Re Southern Riverina Dairy Group Pty Ltd
[2017] VSC 4
•18 January 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2016 05125
IN THE MATTER of an application under ss 439A(6) and 447A of the Corporations Act 2001 (Cth)
IN THE MATTER of SOUTHERN RIVERINA DAIRY GROUP PTY LTD (administrators appointed) (ACN 603 101 042)
| GLENN JEFFREY FRANKLIN, JASON GLENN STONE AND PETR VRSECKY (in their capacity as joint and several administrators of Southern Riverina Dairy Group Pty Ltd) (administrators appointed) ACN 603 101 042) | Plaintiffs |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 19 December 2016 |
DATE OF JUDGMENT: | 18 January 2017 |
CASE MAY BE CITED AS: | Re Southern Riverina Dairy Group Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2017] VSC 4 |
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CORPORATIONS – Company under external administration under Part 5.3A of the Corporations Act 2001 (Cth) – Application for extension of convening period of second meeting of creditors pursuant to s 439A(6) and s 447A – Application granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr H N G Austin SC | Madgwicks |
HIS HONOUR:
On 6 December 2016 (‘Appointment Date’), secured creditors of Southern Riverina Dairy Group Pty Ltd (Administrators Appointed) (‘Company’) appointed the Plaintiffs as joint and several administrators (‘Administrators’) of the Company pursuant to section 436C of the Corporations Act 2001 (Cth) (‘Act’).
The Administrators make application for an extension of the convening period for the second meeting of creditors required to be convened by s 439A(6) of the Act until 15 February 2017. If the convening period is not extended it will expire by operation of s 439A(5)(a) on 12 January 2017.
On 19 December 2016 I made orders extending the convening period and indicated that I would publish reasons for doing so. These are those reasons.
The principal affidavit in support of the application is that of the first named plaintiff, Glenn Franklin, sworn 15 December 2016. The Administrators also rely on an affidavit of their solicitor, Cassie O’Bryan, sworn 16 December 2016, who reports on the outcome of the first meeting of creditors of the Company and the attitude of the creditors attending that meeting to this application.
The primary reasons why the Administrators are seeking the extension of the convening period are:
(a) to facilitate the progression and consider the proposals which are intended to be made for the Company to enter into a Deed of Company Arrangement (‘DOCA’); and
(b) so that the Administrators can be in a position to prepare a report to creditors in advance of the second meeting which contains the requisite opinions as to the three options referred to in s 439A(4) of the Act.[1]
[1]Affidavit of Glenn Jeffrey Franklin sworn 15 December 2016 (‘Franklin Affidavit’) [6].
The Company operates a 320 hectare dairy farm (‘farm’) at Finley in southern New South Wales. The farm milks about 750 cows and supplies its produce to Fonterra Co‑Operative Group Limited.[2] The Company is a wholly owned subsidiary of Pure Australian Milk Ltd (‘PAM’) and was incorporated in October 2014 for the purpose of acquiring the farm.
[2]Ibid [7].
The farm was purchased in May 2015 from Greg and Joanne Fleming, who remain secured creditors under a mortgage granted by the Company to secure payment of the purchase price. The mortgage was to be repaid and discharged by November 2015 however the majority of the debt associated with that security ($2,020,070) remains outstanding.[3]
[3]Ibid [9].
The Company has recently implemented major changes in its management, with the replacement of its sole director, Christopher Gerard Lenehan. There have been allegations of mismanagement made against Mr Lenehan. On 1 March 2016 Mr Lenehan resigned as the sole director of the Company and as executive chairman of PAM. Legal action to recover funds and assets was brought against him and settled in June 2016. He has been replaced by Mr Tony Leechman and Mr Kevin Clements, who are also directors of PAM.
Mr Franklin has been informed by the Company’s secretary, Mr McCormick, that the following matters have contributed to the Company’s financial difficulties:
(a) the alleged mishandling of Company funds and assets left the Company in a difficult financial position. The board sought to restructure the Company and seek refinancing but the efforts to refinance have been unsuccessful;
(b) it is also believed that past mismanagement of the dairy milking herd has resulted in lower milk production and quality than expected. There have been signs of improvement in production since the change of management; and
(c) the quality of the herd has been further affected by the unusual wet weather and flooding on the farm which has directly caused animal health issues and further loss in milk quality and production.[4]
[4]Ibid [12].
