Re Grenfell
[2016] NZHC 36
•29 January 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-000105 [2016] NZHC 36
UNDER Part 15A of the Companies Act 1993 and
Part 19 of the High Court Rules
IN THE MATTER
of an application pursuant to s 239AT of the Companies Act 1993 for an order extending the convening period in the voluntary administration of DSE (NZ) LIMITED (in receivership and voluntary administration)
ANDREW JOHN GRENFELL, KARE JOHNSTONE, JOSEPH DAVID HAYES and JASON PRESTON as administrators of DSE (NZ) LIMITED (IN RECEIVERSHIP AND VOLUNTARY ADMINISTRATION)
Applicants
Hearing: 28 January 2016 Appearances:
S C D Gollin and M D Pascariu for Applicants
G P Blanchard for Interested PartyJudgment:
29 January 2016
JUDGMENT OF COURTNEY J
GRENFELL [2016] NZHC 36 [29 January 2016]
[1] DSE (NZ) Limited, which previously traded as Dick Smith, is in voluntary administration and receivership.1 The Administrators must convene a “watershed meeting” by 2 February 2016 unless the period for doing so is extended by this Court.2 On 28 January 2016 I granted the Administrators’ applications for (1) leave to apply without notice to extend the convening period and (2) an order extending the convening period to 2 August 2016.
[2] The application was served on three creditors on a Pickwick basis and one, Argosy Property (No 1) Ltd, appeared to oppose the applications. The orders made included an express reservation of Argosy’s right to apply to set aside or vary them.
[3] My decision was given on the basis that reasons would follow. These are my reasons.
Extension of the convening period under s 239AT of the Companies Act 1993
[4] Section 239AT(1) of the Companies Act 1993 requires an administrator to convene a “watershed meeting” within the “convening period”, which is the period of 20 working days after the date of the administrator’s appointment and includes any period for which it is extended.
[5] A watershed meeting is:3
… the creditors’ meeting called by the administrator to decide the future of the company and, in particular, whether the company and the deed administrator should execute a deed of company arrangement.
[6] Under s 239AT(3) the Court may extend the convening period on the administrator’s application. The section is silent as to what considerations should be taken into account in allowing an application to extend time. However, I agree with
Heath J’s observation in Nylex (NZ) Ltd v Nylex Engineering Systems Ltd that the
1 Receivers were appointed on 4 December 2015 and administrators appointed on 5 January 2016 with the leave of this Court pursuant to ss 239F and 280 of the Companies Act 1993.
2 Companies Act 1993, s 239AT(2).
3 Companies Act 1993, s 239B.
power should be exercised in the light of the purpose of the voluntary administration regime and the duties imposed on administrators.4
[7] The objects of voluntary administration are identified at s 239A:
… to provide for the business, property and affairs of an insolvent company, or a company that may in the future become insolvent, to be administered in a way that –
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and shareholders than would result from an immediate liquidation of the company.
[8] Achieving these objectives requires the administrator to investigate the company’s affairs,5 report any suspected misconduct by directors, officers or shareholders,6 call the first creditors’ meeting, the watershed meeting and other creditors’ meetings as required.7
[9] In relation to the watershed meeting, the administrator must provide notice of that meeting to as many of the company’s creditors as reasonably practicable, advertise the meeting and ensure that notice of the watershed meeting is accompanied by his or her report about the company’s business, property, affairs and financial circumstances and any other matter material to the creditors’ decisions to be considered at the meeting with a statement setting out the administrator’s opinion, with reasons, about the matters to be decided at the meeting, namely whether it would be in the creditors’ interests for the company to execute a deed of company arrangement or for the administration to end or for the company to be placed in
liquidation.8 Self-evidently, the nature and extent of the work required to fulfil these
obligations will depend on the nature and complexity of the company that is the subject of the administration. The provision for extending the convening period for
the watershed meeting recognises this fact.
4 Nylex (New Zealand) Ltd v Nylex Engineering Systems Ltd HC Auckland CIV-2009-404-1217,
11 March 2009 at [13].
5 Section 239AE.
6 Section 239AI.
7 Section 239AJ.
8 Section 239AU.
[10] Voluntary administration can, however, operate adversely on creditors. There are barriers to the enforcement of charges over property during the administration of a company9 and to the taking of possession of property used or occupied by the company.10 The granting of an extension requires consideration of both aspects.
