of members of committee of creditors
CASES CITED:	Carter v Global Food Equipment Pty Ltd [2007] NSWSC 901 Re Daisytek Aust Pty Ltd (2003) 45 ACSR 446 Re Pan Pharmaceuticals Ltd (2003) 46 ACSR 77
PARTIES:	L.E.D. Builders Pty Ltd (Administrators Appointed) & Ors (First Plaintiffs) Andrew Hugh Jenner Wily and David Anthony Hurst (as Administrators of the First Plaintiffs)(Second Plaintiffs)
FILE NUMBER(S):	SC 3173/08
COUNSEL:	J D Smith (Plaintiffs)
SOLICITORS:	Allens Arthur Robinson (Plaintiffs)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

AUSTIN J

WEDNESDAY 11 JUNE 2008

3173/08 IN THE MATTER OF L.E.D. BUILDERS PTY LTD (ADMINS APPTD); L.E.D. BUILDERS PTY LTD (ADMINS APPTD) & ORS; ANDREW HUGH JENNER WILY & ANOR

JUDGMENT (Ex tempore, revised on 19 June 2008)

1 HIS HONOUR: By an originating process filed in court on 10 June 2008 and made returnable instanter, the administrators of three companies, LED Builders Pty Ltd, LED (North Coast) Pty Ltd and LED (South Coast) Pty Ltd ("the Companies”) apply for an order under s 439A(6) of the Corporations Act 2001 (Cth) extending by four weeks the convening period for the second meeting of creditors of the Companies in administration.

2 There is also an application under s 447A(1) of the Corporations Act for an order that will have the effect of permitting the administrators to hold the second meeting of creditors of the Companies at any time during the extended period created by the order under s 439A(6). I think that such an order under s 447A is sensible and now almost routine. The practice of making an order of this kind was initiated in Re Daisytek Aust Pty Ltd (2003) 45 ACSR 446 and a similar order was made in this Court, for example, in Carter v Global Food Equipment Pty Ltd [2007] NSWSC 901. I intend to make the order under s 447A.

3 The more substantial issue is the application to extend the convening period under s 439A(6). David Hurst, one of the administrators, has given affidavit evidence in support of the application.

4 Each of the three Companies is a proprietary company and a trading entity. They are part of the Beechwood Group, which is under the effective control of Mr Larry King, the sole director. The structure of the Beechwood Group is quite complicated, according to the evidence presented to me on the application. The three Companies are subsidiaries, the holding company of which is LEK Holdings Pty Ltd, which, in turn, is owned by a unit trust behind which there are sub-trusts and other companies. There are many other subsidiary companies in the LEK Holdings group, and in the case of one part of the chain of companies, there are also holdings by a family trust associated with Mr King.

5 The Companies operated as project house builders in Sydney, the South Coast and the North Coast of New South Wales under the registered business name "Beechwood Homes". Collectively they claim to be the largest project home building group New South Wales.

6 LED Builders carried on business in the Sydney district, from leased premises in Liverpool. It had approximately 50 employees and had approximately 140 houses under construction at the date of the appointment of the administrators; namely, 13 May 2008.

7 LED (North Coast) operated from leased premises in Swansea, and carried on business in the Central Coast, North Coast and Hunter Valley regions. At that date of appointment of the administrators it had approximately 20 employees and had approximately 130 houses under construction.

8 LED (South Coast) carried on business in the southern districts of New South Wales, operating from premises in Nowra, which were owned within the group. At the date of appointment of the administrators it had approximately 20 employees and approximately 120 houses under construction.

9 In summary, then, there were about 90 employees of the three Companies and about 390 houses under construction. I shall return to the position of the homeowners under the contractual arrangements with these Companies later.

10 The administrators were appointed by Mr King, as sole director of each company, on 13 May 2008. On the following day the Bank of Western Australia Ltd (BankWest) appointed receivers and managers to each of the Companies, and the receivers and managers entered into possession of the assets of the Companies immediately upon their appointment. I shall refer to the receivers and managers as "the receivers" for convenience.

11 The receivers have informed the administrators that they have commenced a sale of business process, with a view to selling the businesses of the three Companies. On 19 and 20 May 2008 information memoranda were issued to interested parties, who were required to sign confidentiality agreements. The timetable for the sale process is that expressions of interest were due on 23 May, and the submission of what Mr Hurst called in his affidavit "final unconditional offers" was anticipated by 30 May 2008. There was then to be a due diligence process, expected to run for approximately four weeks.

12 The receivers have informed the administrators that they are not in a position to resume normal trading activities. However, they have said they are looking at taking steps to complete a number of houses for some customers of the Companies. They have advised that this process will, at least initially, be restricted to those contracts where they anticipate completing work and settling contracts over a period of two to three weeks, so as to enable the affected homeowners to take ownership of their homes. Meanwhile the receivers have reduced the staff levels at the offices of the three Companies.

