Re Mowbray College
[2012] VSC 300
•6 June 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
No. 3199 of 2012
IN THE MATTER OF MOWBRAY COLLEGE
(ADMINISTRATOR APPOINTED) (ACN 006 090 722)
| JAMES PATRICK DOWNEY AS ADMINISTRATOR OF MOWBRAY COLLEGE (ADMINISTRATOR APPOINTED) (ACN 006 090 722) | Plaintiff |
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JUDGE: | Robson J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 June 2012 | |
DATE OF JUDGMENT: | 6 June 2012 | |
CASE MAY BE CITED AS: | Re Mowbray College | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 300 | |
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CORPORATIONS – Administrator appointed over College – State Government proposed making loan to College to enable College to continue tuition of year twelve students – Application by Administrator to be relieved from personal liability for the loan under s 447A of the Corporations Act 2001 – Loan of State Government to stand behind all other creditors - Whether or not relieving administrator from liability would further objectives of Part xx of the Act – Direction sought that Administrator justified in entering into loan agreement - Applications granted – ss 447A and 443A of the Corporations Act 2001.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | CT Möller | Mills Oakley Lawyers |
| For the State of Victoria | D Newman | Maddocks Lawyers |
HIS HONOUR:
Introduction
Mowbray College is a not‑for‑profit company, limited by guarantee, which carries on business as the operator of a multi‑campus, independent, non‑denominational, co‑educational private college. Mr James Downey, a chartered accountant, has been appointed the administrator of Mowbray College. He was appointed at the request of the directors on 28 May 2012.
Mr Downey does not have sufficient resources to enable the school to continue operating. Without further resources the school will be closed today. For the school to continue operating on a limited basis to allow the year twelve students to complete term two which finishes at the end of June, he will require approximately $1 million.
The Victorian Government has generously offered to lend Mowbray College $1 million to allow the year twelve students to complete term two. Unless relieved from liability, Mr Downey would be personally liable for the debt under s 443A of the Corporations Act 2001 (the Act). As the moneys are to be used on running costs, Mr Downey naturally cannot be expected to assume that liability.
He therefore has applied to this Court for orders pursuant to s 447A of the Act limiting his personal liability in respect of the moneys advanced by the State of Victoria pursuant to s 443A of the Act and for a direction that he would be justified in entering into the loan agreement.
For the following reasons, I propose to make the orders sought.
Mowbray College and its financial position
Mowbray College operates three campuses in Victoria: Patterson campus at Centenary Avenue in Melton which caters for students in Prep to Year 12; Brookside campus at Federation Way in Caroline Springs which caters for students in kindergarten to Year 6; and Town Centre campus on the corner of Lake Street and Caroline Springs Boulevard in Caroline Springs which caters for students in Years 7 to 12.
The College holds a licence from the Victorian Registration and Qualifications Authority and is authorised by that body to provide a co‑educational primary and secondary school, pre‑school for three to four year olds at the Brookside campus, and an overseas secondary student exchange to international students.
The College is the registered proprietor of the following properties which it operates as schools: 5 Stevenson Crescent, Caroline Springs; 183-191 Caroline Springs Boulevard at Caroline Springs; and 102-112 Centenary Avenue, Kurunjang.
As at 12 May 2012, there were a total of 1276 students enrolled across the schools with approximately 506 students at the Patterson campus, 683 students at the Brookside and Town Centre campuses, 1189 students from Prep to Year 12 and 87 students at pre‑school level. As at the date of Mr Downey's appointment, the College employed a total of 220 fulltime employees, most of whom are teachers at the College .
The College derives income from the following approximate sources: tuition fees 48 per cent; government funding 46.7 per cent; and other miscellaneous funds 5.3 per cent.
Mr Downey has been given access to the books and records of the College and has had discussions with the College management and with representatives and advisors of the Department of Education and Early Childhood Development of the State of Victoria. Mr Downey says that the main assets of the company comprise cash at bank, book debts, real property, furniture and equipment.
In addition, the College has intangible assets in the form of enrolments, curricula, business plans, policies and procedures, employee contracts and other operating facilities and contractual rights. The liabilities of the College principally comprise accrued entitlements for employees; liabilities to the Australian Taxation Office; liabilities to the National Australia Bank for the loan facilities provided; liabilities for pre‑paid tuition fees; and liabilities to other trade creditors who have provided goods and services to the College.