[11] The approach required to an application to extend the convening period has been articulated in previous cases in both Australia (where the regime is very similar) and New Zealand. In Re Diamond Press Australia Pty Ltd Barrett J described the approach as requiring:11
… an appropriate balance between, on the one hand, the expectation that administration will be a relatively speedy and summary matter and on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders.
[12] In Re Harrisons Pharmacy Pty Ltd (administrators appointed) Farrell J took that same approach:12
The approach to be taken by the Court in applications of this type is well settled. The power to extend the time for convening the second meeting is one that should not be exercised as of course: ABC Learning Centres Ltd, in the matter of ABC Learning Centres Ltd; application by Walker (No 5) [2008] FCA 1947 at [8] per Emmett J. The Court must strike an appropriate balance between the expectation that administration will be a relatively speedy and summary matter and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders: Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10].
[13] Heath J followed this approach in Nylex, as did Asher J in Postie Plus Group
Ltd v Bridgman & McCloy.13 I, too, consider it to be the right approach.
[14] The appropriateness of an extension is, self-evidently, a fact specific determination. However, factors likely to be relevant were identified in Re Riviera
Group Pty Ltd:14
9 Section 239ABC.
10 Section 239ABD.
11 Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10].
12 Re Harrisons Pharmacy Pty Ltd [2013] FCA458 (2013) at [11].
13 Postie Plus Group Ltd v Bridgman & McCloy [2014] NZHC 1337.
14 Re Riviera Group Pty Ltd [2009] NSWSC 585, (2009) 72 ACSR 352 at [13], followed in Re
WGL Retail Holdings Ltd [2011] NZCCLR 22 at [9].
(a) Size and scope of the business. (b) Substantial offshore activities.
(c) Large number of employees with complex entitlements. (d) Complex corporate structure and inter-company loans.
(e) Complex transactions entered into by the company (for example securities lending or derivative transactions).
(f) Lack of access to corporate financial records.
(g) The time needed to execute an orderly process of disposal of assets.
(h)The time needed for a thorough assessment of a proposal for a deed of company arrangement.
(i)Where the extension will allow the sale of the business as a going concern.
(j)More generally, where additional time is likely to enhance the return for unsecured creditors.
[15] Although the extension of the convening period is not granted as a matter of course, in some cases the scale and complexity of the issues confronting administrators are such that the question is not so much whether an extension should be granted but what the length of that extension should be.15 A review of recently decided cases suggests that six months (the period sought and granted in this case) is regarded as a significant period in this context. That period has been described as being “at the top of the range”16 and “a long time”.17 In Postie Plus, Asher J noted
that in previous cases extensions of the convening period had ranged over four-and-
15 Mr Blanchard, for Argosy, acknowledged that the present case was one where some extension was warranted, though he put the appropriate period at a matter of weeks rather than months.
16 Re WGL Retail Holdings Ltd, above n 13, at [26].
17 Re Harrisons Pharmacy Pty Ltd, above n 11, at [43].
a-half months,18 six months19 and 180 days20 before granting an extension of 61 days.21 In at least one case, however, a much longer extension of 18 months was granted.22
Reasons for extending the convening period
[16] The reasons for the applications appeared from affidavits filed by one of the Administrators, Kare Johnstone, and one of the Receivers, Ryan Eagles. The first was the size and complexity of DSE coupled with the issues arising from its place as part of the Dick Smith group.
[17] DSE is part of the Dick Smith group of companies. Its ultimate owner is Dick Smith Holdings Ltd (administrators appointed) (receivers and managers appointed) ACN166 237 841. The group is one of the largest electronic retailers in New Zealand and Australia. It had annual sales of approximately AU$1.3 billion in the financial year to 28 June 2015. The New Zealand operation is closely connected with that in Australia. Head office functions, finance, IT and ordering are all dealt with from the group’s head office in Sydney. Companies within the group, including DSE, have cross-guaranteed the group’s secured borrowings of AU$135m. In Australia the group employs over 3,200 staff (full-time, part-time and casual) in 393 stores. In New Zealand DSE employs approximately 500 staff in 62 stores and one distribution centre (this being owned by Argosy).