The Company reached the point where it was unable to meet its financial obligations and became the subject of various court judgments during 2016. It is also currently the subject of a pending winding up application in the Supreme Court of Victoria, which was commenced by the Company’s former solicitor, Nicholas Weston, on 10 November 2016. That application was returnable on 14 December 2016 and Mr Franklin has been advised by his solicitor, Ms O’Bryan, that the issues between the Company and Mr Weston have been resolved. However, another creditor, Fenhill Pty Ltd, has now made application to be substituted as plaintiff in the application. The application for substitution and the winding up application have been adjourned to 25 January 2017 in the Corporations List of this Court.[5]
[5]Ibid [15].
The Company has seven employees and it appears that its superannuation obligations have not been complied with and the ATO may be owed an amount in respect of unpaid Superannuation Guarantee Charges.
In addition to Mr and Mrs Fleming, there are two additional secured creditors. National Australia Bank (‘NAB’) has securities in place in respect of hire purchase transactions for vehicles used by the farm securing a debt of approximately $700,000. Lower Moira Group Pty Ltd (‘Lower Moira’) holds a charge over part of the herd to secure a lease to the Company of 200 Holstein cows in the herd. The total amount secured, including the amount owing to the Flemings, is approximately $2.7 million.[6]
[6]Ibid [18]–[20].
The Administrators’ preliminary investigations indicate that the Company’s unsecured creditors are owed in excess of $4.569 million. The principal unsecured creditor is its holding company, PAM, which is said to be owed approximately $3.5 million. The ATO is a creditor for approximately $200,000 for GST, PAYG and superannuation.[7]
[7]Ibid [21]-[22].
The Company’s books indicate a net asset deficiency of approximately $2.9 million. The value of the Company’s assets is uncertain, but may amount to $4.4 million. The Administrators have not commissioned a valuation of the assets and therefore cannot advise as to the estimated realisable values. This is to be measured against the liabilities recorded in the Company’s books of approximately $7.3 million.[8]
[8]Ibid [23].
In terms of assets, the Company’s property comprises the farm at Finley and associated water rights. The land, buildings, including the freehold of the 50 unit rotary dairy and water rights, were valued on behalf of NAB as at 8 February 2016 at approximately $3.125 million. The Company has plant and equipment comprised of motor vehicles which have a recorded book value of $333,214 in the Company’s accounts.[9]
[9]Ibid [25], [26].
The directors have estimated that the book value of livestock and fodder held by the Company is $800,000. However, the value of the livestock in the books of the Company is recorded as approximately $2.137 million and fodder is valued at approximately $742,000. The Company is owed $108,000 by Fonterra for debts owed prior to the appointment of the Administrators. Fonterra set off a loan to the Company against this debt and the balance was paid into the Company’s pre-appointment NAB overdraft.[10]
[10]Ibid [27].
Apart from the Administrators’ encouragement of DOCA proposals, the outcome of which will impact on the opinion that the Administrators will need to provide to the creditors prior to the second meeting of creditors, the Administrators have undertaken various other tasks which include:
(a) inspection of the farm;
(b) informed the directors and the external accountant of the Company’s liquidation and sought the submission of a RATA, the Company’s books and records;
(c) liaised with the secured creditors, Greg and Joanne Fleming and the NAB;
(d) convened the first meeting of creditors;
(e) liaised with suppliers to establish supply to the Company;
(f) attendance at Court for the return of the winding up application;
(g) meeting with directors and the Company secretary; and
(h) opened new bank accounts to assist with the running of the business.[11]
[11]Ibid [32].
Mr Franklin also wrote to the directors of the Company on 8 December 2016 requesting that any written proposals in respect of any DOCA be provided to him by no later than 19 December 2016.[12] This was followed up on 13 December 2016 when he instructed Mr Milne of his office to contact Mr Clements, one of the directors of the Company, in relation to the DOCA proposals.[13] Mr Clements responded on 14 December 2016, requesting that the convening period be extended to allow him to formulate a DOCA proposal. He specifically requested that the meeting be adjourned to after 7 February 2017.[14]
[12]Exhibit “GJF7” to Franklin Affidavit.