The National Australia Bank holds a registered fixed and floating charge over the assets and undertaking of the College which has now been migrated across to the personal property securities register, and first registered mortgages over the properties.
Mr Downey says that on his preliminary view of the assets and liabilities of the College, he has formed the opinion that the College is unable to pay all its debts as and when due and is therefore insolvent. Mr Downey tendered a draft balance sheet as at 30 April 2012, prepared by the College on 12 April 2012. The following information regarding the assets and liabilities should be understood to be based on that document. Mr Downey has not been in a position to carry out his investigations and confirm whether these figures are entirely accurate.
According to the balance sheet, as at 30 April 2012 the College owed the National Australia Bank about $16.1 million. In addition, the College owes staff accrued long service leave and annual leave of about $2.2 million.
The College has a surplus of assets over liabilities of $19 million, but that is based to a great extent on the fact that the land and buildings were valued at $41 million. Mr Downey says that the unsecured creditors are relatively modest, being owed some $557,000. The unsecured creditors would, in the normal course, stand behind the bank, behind the employee entitlements, and behind the administrator's costs, expenses and remuneration.
Since Mr Downey’s appointment, he has continued to operate the schools with minimal change to their operations. He says that he controls the following amounts in his capacity as administrator of the College which he may be able to draw upon to meet the expenses and liabilities of the continued operation of the College:
(a) Approximately $290,000 in an account maintained with the Commonwealth Bank of Australia. Mr Downey has been told by staff of the College that these funds may represent prepaid tuition fees. He says it is currently unclear whether he can have recourse to those funds to meet the expenses and liabilities incurred in operating the College.
(b) $400,000 which amount was paid into the company's account with the National Australia Bank on or about the day of his appointment. Mr Downey says that he has been informed by the Victorian Registration and Qualifications Authority that those moneys represent a prepaid grant from the Victorian Government.
Mr Downey says that on 6 June 2012 as a result of his continued operation of the schools in the period since his appointment he will need to pay a total of approximately $549,000 in wages, superannuation, pay as you go and payroll tax for the fortnight ended 8 June 2012, and after 6 June he says that he proposes to operate the schools on the following basis
(a) the facilities for students for pre-school to Year 10 will be closed;
(b) the teaching staff of the students from pre-school to Year 12 will be retained for a further three to four business days to enable them to finalise the academic records for these students; and
(c) the facilities for all students studying subjects in the Victorian Certificate of Education (VCE) and International Baccalaureate Diploma (IBD) will continue until the end of the school term in late June 2012.
Mr Downey says that if he is to continue to operate the schools on this basis he estimates that during the administration period, namely between the date of his appointment and the second meeting of the creditors, the operating costs and liabilities to which he may be exposed will be approximately $976,000, made up as follows;
(a) Wages, superannuation, pay as you go and payroll tax of approximately $549,000 on 6 June and approximately $300,000, being three extra days for all teachers after students finish and an estimate of the full fortnight gross wages for VCE and IBD teachers for the fortnight after 8 June until the end of the school term in late June 2012;
(b) Insurance costs of approximately $20,000 until the end of the school term in late June 2012;
(c) Information technology services costs of approximately $20,000 until the end of the school term in late June 2012;
(d) Security and maintenance costs of approximately $10,000 to $20,000 until the end of the school term in late June 2012; and
(e) School bus costs of approximately $5000 per day until the end of the school term in late June 2012.
Mr Downey says that in circumstances where he expects the operating costs and liabilities associated with his continued limited operation of the schools to be approximately $1 million, he does not have sufficient funds available in the administration of the College to continue operating the schools even on the limited basis without the funding provided by the loan from the State of Victoria.
If the College closes down it is likely that the College’s registration with the Victorian Registration and Qualifications Authority will be revoked. The College could not continue to operate as an education provider. Its intangible assets will become practically worthless. Mr Downey says he does not know whether the Authority would later reinstate the College's registration if requested to do so.
