Schwarz, in the matter of Gordon Smith Marketing Pty Limited (Administrator Appointed)
[2016] FCA 836
•21 July 2016
FEDERAL COURT OF AUSTRALIA
Schwarz, in the matter of Gordon Smith Marketing Pty Limited
(Administrator Appointed) [2016] FCA 836
File number: NSD 1173 of 2016 Judge: YATES J Date of judgment: 21 July 2016 Catchwords: CORPORATIONS – external administration – application to extend convening period for second meeting of creditors Legislation: Corporations Act 2001 (Cth) ss 438A, 439A
Fair Entitlements Guarantee Act 2012 (Cth)
Date of hearing: 21 July 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 31 Counsel for the Plaintiff: Mr ML Rose Solicitor for the Plaintiff: King & Wood Mallesons ORDERS
NSD 1173 of 2016 IN THE MATTER OF GORDON SMITH MARKETING PTY LIMITED (ADMINISTRATOR APPOINTED) ACN 003 840 168 AND EACH OF THE COMPANIES LISTED IN THE SCHEDULE
ANDREW SCHWARZ IN HIS CAPACITY AS ADMINISTRATOR OF GORDON SMITH MARKETING PTY LIMITED (ADMINISTRATOR APPOINTED)
ACN 003 840 168 AND EACH OF THE COMPANIES LISTED IN THE SCHEDULEPlaintiff
JUDGE:
YATES J
DATE OF ORDER:
21 JULY 2016
THE COURT ORDERS THAT:
1.The originating process be made returnable instanter.
2.Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act) the convening period within which the plaintiff must convene the second meeting of creditors of Gordon Smith Marketing Pty Limited (administrator appointed) ACN 003 840 168, Rodney Clark Pty Ltd (administrator appointed) ACN 088 072 244 and Rodney Clark Retail Pty Ltd (administrator appointed) ACN 138 806 256 (together, the Companies) under s 439A of the Act (the second meetings) be extended from 25 July 2016 to 15 September 2016.
3.Pursuant to s 447A(1) of the Act, that Pt 5.3A of the Act operate such that the second meetings may be held, together or separately, at any time during, or within five business days after the end of, the convening period as extended by Order 2, notwithstanding the provisions of s 439A(2) of the Act.
4.The plaintiff, within seven business days of the making of these orders, take all reasonable steps to give notice of the orders to the Companies’ creditors (including the persons claiming to be creditors), by means of a circular:
(a)sent by email transmission to creditors for whom the plaintiff has a current email address; or
(b)sent by ordinary post to creditors for whom the plaintiff has only a postal address.
5.Pursuant to s 447A(1) of the Act, that Pt 5.3A of the Act operate such that the requirement on the plaintiff to issue notices under s 439A(3) of the Act be modified such that notice of the second meetings will be validly given to any creditors by, not less than five business days prior to the date of the proposed meeting:
(a)giving such notice electronically by email sent to the email address of any creditor (including persons claiming to be creditors) of the Companies for whom or which the plaintiff holds an email address;
(b)sending such notice to the postal address or facsimile number, or otherwise as provided for by the Act or the Corporations Regulations 2001 (Cth), to any creditors not being a creditor referred to in sub-paragraph (a);
(c)causing such notice to be made available on the website maintained by the plaintiff’s firm at and
(d)causing such notice to be published in The Australian newspaper.
6.Pursuant to s 447A(1) of the Act that s 439A(4) of the Act be modified such that the information required under s 439A(4) of the Act to accompany the said notice to creditors may be validly given if it is:
(a)available for download from the website that is maintained by the plaintiff; and
(b)referred to in the notices issued and published in accordance with Order 5, as being available for download from the website that is maintained by the plaintiff.
7.Liberty to apply be granted to the following parties on giving all other interested parties not less than three business days’ notice:
(a)any person who can demonstrate sufficient interest (including any creditor of the Companies) for the purpose of modifying or discharging any orders made pursuant to Order 2 and Order 3; and
(b)the plaintiff, for the purpose of seeking any further extension of the convening period.
8.The plaintiff’s costs of and incidental to this application be costs and expenses in the administration of each of the Companies, and be paid out of the assets of the Companies.
9.Pursuant to s 37AF(2) of the Federal Court of Australia Act 1976 (Cth), Exhibits Confidential C, Confidential D and Confidential E be kept confidential and not be disclosed to any person without prior leave of the Court. Subject to any extension, this order is to operate until 5.00 pm on 15 September 2016 and is necessary to prevent prejudice to the proper administration of justice.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
(REVISED FROM TRANSCRIPT)YATES J:
The plaintiff, Andrew Schwarz, is the voluntary administrator of Gordon Smith Marketing Pty Limited (administrator appointed) (Gordon Smith Marketing), Rodney Clark Pty Limited (administrator appointed) and Rodney Clark Retail Pty Limited (administrator appointed) (together, the companies). He was appointed on 27 June 2016. Mr Schwarz seeks an order pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act) that the convening period for the second meeting of creditors of each company be extended. Unless extended, the convening period in each case will expire on 25 July 2016. Mr Schwarz seeks an extension in each case to 15 September 2016, a period of just less than eight weeks.