[13]Exhibit “GJF8” to Franklin Affidavit.
[14]Exhibit “GJF9” to Franklin Affidavit.
On 13 December 2016, Mr Franklin was informed by Mr Craig McCormick, the Company’s secretary, advising that he had been in contact with a potential investor who was interested in putting forward a DOCA proposal. However, because of the Christmas holiday period, he indicated that he would not be able to formulate a proposal within the required time. Mr McCormick requested that the convening period be extended until February 2017. There is the further complication that one potential investor would need to go through the Foreign Investment Review Board process, which is said to itself take six weeks.[15]
[15]Exhibit “GJF10” to Franklin Affidavit.
On 13 December 2016, Mr Franklin instructed Mr Milne to contact Mr and Mrs Fleming in relation to whether they had any objection to an extension of the convening period[16]. Mr Milne received a response from the Flemings on the same day stating that they had no objection to an extension.[17]
[16]Exhibit “GJF11” to Franklin Affidavit.
[17]Exhibit “GJF12” to Franklin Affidavit.
Mr Franklin deposes that the Administrators will need further time in which to complete their investigations. Absent an extension of the convening period, the dates the Administrators must work to, bearing in mind the Christmas close down of their office between 23 December 2016 and 3 January 2017, is to issue the report to creditors by Friday, 23 December 2016 and hold the second meeting of creditors by Tuesday, 10 January 2017.[18] Mr Franklin states that he has been informed by his solicitor, Ms O’Bryan, and believes that the Court closes for the Christmas vacation until 9 January 2016, so it does not appear to be possible for the Administrators to bring an application closer to the time by which the second meeting would otherwise be required to be convened.[19]
[18]At the hearing of this application it was indicated by senior counsel for the plaintiffs, Mr Austin, that this computation is not correct. In the absence of an extension of the convening period, by operation of s 439A(5)(a), the administrators must hold the meeting by 12 January 2017.
[19]Above n 1, [40].
Mr Franklin states that the Administrators will require further time to prepare a proper and informative report that contains their opinions and the reasons for those opinions, required by s 439A(4) of the Act, as to whether it would be in the creditors’ interests for the Company to execute a DOCA, for the administration to end or for the Company to be wound up. The Administrators are still in the process of completing their investigations as to (a) the Company’s business, property, affairs and financial circumstances; (b) whether there has been any insolvent trading, voidable preferences or related party transactions which may be available to a liquidator; and (c) whether there have been any other contraventions of the Act.[20]
[20]Ibid [41].
Mr Franklin considers that any report completed by him within the current convening period would be inadequate for the creditors’ needs and is unlikely to comply with the requirements of s 439A(4) of the Act. In particular, the Administrators are not presently able to report to the creditors as to the possible merit of any of the potential DOCA proposals and therefore could not provide a comparison as to the likely return under any such proposal as compared with a liquidation.
Unusually, this application has been issued prior to the first meeting of creditors taking place. This has arisen by reason of the timing of the commencement of the administration and the intervention of the Christmas period. The first meeting of creditors was held on 16 December 2016. Ms O’Bryan deposes that in a telephone call, made shortly after the first meeting of creditors, Mr Franklin indicated to her that he had conducted the first meeting of creditors that day and the issue of the application for extension of time was raised by him. Mr Franklin told her that all of the creditors in attendance at the meeting (including Fenhill Pty Ltd who issued the application to be substituted in the winding up) indicated their support for the application and no objection was raised to the proposed extension. Neither the NAB nor Lower Moira attended the meeting or provided a proxy to the Administrators.
Presumably, because of the attitude of the proposed substituted creditor at the first meeting, it will assent to an application by the Administrators to adjourn the winding up application which will be a powerful factor in the exercise of the Court’s discretion under s 440A(2) of the Act when the matter returns to Court on 25 January 2017.