Mr Downey says that if the school is unable to operate on at least the limited basis he proposes, the school's VCE and IBD students will not be able to complete their VCE and IBD subjects and will be displaced prior to undertaking their VCE and IBD mid-year examinations and assessments. He says that in order to minimise disruption to students, families and staff associated with the schools, the State of Victoria has agreed to provide the College with funding up to an aggregate of $1 million dollars to allow him to continue operating the schools on the limited basis for the remainder of the school term which will conclude in late June 2012. Mr Downey says the advance made under the loan agreement is available to him for the sole and express purposes of meeting his administration costs, expenses and remuneration required to continue operating of the schools on the limited basis which I have described.
Details of the proposed loan
In order to ensure that the College continues to operate until the end of the school term in late June 2012 the State of Victoria has offered to make the advance with draw downs being made upon written request issued to the State of Victoria following satisfaction of the conditions precedent. The loan agreement provides that the advance will be repayable to the State of Victoria as an expense of the administration of the College only to the extent the College’s available assets are sufficient to meet this payment after payment of all Mr Downey’s administration costs, remuneration and expenses, and after payment of all other claims which are afforded a priority under s 556(1) of the Act.
Section 556(1) of the Act gives priority to administrator's expenses, winding up costs, and employee entitlements before unsecured creditors.
Mr Downey says that if the money offered by the State of Victoria is not made available, as administrator of the College he will cause the College to cease trading immediately and terminate the employment of all employees of the College. He says he is not prepared to incur significant ongoing trading liabilities as set out above in circumstances where the financial position of the College is not known with any degree of certainty and where he will be personally liable for the repayment of those liabilities.
Mr Downey says that it is a condition precedent to the performance of the loan agreement that orders be made pursuant to s 447A of the Act to modify the operation of s 443 of the Act to relieve Mr Downey from incurring personal liability in connection with repayment of loans made under the loan agreement.
The application
During the period of Mr Downey’s appointment as administrator of the College, pursuant to s 443A(1) of the Act, he is personally liable for the repayment of any loans incurred by the College, including borrowing costs and interest to the extent that those liabilities cannot be satisfied out of the assets of the College.
Section 443A(2) of the Act prevents Mr Downey from contracting out of that liability. Despite section 443A(1) and (2) of the Act, the State of Victoria has, subject to satisfaction of the conditions precedent, agreed not to hold Mr Downey liable for the moneys loaned by it under the loan agreement. The State of Victoria has requested that Mr Downey as administrator of the College apply to this court seeking an order pursuant to s 447A of the Act. Mr Downey says that in his view the loan agreement, and therefore the making of the orders, is in the best interests of all stakeholders including creditors, parents and students in that it allows for the continued limited operation of the College to cater for the needs of VCE and IBD students including their exams and assessments, and allows Mr Downey to ensure that the academic records of all other students are completed and final assessments added by teaching staff for term 2.
It also allows for the orderly packing, indexing and storage of academic records, which are required by law to be securely stored for a period of years. Mr Downey will also be able to complete his investigation into the College’s business, property, affairs and financial circumstances as required pursuant to s 439A of the Act, and to evaluate the merits of any proposals for a deed of company arrangement or other plans which may be forthcoming to restructure the College or purchase its assets.
Mr Downey says that should he not be in a position to secure immediate funding for the College, then in order to avoid incurring personal liability in circumstances where the College’s financial position is uncertain, the only recourse available to him as administrator of the company is to cease operating the schools with the effect described earlier and above. As noted above, if the College must shut, it is likely to cause the cancellation of the College's registration to operate as a school. Approximately 220 employees will have their employment terminated immediately and the 305 VCE and IBD students will be displaced, making it difficult for them to sit their exams.
Mr Downey has also sought a directions that he is justified in entering into the loan agreement.
Should the orders be made?
The power to make an order to relieve an administrator of liability is contained in s 447A(1) of the Act, which says the court may make such orders it thinks appropriate regarding how the relevant part of the Act dealing with administrations is to operate in relation to a particular company.
In many instances, the court has relieved an administrator of personal liability where the administrator has been able to organise a loan with a lender to a company under administration and the lender has also agreed not to seek recourse against the administrator.[1] Courts have been prepared to make those orders where it is in the interest of creditors to do so.