In essence, the application is brought to allow Mr Schwarz to give effect to a pre-existing sale of the companies’ assets and to afford him additional time to investigate the affairs of the companies in order to allow him to form the opinion required by s 439A(4) of the Act.
The application is supported by an affidavit made by Mr Schwarz on 21 July 2016. In that affidavit, Mr Schwarz surveys the background to his appointments, the administration of the companies to date, and the position in respect of creditors including landlords and employees.
The sale agreements
The companies operate a retail women’s fashion business that was established in 1992. The business is conducted online and from 17 leased premises in New South Wales, Queensland, the Australian Capital Territory and Victoria, as well as through major department stores. Gordon Bruce Smith is the sole director and sole shareholder of each of the companies.
Prior to Mr Schwarz’s appointment, the companies entered into an asset sale agreement (the asset sale agreement) with Brands For Us Pty Ltd (the buyer). At that same time, Mr Smith also entered into a share sale agreement for the issued capital of Palm Beach Brands Pty Ltd (PBB) with the buyer. Mr Smith is the sole director and sole shareholder of PBB. PBB is not in administration.
Under the asset sale agreement, the buyer is required to offer each full-time and part-time employee of the companies an offer of employment on substantially similar and no less favourable terms than the employee’s current terms of employment, and to each casual employee an offer of employment on a casual basis. In each case, the employment is to be offered on a continuity of employment and benefits basis, as if the employment with the buyer started on the date the employee commenced employment with the relevant company or any predecessor.
The asset sale agreement is subject to certain conditions precedent, as explained in paragraphs 20 and 21 of Mr Schwarz’s affidavit. Steps are underway to satisfy those conditions. The assets to be sold include all, but one, of the real property leases to which one of the companies is a party. It is intended that, as part of the asset sale, each relevant lease will be novated. At the present time the companies have the advantage of the moratorium provided by the administration.
In order to facilitate the asset sale as a going concern and to minimise the cost to the companies of keeping the businesses operating as a going concern, until completion of the asset sale agreement, Mr Schwarz has licensed the assets of the companies and operation of the companies’ business to the buyer from 27 June 2016 (the licence). The effect has been that since 27 June 2016 the buyer, as licensee, has been liable for all debts, claims and liabilities incurred during the term of the licence for goods bought, services rendered or property hired or leased, including salaries and costs arising out of the operation of the assets and certain intellectual property.
A possible DOCA proposal
A deed of company arrangement proposal (the DOCA proposal) is in contemplation. The DOCA proposal is from Mr Smith. The proposal would see all the proceeds of the asset sale agreement and the share sale agreement made available to the unsecured creditors, other than for an amount of approximately $150,000 being paid to the National Australia Bank (NAB) as a secured creditor in relation to certain bank guarantees. Apart from proving for this sum, NAB would not participate in the DOCA process.
In his affidavit, Mr Schwarz draws attention to the fact that such a proposal would provide the creditors of the companies with the proceeds of the share sale agreement, which proceeds would not otherwise be available them. Thus, if such a proposal were to be effectuated, the creditors would receive not only the benefit of the sale proceeds of the asset sale agreement (approximately $750,000) but also the benefit of the sale proceeds of the share sale agreement (also approximately $750,000). Therefore, if the asset sale agreement proceeds to completion, the combined proceeds available to creditors would be $1.5 million.
Mr Schwarz has given evidence that, based on his preliminary investigations, the main value in the companies resides in the assets being sold on a going concern basis. If the companies were to be placed into liquidation prior to the asset sale agreement completing, Mr Schwarz is of the view that the return to creditors would be approximately zero cents in the dollar. Furthermore, approximately $1.8 million in employee entitlements would crystallise and become immediately payable. Under the asset sale agreement and the contemplated DOCA proposal, it is possible that creditors could receive up to 15 cents in the dollar. If the asset sale agreement were to complete, with the companies then being placed into liquidation, Mr Schwarz says that it is possible that creditors would receive five cents in the dollar.
In his affidavit, Mr Schwarz has stressed the interrelationship between the asset sale agreement, the share sale agreement and the contemplated DOCA proposal. Mr Schwarz has deposed to the fact that, in order to maintain the possibility of a substantially higher return to creditors, it is important that the asset sale agreement be allowed to proceed to completion so that the contemplated DOCA proposal can be put forward for the creditors’ consideration. If the asset sale agreement is not allowed to proceed to completion, Mr Schwarz does not believe that it would be possible for the assets to be sold on a going concern basis. Thus, a funded DOCA, contingent on an effective sale under the asset sale agreement and the share sale agreement, may be the only source of return available to creditors of the companies.
Mr Schwarz has also deposed that, given the complexities of the administration, which he has explained in paragraph 41 of his affidavit, and the need for him to conduct further investigations pursuant to s 438A of the Act, he is not in a position to provide, at the present time, an opinion to the creditors for the purposes of s 439A(4)(b) of the Act.
