FEDERAL COURT OF AUSTRALIA

Allied Express Transport Pty Limited v Exalt Group Pty Ltd (Administrator Appointed), in the matter of Exalt Group Pty Ltd (Administrator Appointed) (No 2) [2013] FCA 477

IN THE MATTER OF EXALT GROUP PTY LTD (ADMINISTRATOR APPOINTED)

THE COURT ORDERS THAT:

1.    Exalt Group Pty Ltd ACN 123 551 057 (the Company) be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth).

2.    Adam Farnsworth of Level 2, 32 Martin Place Sydney, be appointed as liquidator of the Company.

3.    The costs of Allied Overnight Express Pty Ltd in respect of its application for the winding up order (including the costs of its application for substitution and of the adjournment applications) be reimbursed out of the assets of the Company in accordance with ss 466(2) and 556(1)(b) of the Corporations Act 2001 (Cth).

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).

IN THE MATTER OF EXALT GROUP PTY LTD (ADMINISTRATOR APPOINTED)

REASONS FOR JUDGMENT

1    On 16 May 2013 I ordered that the winding up application brought by the plaintiffs (Allied) against the defendant (Exalt) be adjourned until later that day in order to permit creditors to vote on a proposed Deed of Company Arrangement (DOCA) at a meeting which was due to commence very shortly after the time at which I delivered my reasons for judgment. I made that order under s 440A(2) of the Corporations Act 2001 (Cth) (the Act) because I was satisfied that it was in the interests of Exalt’s creditors to continue the administration pending consideration of the DOCA.

2    The state of satisfaction which I reached was not a particularly strong one. Although I considered that I should grant the adjournment, I expressed a number of concerns and reservations which I considered should be brought to the attention of creditors.

3    When the matter came back before me during the afternoon of 16 May, I was informed that the meeting was still in progress and that there was “robust debate” about the concerns I had expressed in my judgment. I therefore stood the matter over until Monday 20 May 2013.

4    Mr Golledge who appears for Exalt now applies for a further adjournment under s 440A(2) upon the basis that the creditors voted by a majority, both in number and value, in favour of the resolution that Exalt enter into the DOCA.

5    The vote took place by a poll. The results of the poll were that 43 creditors in number with a value of $680,551.98 voted in favour of the resolution while 15 creditors in number with a value of $633,363.58 voted against it.

6    As I said in my previous judgment, it is well recognised that creditors are usually better judges of what is in their interests than the Court. Nevertheless, Mr Feller SC submits that I should find that the pre-condition required by s 440A(2) has not been satisfied.

7    Mr Feller relies upon a number of matters which I addressed in my earlier judgment and on an analysis of the votes at the meeting. He submits that on a proper analysis of the votes, in particular by “peeling away” the votes of related or interested parties, a majority in value opposed the resolution.

8    Mr Golledge accepts that the present application under s 440A(2) is a fresh application to that which I determined last week. He submits, in my view correctly, that the application is not one that falls to be considered under s 600A, but even if it does, the issue is largely the same as the issue which is raised under s 440A(2).

9    Section 600A confers power on the Court to make an order setting aside a resolution that a DOCA be executed if the votes of related creditors are disregarded, without which the resolution would not have been passed and the Court is satisfied that the resolution is contrary to the interests of creditors as a whole.

10    Mr Golledge submits that the regime to be adopted under the DOCA is in the interests of creditors and that it is therefore in their interests for the administration to continue. I will address below each of the issues debated before me on the application.

The concerns expressed in my earlier judgment

11    The short answer to the concerns which I have expressed is that I am satisfied that they were disclosed at the meeting. It is true, as Mr Feller submits, that what was said at the meeting is not proof of the facts that were asserted. However, there is nothing to suggest that the creditors were misled.

The votes

12    Mr Feller submitted that, notwithstanding the apparent majority in number and value, the votes of three classes of creditors should be disregarded, or at least given less weight.

13    The first class is the votes of employees who are priority creditors. The impact of their votes is reflected most notably in the number of creditors in favour of the DOCA. Mr Feller submits that the employees voted in favour of the scheme in order to secure their employment with the DOCA entity, Logistics Partners Pty Ltd (Logistics) and that their votes should therefore be given less weight in considering what is in the interests of Exalt’s creditors.