13 The receivers have also informed the administrators that they are working closely with an insurance company, Vero, and the Department of Fair Trading, with a view, they say, to minimising the impact of the insolvency of the Companies on homeowners. Vero is an insurer under builders' warranty insurance arrangements.

14 The information that I have summarised was provided by the receivers to the administrators on 23 May. Although the administrators wrote to the receivers on 3 June asking for updated information, and the receivers have been in correspondence with the administrators after that date, for some reason the receivers have not replied to the administrators' request for further updated information. That has left the court in a less than fully satisfactory position in respect of the present application, and no doubt has caused the administrators some real inconvenience.

15 It seems to me important that in situations such as this, where the interests of creditors are at stake and large amounts of money are involved, that there be co-operation between receivers and administrators in respect of the administration of the assets of a company in administration and under receivership, so that they can perform their respective roles to maximum effect. I acknowledge that receivers have concerns about commercial confidentiality, and perhaps other legitimate concerns, and that they owe their duty to the chargee that has appointed them. But the effective execution of their duty is often enhanced by co-operation, in circumstances where the vital interests of those whom they represent are not at risk. I would encourage the receivers in this case to do what they can to co-operate with the administrators more effectively than the evidence before me indicates.

16 Since their appointment as administrators on 13 May, the applicants have carried out their normal statutory functions, including the holding of the first meeting of creditors, at which a committee of creditors was appointed for each company. They have also, less usually, superintended a meeting convened to supply information to homeowners who have contracts with one of the three Companies. That meeting was held on 23 May.

17 The administrators have received proofs of debt from persons claiming to be creditors of the Companies. As at 10 June 2008 they had received claims from 345 creditors who had submitted proofs of debt totalling approximately $53.6 million. That does not, of course, include the claim of BankWest as chargee. I understand that the figure includes the claims of only a relatively small minority of the homeowners.

18 The administrators have also had discussions, as one would expect, with Mr King, the director of the Companies, and with accounting staff of the Companies, and they have conducted investigations into the Companies’ books and records. They have had discussions with creditors of the Companies in respect of specific matters raised by the creditors, and they have reviewed information provided by creditors. They have also been in touch with parties who are considering whether to propose a deed of company arrangement. They have reached the point where they have identified some "key issues" and Mr Hurst has given evidence of those issues.

19 The issues include the following:

(a) The receivers are still to finalise the sale of the businesses and until a sale contract is signed, the administrators will not know whether it is likely that there will be funds available after payment of BankWest.
(b) There is the possibility that a deed proposal may eventuate, either arising out of the discussions I have mentioned, or otherwise.
(c) The administrators are concerned about the complex nature of the relationships within the corporate group, and also the fact that the affairs of the Companies seem to be intermingled and at various times it appears that they have been treated as a single entity.
(d) There are complex relationships between the Companies and related entities, and they involve complex financial arrangements and agreements.
(e) The administrators are concerned with difficulties of identification of creditors, including trade creditors and related entities, and also with the position of potential creditors including, in particular, the homeowners.
(f) They are encountering difficulty in assessing the merits and quantum of claims made by creditors. There are two matters of particular concern to the administrators. One is that they have identified certain dealings between Mr King and a person called Mark Peters with respect to the lending of funds, principally by LED Builders. The administrators are currently investigating these dealings and they have provided further confidential evidence about them to the court. The other matter of concern is to investigate certain related party transactions and other dealings to establish whether they might constitute voidable transactions under Pt 5.7B. Again, they have provided the court with some confidential evidence about that matter.

20 In his first affidavit, Mr Hurst expressed his belief that the resolution of these issues needs to be largely, if not wholly, completed before the administrators will be able to prepare an adequate report to creditors as required by s 439A(4). In particular, the resolution of the issues would allow the administrators to undertake financial analysis to establish potential returns to creditors of the Companies, and could have a considerable effect on the terms of any deed of company arrangement that might be proposed and recommended by them to creditors.

21 Mr Hurst is a person of considerable experience as an insolvency practitioner, and his opinion is that it is of primary importance that the administrator’s report contains sufficient information to enable the creditors to be as fully informed as practicable about the matters he has identified. The receivers have advised the administrators that they anticipate concluding the sale of the businesses by the end of June 2008. The administrators are particularly concerned to have the sale price determined so that they can identify the surplus available to unsecured creditors.

22 In dealing with an application under s 439A(4), the court’s general approach is to seek to achieve a balance between the need for the administration of the company to be carried out efficiently and expeditiously so as to minimise the effect on those persons who are subjected to the moratorium under Pt 5.3A, and the need to give the administrators time to present meaningful choices to the creditors at their meeting (see Re Pan Pharmaceuticals Ltd (2003) 46 ACSR 77 at 85, per Lindgren J).

23 In my opinion Mr Hurst’s evidence constitutes a compelling case for an extension of the convening period. There is so much relevant financial information unavailable at the present time, and so many significant judgments that the administrators are not yet able to make, that it is necessary that there be some extension of the convening period, which would otherwise expire at five o'clock tomorrow, 12 June 2008. The evidence indicates the probability that a sale price will be available soon, and that should assist any interested party to formulate a deed proposal, and should also assist the administrators to advise the creditors under s 439A(4) on the alternatives available to them.