Legal Principles
A number of authorities have summarised the principles to be applied in these types of applications. In Algeri; Re Colorado Group Ltd,[21] Judd J observed:
[21][2011] VSC 260 (‘Re Colorado Group’).
24.When an application is made for an extension of time to convene a meeting, the court will attempt to strike a balance between the expectation that the administration will be conducted relatively speedily and summarily, and the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders. Where the relevant business group is large and complex, or there is a prospect of successful realisation of assets through negotiations with third parties, as in the present case, the administration process is often given more time. There is no place for a predisposition against granting an extension. In Re FEA Plantations Ltd [2010] FCA 468, at para 19, Dodds-Streeton J said:
Relevant authorities recognise that strict compliance with the tight timeframes for convening the second meeting (statutorily imposed to avoid the prolongation of the voluntary administration procedure and its concomitant moratorium and impact on rights) may not be feasible in large and complex administrations, if the administrators are to produce informed recommendations based on adequate investigations, and a sufficiently comprehensive and detailed report capable of providing meaningful assistance to the creditors in deciding the fate of the company.
25.In Re Riviera Group, Austin J noted that extensions had been granted in cases falling within the following broad categories:
The reasons given for an extension in subsequent cases can be grouped into the following broad categories:
• the size and scope of the business: Re Lombe; Babcock & Brown Ltd (admins apptd) [2009] FCA 349 (Re LombeRe Worrell; Storm Financial Ltd (recs and mgrs apptd) (2009) 69 ACSR 584; [2009] FCA 70 (Re WorrellRe ABC Learning Centres Ltd; Application by Walker (No 5) [2008] FCA 1947;
• substantial offshore activities: Re Lehman Bros Australia Ltd [2008] NSWSC 1132;
• large number of employees with complex entitlements: Re S & D International Pty Ltd (in liq); Malhotra v Tiwari [2005] VSC 496; Re Ansett Australia Ltd and Korda; sub nom Ansett Australia Ltd (No 3) (FCR) (2002) 115 FCR 409 ; 40 ACSR 433 ; [2002] FCA 90;
• complex corporate group structure and intercompany loans: Re Lombe; Re Octaviar Ltd (admins apptd) (recs and mgrs apptd) [2008] QSC 272; Re LED Builders Pty Ltd (admin apptd) [2008] NSWSC 633; Hall; Re Australian Capital Reserve Ltd (admins apptd) [2007] FCA 1328;
• complex transactions entered into by the company (for example securities lending or derivatives transactions): In Re Lift CapitalPartners Pty Ltd (admin apptd) [2008] NSWSC 446 (Re Lift Capital);
• complex prospects of recovery proceedings: Re WorrellCoal Developments (German Creek) Pty Ltd v Cmr of Taxation (2007) 241 ALR 667 ; [2007] FCA 1324;
• lack of access to corporate financial records: Re Sims; Destra Corp Ltd [2008] FCA 2002; Re Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192; [2007] NSWSC 363;
• the time needed to execute an orderly process of disposal of assets: Re Carter, SFM Australasia Pty Ltd (admin apptd) (No 2) [2009] FCA 419; Re ABC Learning Centres Ltd; Application byWalker (No 7) (2009) 71 ACSR 560 ; [2009] FCA 454;
• the time needed for thorough assessment of a proposal for a deed of company arrangement: Silvia, Re Austcorp Group Ltd (admin apptd) [2009] FCA 636;
• where the extension will allow sale of the business as a going concern: Re Lombe; Australian Discount Retail Pty Ltd [2009] NSWSC 110; Stewart, Re Kleins Franchising Pty Ltd (admin apptd) [2008] FCA 721; Re Uni-AireSecurity Pty Ltd (admin apptd) [2006] FCA 1423;
• more generally, that additional time is likely to enhance the return for unsecured creditors: Deputy Commissioner of Taxation v ScottsdaleHomes No Pty Ltd (No 2) [2009] FCA 190; Re Fitzgerald; PrimebrokerSecurities Ltd (admin apptd) (recs and mgrs apptd) [2008] FCA 1247; ReVouris; Marrickville Bowling and Recreation Club Ltd [2008] FCA 622.