Prejudice to creditors in granting an extension?
In his affidavit, Mr Schwarz has considered whether any prejudice would result to various classes of creditors should the convening periods be extended.
He has expressed the view that there is no likely prejudice to landlords because the companies’ obligations to the landlords will be either paid under the licence or, upon completion of the asset sale, novated.
With respect to employees, Mr Schwarz notes that the companies currently employ 92 people, of which 54 are employed on a permanent basis and 38 are employed on a casual basis. He has deposed that, since his appointment, apart from one full-time and two casual employees at a store in Queensland, no employee has had his or her employment terminated and that wages and employee entitlements are being paid by the buyer under the licence. The wages and outstanding entitlements of the three terminated employees have been paid.
As noted (see [6] above), it is a condition of the asset sale agreement that all employees will be offered employment with the buyer on a continuity of employment and benefits basis. It will, of course, be a matter for each employee as to whether he or she accepts employment with the buyer. Mr Schwarz is of the opinion that, if employees do not choose to accept such employment, then an extension of the convenient period will provide them with additional time to seek alternative employment, while their wages and entitlements are being paid by the buyer. If the asset sale agreement does not complete and the employment of the employees is terminated (ie, in the event that the companies are placed in liquidation), the employees will still be eligible to receive their entitlements under the Fair Entitlements
Guarantee Act 2012 (Cth) (the Fair Entitlements Guarantee Act).So far as unsecured creditors are concerned, Mr Schwarz has expressed the view that there will be significantly higher returns to creditors under the asset sale agreement and the contemplated DOCA proposal.
Other matters
On 23 June 2016, a statutory demand was served on Gordon Smith Marketing. Mr Schwarz is not aware of any proceeding having been commenced in relation to that demand.
In the course of the present application, certain letters and email correspondence were put before me: Exhibit A. This correspondence is between Boyle Associates and the plaintiff’s solicitors, King & Wood Mallesons.
Without intending any disrespect, the correspondence from Boyle Associates is difficult to comprehend. As counsel for Mr Schwarz has submitted, its effect appears to be to voice a number of issues in respect of the companies and the asset sale agreement. In particular, and amongst other things, the correspondence appears to make allegations concerning insolvent trading; “phoenix” activity; Mr Schwarz’s alleged failure, as administrator,
to“continue to trade” the companies; the propriety and legality of the licence; and the sale price of the companies’ assets. The correspondence also raises allegations that the companies’ administrations are part of a “scheme” or the result of “backroom deals”.
Two things seem to emerge from the correspondence. First, in the author’s view, there are actions of the companies and the companies’ officers that ought to be investigated. That, of course, is a matter which will occur as part of the administrations and, as it happens, is one of the reasons advanced by Mr Schwarz for extending the convening periods. Secondly, insofar as complaints are raised in respect of the administrations, those complaints are not matters that are presently before me. Should any relevant party wish to raise any complaint, then extending the convening periods would not prevent that from occurring.
The consequences of immediate liquidation
Mr Schwarz has identified four main consequences of an immediate liquidation of the companies.
First, the business of the companies would, potentially, cease. Mr Schwarz says that it is possible that the asset sale agreement could complete while the companies are in liquidation. However, according to him, this process would be more complicated and the costs of achieving completion would be likely to increase.
Secondly, the employment of the employees will be immediately terminated. They will need to wait for their entitlements under the Fair Entitlements Guarantee Act to be processed. The employees are currently owed entitlements of approximately $700,000. This would increase to $1.8 million when redundancy and notice are accounted for.
Thirdly, the leasehold interest over each site would need to be terminated. This would mean that the landlords would be required to find alternative tenants and that any claims the landlords may have against the companies would become unsecured claims in the liquidations. There may be potentially large contingent claims if the presently leased premises are unoccupied for a period of time, for which the existing bank guarantees might not be sufficient.
Fourthly, Mr Schwarz estimates that the creditors would not receive any return, although this position might change once further investigations are carried out, including into potential causes of action that may be available to the companies.
Submissions
I have been assisted in my consideration of this application by the preparation of detailed written submissions by counsel for Mr Schwarz. The submissions will be placed on the Court file.
Apart from summarising the facts that emerge from Mr Schwarz’s affidavit, the submissions contain a comprehensive reference to the relevant principles to be applied and advance reasons why the extensions, as sought, should be granted.
Conclusion
I accept the submissions that have been advanced. I am satisfied that, in balancing the need for a relatively swift administration with the need to ensure that sensible and constructive actions directed to maximising the returns to creditors are advanced and not jeopardised, it is plainly desirable that the extensions be granted. Based on Mr Schwarz’s evidence, the extensions will allow for the possibility of a significantly better return to creditors than if the administrations were to end before that time.
DISPOSITION
For these reasons, orders substantially as sought in paragraphs 1 to 8 of the originating process will be made.
I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate:
Dated: 25 July 2016
SCHEDULE
Rodney Clark Pty Ltd (administrator appointed) ACN 088 072 244 Rodney Clark Retail Pty Ltd (administrator appointed) ACN 138 806 256
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