[1]See Re Ansett Ltd (administrators appointed) (2001) 11 FCR 736, [48] (Goldberg J); Re Spyglass Management Group Pty Ltd (administrators appointed) (2004) 51 ACSR 432 (Finkelstein J); Sims; Re Huon Corporation Pty Ltd (admins apptd) [2006] FCA 1201; Re Malanos [2007] NSWSC 865 (Hammerschlag J); Re Great Southern Infrastructure Pty Ltd; ex parte Jones [2009] WASC 161 (Sanderson M); Re SFM Australasia Pty Ltd (administrators appointed) [2009] FCA 360 (Mansfield J); Re Cook Cove Pty Ltd (administrators appointed) [2009] NSWSC 620 (Austin J); Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (admin app) [2011] FCA 1493.
Creditors includes all creditors whether secured or unsecured. In this case, the creditors include the National Australia Bank, that holds securities over the College properties, the priority creditors such as the employees, as well as the unsecured creditors. The administrator submits that there is a benefit in the proposed transaction to the College. The claims against it might be reduced in that damages claims by parents might be reduced and teachers may be able to be given longer notice and therefore any claims they may have may also be reduced.
I accept these submissions. Nevertheless, during the hearing of the application, I was concerned about the position of the unsecured creditors. If the State Government advances loan funds to the College to enable it to continue as Mr Downey envisages it is unlikely any significant income would be generated by extra school fees being earned. A benefit to the College might be in reducing the liabilities. There is a possibility that the assets of the College might be realised for a better value if the administrator has further time to find out what went on in the collapse of the College and present the assets to a potential purchaser in a better light.
The State of Victoria, however, indicated that it is not making this loan on the assumption that it will be repaid and it accepts the possibility, in fact, likelihood that it may not be repaid. Nevertheless, as mentioned above, I was concerned that the loan agreement provides that the State of Victoria ranks after the priority creditors but before the unsecured creditors. I was concerned that the proposed loan might work to the disadvantage of the unsecured creditors.
Under the Act, any order I make under s 447 must be made for the purposes of furthering the objects of the administration provisions of the Act. In substance, the objects of these provisions are to improve the outcome of the insolvency position for creditors and shareholders. Those are essentially commercial objectives. They look to the financial position of shareholders and creditors. The provision have been designed for commercial ventures and unfortunately do not give much weight to issues such as whether or not students would be disadvantaged in their exams. Therefore, even though the objectives of this agreement are extremely desirable to the parents and the students and no doubt the people of Victoria, I was concerned that I may not have had the power to make the orders sought, despite the submissions of the administrator on the benefits that would otherwise flow from the College receiving the loan.
To overcome that problem, the State of Victoria has kindly agreed to stand behind the unsecured creditors. In those circumstances, in my view, the objectives of the Act are being advanced by the borrowing of the moneys. It will allow staff to be let go on better terms, and in a more orderly fashion. It will potentially reduce claims for damages against the school. It does not disadvantage, in my view, the other creditors. In fact, as I said, there are advantages to the creditors. The agreement is in the interests of the College.
Conclusion
For the above reasons, I find that Mr Downey is justified in entering into the loan agreement with the State. I am also satisfied that I should relieve Mr Downey from personal liability for the loan. I will make the following orders:
1. Pursuant to section 447A(1) of the Corporations Act 2001 (Cth) (Act):
(a) the liabilities of the plaintiff, in his capacity as administrator of Mowbray College (administrator appointed) (ACN 006 090 722) (Company), pursuant to the terms of the loan agreement dated 6 June 2012 between the plaintiff, the Company and the State of Victoria (as amended) (Loan Agreement), be limited in the manner provided for by the Loan Agreement;
(b) the operation of section 443A(2) of the Act is modified so far as it applies to the liabilities of the plaintiff (in his capacity as administrator of the Company) under the Loan Agreement, so as to permit those liabilities to be limited in the manner provided for by the Loan Agreement;
(c) section 443A(1) of the Act is modified so far as it applies to the liabilities of the plaintiff (in his capacity as administrator of the Company) pursuant to the Loan Agreement, so the plaintiff is not personally liable under section 443A(1)(d)-(f) of the Act or otherwise for, or in connection with, the funds provided pursuant to the Loan Agreement (including, without limitation, repayment of the money borrowed, interests thereon and borrowing costs) otherwise than in accordance with the terms of the Loan Agreement.
2. The plaintiff is justified in causing the Company to enter into the Loan Agreement.
3. The plaintiff’s costs of the application are costs in the administration of the Company.
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