14    The second class of creditors consists of the votes of related parties. They are parties who have a familial relationship with Mr Dobson who is the principal of Exalt. The parties are described on page 16 of Mr Vardy’s report. Their debts total $186,275.

15    If the votes of those parties are excluded, the value of the creditors voting in favour of the DOCA is $494,276.98. The value voting against remains the same as above, namely, slightly in excess of $633,000. Thus if the related parties’ votes are disregarded, a majority in value voted against the DOCA.

16    The third class of creditors consists of one party, Logistics, which claims to be a creditor by way of subrogation to the claims of Australia Post and a number of other smaller creditors, all of whom were paid out by Logistics in advance of the meeting.

17    Logistics claimed to have paid out creditors in an amount of slightly in excess of $200,000 but it was admitted to vote as a creditor at the meeting for an amount of $105,000. If its votes are disregarded, the value of the votes in favour of the DOCA is reduced to approximately $390,000.

18    Thus, those voting against the DOCA would consist of approximately 60% in value of the total of creditors.

Whether the votes of employees should be disregarded

19    I do not think I should disregard the votes of employees. It is true that they are not commercial creditors who have supplied goods to Exalt. It is also true that they have an interest which is different from commercial creditors, namely their interest in remaining in employment.

20    It may be that the employees will receive 100 cents in the dollar in liquidation because any shortfall in their entitlements will be met from the GEARS scheme.

21    Nevertheless, it seems to me that I should give some weight to the votes of the employees which should be weighed in the balance with other considerations in determining whether it is in the interests of creditors to continue the administration.

Whether the votes of related parties should be disregarded

22    Mr Feller did not challenge the decision to admit the proofs of debit of the related parties to vote at the meeting. However, the effect of his submission is that in determining what is in the interests of creditors, the votes of related parties should not be taken into account.

23    Mr Golledge submits that, in any company, creditors are not a homogeneous group. Rather, they will almost always comprise a body of persons with a range of views and considerations, whereas the Act looks only at what constitutes an overall majority.

24    Whether or not that is so, I am entitled in determining the question of what is in the interests of creditors to take into account the familial relationship of the second group with Mr Dobson. This is because it seems to me that the question of whether it is in the interests of creditors to continue the administration is one for the Court and is one which takes into account commercial considerations.

25    Of course, the Court ordinarily acts on the view that the creditors are better judges of what is in the interests of the company than the Court. But that maxim assumes that the creditors have considered the matter in the light of all the commercial considerations that are to be weighed in the balance.

26    Here, Mr Golledge submitted that the related parties must be presumed to be interested in recovering their debts but he conceded that they may also have been influenced by personal considerations, in particular, the desire to enable Mr Dobson to have a second chance in business, notwithstanding the failure of his existing enterprise.

27    Having regard to the minimal return to creditors that is anticipated under the DOCA, it seems to me that the votes of the related parties must have been largely influenced by considerations other than commercial ones. I therefore propose to disregard their votes. This has the effect of altering the percentages to approximately 44% in value in favour of the DOCA and 56% against.

Whether to disregard the votes of Logistics

28    Three issues arise in relation to the votes of Logistics. The first is whether it was properly admitted to vote as a creditor whose claim was subrogated to that of the creditors which it had paid. The second is whether Logistics paid out the debts due to Australia Post or others for the purpose of improperly influencing the vote at the meeting.

29    The third issue is whether, even if I determine both of the other issues favourably to Exact, I should have regard to the votes of Logistics in considering whether it is in the interests of creditors to continue the administration.

30    Logistics was not a surety for the debts. However, Mr Golledge referred me to a decision of Young J in Re Trivan Pty Ltd (unreported, Sup Ct, NSW, Young J, 30 August 1996) in support of the proposition that Logistics was entitled to be subrogated to the debts.

31    In that case, Young J said that the equitable doctrine of subrogation is not restricted to closed categories. His Honour referred to an American text which states that a right of subrogation will arise, inter alia, where the party making the payment “has some interest to protect”. His Honour said that this statement was intended to distinguish between cases where a person has a valid commercial reason for acting in a way that discharges the debt of another and the situation where the person making the payment is a volunteer. His Honour recognised that the exact line may be difficult to draw.