In Re Colorado Group, Judd J noted that, in support for an extension of the convening period, the administrators were unable to prepare and circulate a meaningful report to creditors so as to comply with their obligations under section 439A(4) of the Act.[22] Here, the preparation of such a report in the absence of the receipt and analysis of the foreshadowed DOCA proposals, would be premature.
[22]Re Colorado Group, [26] (Judd J).
In Re Diamond Press Australia Pty Ltd,[23] Barrett J considered that the Court’s function on an application for extension of a convening period was to strike a balance between the expectation that the administration will be speedy and the requirement that undue speed should not prejudice sensible and constructive actions directed towards maximising the return to creditors.
[23][2001] NSWSC 313.
Barrett J regarded this as a substantial ground in that case to support an extension of time for the period sought by the administrators to enable this to be done. Based on the evidence summarised above, the following factors, recognised in the case law referred to, are prominent and are in favour of the grant of the extension sought:
(a) the time needed for thorough assessment of proposals for a DOCA;
(b) additional time is likely to enhance the return for unsecured creditors; and
(c) the extension will enable the preparation of a report which complies with the requirements of s 439A(4) of the Act.
Where a substantial issue in any of the abovementioned categories is established, the Court tends to grant an extension for the time sought by the administrator provided that:
(a) the evidentiary case has been properly prepared;
(b) there is no evidence of material prejudice to those affected by the moratorium imposed by an administration; and
(c) the Court is satisfied that the administrator’s estimate of time has a reasonable basis.[24]
[24]Re Riviera, 355 [14] (Austin J).
Here, the time period of the proposed extension is modest and is focussed around information received concerning the timing of DOCA proposals.
The intervention of the Christmas holiday period is a matter which is expressly recognised by the statute as justifying a longer convening period (s 439A(5)). Unsurprisingly, the compressing effect of the break on the conduct of a voluntary administration has been relied on[25] and taken into account[26] in previous cases concerning extensions of the convening period. In Re Hans Continental Smallgoods Pty Ltd (Administrators Appointed),[27] Jacobson J extended the relevant convening period by 90 days and encapsulated the point in one of the bases for his conclusion to extend the period:
The first reason is that the cases indicate that an extension of two and a half to three months is not unusual where there is a relatively complex sale process. Bearing in mind the intervention of the holiday period, it seems to me that the effect of the orders which are presently sought is to grant an extension of up to two and a half months, because the Christmas and New Year holiday period intervenes and it is not unusual for a period of up to two working weeks to be lost as a result of that holiday period.
[25]Re Australian Money Exchange Pty Ltd (Administrator Appointed) [2013] VSC 659, [11]; Re AED Oil Limited (Administrators Appointed) [2011] VSC 460, [14]; Hancock and Hird as voluntary administrators, in the matter of BC3 Thoroughbreds Aus Pty Ltd (administrators appointed) and BC3 Thoroughbreds Pty Ltd (administrators appointed) [2013] FCA 1447, [29].
[26]Re Coalpac Pty Ltd (Administrators Appointed) [2013] NSWSC 2017, [15] (Black J); Mentha, in the matter of Hans Continental Smallgoods Pty Ltd (Administrators Appointed) [2008] FCA 1933, [26] (Jacobson J); Abruzzi Sports Club Ltd (Administrator Apptd) [2003] NSWSC 1182, [2] (Hamilton J); Taylor, in the matter of Healthzone Limited (Receivers and Managers Appointed) (Administrators Appointed) [2011] FCA 1455, [16].
[27]Mentha, in the matter of Hans Continental Smallgoods Pty Ltd (Administrators Appointed) [2008] FCA 1933, [26].
It is submitted on behalf of the Administrators that the holiday period will impede them in the performance of all their functions because of the absence of personnel and third parties. The potential DOCA proponents require further time to progress and formulate their proposals.
In order for the Administrators to form opinions and report to creditors concerning DOCA proposals so as to produce a proper report in compliance with s 439A, there must be fully formed proposals capable of proper analysis. In the section of her judgment in ASIC v Edge headed ‘Deficiency of The Pines s 439A reports’,[28] Dodds‑Streeton J noted as follows:
[28](2007) 211 FLR 137, [318]-[341].