24 As to the length of time of the extension of the convening period, I have no difficulty with the proposed four-week extension. Generally speaking, in an application under s 439A(6), the court will give weight to the judgment of experienced administrators as to how much additional time they need for the preparation of a meaningful and helpful report to creditors. Some comfort to creditors who may be concerned about delay arises out of the fact that if the administrators are ready to convene the meeting within those four weeks, the orders will permit them to do so.

25 In carrying out the balancing exercise to which I have referred, the court pays attention to the interests of those who are affected by the moratorium imposed by Pt 5.3A. In the present case, I have given particular consideration to the interests of lessors of the Companies' business premises, and the homeowners.

26 As to the lessors, the balancing to be effected by the court is here influenced by the presence of the receivers. The rights of the lessors of business premises are affected rather more by the fact that the receivers are in possession of the Companies' assets than by the moratorium under Pt 5.3A.

27 At the first hearing of the application, I expressed a particular concern about the position of homeowners. Mr Hurst has addressed that issue in a supplementary affidavit filed in court today. His evidence is that the homeowners who have dealt with one of the Companies for the construction of a home on their land fall into two categories. The first category is those homeowners who entered into a contract with one of the Companies prior to 13 May 2008. The second category is those who have paid a deposit to one of the Companies, but as at 13 May had not entered into a contract with the Company.

28 As to the first category, Mr Hurst noted that BankWest, as holder of a registered charge over the Companies’ assets and undertaking, has entered into possession of the Companies’ assets including the Companies' rights under contracts with homeowners, and (he said) that has given the receivers control over the unfinished homes of those homeowners. Mr Hurst’s view is that those homeowners will now either: (a) be no worse off (apart from costs occasioned by delay), if a buyer of the business is willing to take over their contracts for the same price as was agreed with the relevant Company; or (b) enter into a new contract to finish construction of the home with the buyer of the business, for what is likely to be a higher price, taking into account the facts that the Company with which they originally contracted owned the copyright in the plans for the home, the copyright now is controlled by the receivers, and it is able to be assigned by the receivers to the buyer, or (c) make a claim on their insurer, Vero, which, according to Mr Hurst, will cover them for up to 20% of the contract price of their home.

29 According to Mr Hurst, the benefit of the contracts, which are assets of the homeowners, is affected by the receiver’s control of the contractual position of the Companies. In those circumstances there appears to be nothing that the administrators can do to alter the situation of homeowners in the first category, beyond facilitating meetings with the Department of Fair Trading and Vero (as they have in fact done).

30 Mr Hurst’s view, with which I concur, is that it is in the interests of these homeowners that the convening period be extended so that further information about the sale process, and the possibility of a deed of company arrangement, will become clearer. Clarification of these matters should also clarify the position of the homeowners. The homeowners should not be affected by an extension of the convening period made for the purpose of obtaining such clarification.

31 As to the second category, the homeowners who paid a deposit (generally between $2500 and $4000) and had not entered into a contract at the time of the administration, Mr Hurst said they will be unable to make a claim on Vero. The Company to which they have paid their deposit would own the plans for the home, now controlled by the receivers, and therefore the homeowners would be unlikely to be able to enter into a contract with another builder, using those plans. Mr Hurst said that to the extent that this group of creditors have lost their deposits, they will be able to claim as unsecured creditors of the relevant Company.

32 As with the first category, it seems to me that homeowners in this category will be no worse off, and perhaps better off, if the convening period is extended to enable the administrators to release additional information in a report to creditors. Again, I agree.

33 When the application first came before me for hearing on 10 June 2008, there was no evidence as to the opinion of members of the committees of creditors of the Companies on the merits of the application for extension. I expressed the opinion, which I now affirm, that in a case where the total amount owing to creditors is large and there are many creditors, who have appointed a committee of creditors at the creditors' meeting held under s 436E, the court is likely to be assisted in its assessment of the application by hearing the views of members of the committee, who are in a sense proxies for the body of creditors as a whole.

34 In the present case counsel for the administrators responded to my expression of opinion by seeking a short adjournment so that the administrators could obtain and give evidence of the opinions of members of the committees. I adjourned the application until today and I have now received evidence that telephone calls have been made and e-mails have been sent to all members of the committees of creditors of each of the three Companies. Only two could not be contacted. All others replied either by agreeing without qualification that the convening period should be extended as requested, or (in the case of two committee members) agreeing subject to the qualification that a meeting of the committee of creditors should be called within the next week. Mr Hurst gave evidence that the administrators propose to convene meetings of the committees for Wednesday or Thursday next week.

35 I have concluded that the committees of creditors generally support the application. I have noted that no member of any of the committees raised any grounds for objection.

36 Balancing the considerations I have set out, in my view it is appropriate to make the orders that have been sought.

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