32    I do not need to consider whether this principle is correct or whether it applies in the present case. It seems to me that the commercial reasons why Logistics paid the debts are inextricably bound up with its desire to keep Exalt on foot and in particular to enable it to propound the DOCA.

33    I do not consider that the evidence demonstrates that Logistics entered into an “underhand bargain” to buy up the debts. The position here is quite different from that which occurred in Grocon Constructors Pty Ltd v Kimberley Securities Ltd (2009) 72 ACSR 305 at [57], [69]-[76].

34    Ultimately, it is the third issue which is of importance in the present application. In my opinion, even if Logistics was properly admitted to vote, and even if it did not act improperly, it cannot be considered to be a disinterested creditor whose views I should take into account.

35    It follows that, in my opinion, the value of votes in favour of the DOCA should be correspondingly reduced with the effective result that more than 60% in value of creditors voted against the DOCA.

Whether it is in the interests of Exalt’s creditors for the company to continue in administration

36    The ultimate question before me is the same as that to which I referred in my earlier judgment and the same principles apply. An adjournment under s 440A(2) requires the Court to be satisfied that there is a “sufficient possibility, as distinct from mere optimistic speculation, that creditors’ interests will be accommodated to a greater degree in an administration than in a winding up”: Weriton Finance Pty Ltd v PNR Pty Ltd (2012) 92 ACSR 88 at [16] and the authorities cited there.

37    It seems to me that it is not in the interests of the creditors to continue the administration. There are a number of reasons for this.

38    As Mr Golledge submitted, the exercise involves an element of speculation as to what the evidence demonstrates in relation to two insolvent regimes, that it to say administration versus liquidation.

39    It is true that there are uncertainties as to the collection which will occur if Exalt is placed into liquidation. There is no suggestion that a liquidator would have funding to seek to recover debts and pursue preference claims or claims against the directors. It is also true that the customer base, which forms a principal asset of Exalt, is likely to be lost. It may well be that there will be nothing to sell other than plant and equipment.

40    However, against this the return to creditors under the proposed DOCA is miniscule. Even if the business may be turned around, what is envisaged is a return of 2 cents at a minimum and 12 cents maximum, payable in three years’ time with the priority creditors being paid in full.

41    Other than the employees, the return which is anticipated is extraordinarily low. As Barrett J said in Grocon at [84] creditors usually take a pessimistic view. On that view, the return is marginally better than zero. Even on an optimistic view, it is a highly conditional outcome and is not payable until the expiry of the DOCA in three years. Having regard to the true value of money, it is worth very little.

42    The words of Barrett J in Grocon at [84] are apt:

… No one with an eye to their own financial interests would regard such a return as worth pursuing with any greater vigour than one might expect in picking up a coin found lying on the pavement.

43    I have taken into account what I consider to be a proper analysis of the votes at the meeting. It is true that creditors of a substantial value (though, less than a majority of arm’s length creditors) voted in favour of the DOCA, as did the employees.

44    However, in the absence of a DOCA which the Court regards as one that provides a real commercial benefit to creditors rather than to place the company in liquidation, I do not see how it can be said that the DOCA is in the interests of creditors. In my opinion, it is nothing more than an optimistic speculation, rather than a sufficient possibility that the creditors will obtain anything from the DOCA.

45    The Court is not a rubber stamp to make an order which in effect approves an uncommercial DOCA. It is proper and appropriate that an insolvent company be wound up unless, in the present circumstances, a commercial DOCA which provides real benefits to creditors is proposed: see the authorities cited by Barrett J in Grocon at [109].

46    Mr Golledge referred me to a decision of Windeyer J in Andrew Learmont and Tracey Learmont v Love Childcare Pty Ltd [2012] NSWSC 1322. His Honour said that “three cents as against no cents” seemed to be a benefit to creditors. But there, the cash was payable over 12 months and was guaranteed by the directors. I do not find the case to be of assistance in the present application.

Orders

47    I will refuse the adjournment sought under s 440A and order that Exalt be wound up. The parties should bring in short minutes of order.

Associate:

Dated:    23 May 2013