[336] The report stated that the director had proposed to offer creditors 50 cents in the dollar immediately and 50 cents in nine months’ time, allowing the director sufficient time to realise “other assets not held within the company”. It further stated, “in my opinion, it would be in the creditors’ interest for the proposal to be accepted as it returns 100 cents in the dollar albeit over a period of nine months”.
...
[338] The report contained no reference to a specific DOCA and its details, as required by s 439A(4)(c), but simply referred to a generalised proposal. By the time of preparation of the report dated 13 September 2004, the administration of The Pines was nearly complete, but the report stated that “a complete review of the financial affairs of the company has not been completed” and a DOCA was therefore not proposed.
[339] While it indicated that it was in the creditors’ interests to accept a proposed DOCA because they would receive 100 cents in the dollar over nine months, there was no independent reasoning, and no independent data or assessment of the company’s financial position or the creditors’ options.
Another relevant consideration is whether the creditors generally support the extension.[29] The principal secured creditors are amendable to it and the principal unsecured creditor, PAM, is amongst those who have requested an extension so that a DOCA proposal can be advanced. Thus, the attitude of those most potentially effected is neutral, if not favourable, to the extension. The attitude of such potentially affected parties is relevant.[30] The creditors of the company who attended the first meeting of creditors support the extension.
[29]Re South Burnett Wines Ltd (2004) 52 ACSR 298.
[30]Re Munday Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2010] FCA 447, [6], [10] (Gordon J); Re Riviera Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) (2009) 72 ACSR 352, 353 [3] (Austin J).
If no extension is granted the Administrators would have no choice but to convene the second meeting and recommend that it be adjourned, resulting in two second meetings instead of one, with the associated wasted expenditure.[31] That is highly undesirable.
[31]Franklin Affidavit, [46]. See Re AEGIS Correctional Partnership Pty Ltd (Administrators Appointed (Receivers and Managers Appointed) [2012] VSC 310 (Re AEGIS), [16].
Further, the evidence shows that there is the potential for a better return to creditors in the event a DOCA was to be executed as opposed to an immediate winding up,[32] a matter which is recognised as relevant to the balancing exercise undertaken by the Court.[33]
[32]Franklin Affidavit, [44], [45].
[33]Re Riviera, (2009) 72 ACSR 352, 355 [13] (Austin J); Re Coalpac Pty Ltd (Administrators Appointed) [2013] NSWSC 2017, [16] (Black J).
One of the significant factors in these applications is the material prejudice to those affected by the moratorium imposed by the administration, including lessors of property. Here, the Administrators submit that the owners of property whose interests require consideration, being NAB and Lower Moira, have not raised objection to the extension being granted. The Administrators submit there is otherwise no evidence of any likely prejudice to any party by any extension, and indeed, the evidence supports the potential for affected persons to benefit by the extension sought. The administration process was actuated by the principal secured creditors, the Flemings, who support the making of this application.
While it is not entirely clear at this stage, Mr Franklin states in his affidavit that should the Company be placed into liquidation, there may be little to no return to unsecured creditors. He states that there is a possibility of at least some return to unsecured creditors in the event that a DOCA is effected, particularly because of the existence of a great deal of related entity debt.
I consider that in the circumstances there are substantial reasons for making an order extending the convening period of the administration of the Company until 15 February 2017 pursuant to s 439A(6) of the Act.
In addition, the Administrators also sought an order under s 447A(1) of the Act to allow the Administrators to convene the second meeting at any time during the convening period so extended or within five business days thereafter. Such orders, known as Daisytek[34] orders, are common place ancillary orders made in these types of applications.
[34]Re Daisytek Australia Pty Ltd (Administrators Appointed) [2003] FCA 768.
I consider that orders should also be made in respect of the provision of notice to the creditors, liberty to apply for the Administrators to apply for a further extension if necessary, liberty to apply to any person having a sufficient interest to apply to the Court to modify or discharge the order sought and an order that the Administrators’ costs of this application are costs in the administration of the Company.
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