[18] These circumstances mean that the Administrators do not have sufficient time to obtain and analyse the information needed for a recommendation to creditors at the watershed meeting. At this stage the directors have not yet been able to provide a statement of company position in accordance with s 239AF and have requested an extension to 19 February 2016.
[19] The second reason is that the return to the creditors will be maximised if a sale of the group as a going concern can be achieved. But this will be a complex and
18 Re Nylex (New Zealand) Ltd v Nylex Engineering Systems Ltd, above n 4.
19 Re WGL Retail Holdings Ltd, above n 13.
20 Re Gourmet Food Holdings NZ Ltd [2012] NZHC 3606.
21 Postie Plus Group Ltd v Bridgman & McCloy, above n 12, at [22].
22 Re ABC Learning Centres Ltd [2008] FCA 1947.
time-consuming task. As well as trading under “Dick Smith” bannered stores, the Dick Smith group trades under “Move” bannered stores which stock brands not offered in Dick Smith branded stores, “Move by Dick Smith” which is an airport duty free business, and “David Jones Electronics Powered by Dick Smith”, under an exclusive retail brand management agreement with David Jones. The complex and varied nature of these businesses and the leases and supply contracts associated with them means that any sale process will be lengthy.
[20] The receivers have proposed a timetable for the sale process that would see final binding offers provided by 26 February 2016 and an anticipated settlement period of up to 90 days. This may take three months or so. If a sale can be achieved the Administrators would need time to analyse the implications of any proposed sale; a deed of company arrangement may be proposed, which would require time to be negotiated and considered before being put to creditors.
[21] Thirdly, the inter-connectedness between DSE and the Australian companies means that DSE’s administration will be more efficient if it can be co-ordinated with the administration of the Australian companies, including common periods for convening watershed meetings. An application to vary the convening period relating to the Australia companies was made on the same day as the application before this Court was heard.
[22] Fourthly, the moratorium that arises under voluntary administration will assist DSE’s business to continue trading, putting it in the best possible position for sale as a going concern, and the fact that the receivers are presently required to continue meeting lease obligations23 means that there is little prejudice to creditors as a result of an extension being granted.
[23] In these circumstances, it is not possible for the Administrators to provide any meaningful recommendation or proposal to creditors as required by s 239AU(3). Extension of the convening period was inevitable on that basis. The fact that sale of the group’s business is likely to produce the best outcome for creditors and will take
several months means that the extension of six months was appropriate.
23 Re DSE (NZ) Ltd [2016] NZHC 10.
[24] I reached this view notwithstanding Argosy’s objection that where receivers are in control of a company’s assets and are moving to sell the business it is wrong in principle to grant an extension of the convening period because that would effectively confer the benefit of the moratorium on the receivers who would not otherwise be entitled to such a benefit under the Receiverships Act 1993. Mr Blanchard, for Argosy, accepted that without a report from the directors, the Administrators were not in a position to convene a watershed meeting yet so that, at the least, an extension of 3 – 4 weeks would be needed. However, he resisted any further extension and urged that the Administrators should proceed expeditiously to a watershed meeting at which creditors can make a determination as to whether the voluntary administration should come to an end or the company should be liquidated.
[25] Mr Blanchard acknowledged that the issue he was raising had not been considered in any of the Australian or New Zealand cases in which companies had both receivers and administrators appointed but pointed out that the earlier cases involved unopposed applications and submitted that it was a serious point of principle that ought to be fully argued. I was concerned that if, ultimately, the point was decided against Argosy the Administrators and creditors could be significantly disadvantaged by a refusal to grant an extension that was otherwise justified. Although the point appears not to have been argued, the courts in all of the recent cases have, nevertheless, regarded an extension of the convening period as available where both receivers and administrators had been appointed. Further, there was no apparent prejudice to Argosy since the receivers are still liable to meet lease payments and, as Mr Gollin for the Administrators pointed out, any creditor
particularly affected could seek relief under s 239ABD24 or apply to set aside or vary
the orders made.
P Courtney J
24 Another landlord creditor has availed itself of this course and reached an agreement with the
Adminstrators allowing it take steps that would otherwise be precluded by the moratorium.
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