FEDERAL COURT OF AUSTRALIA

In the matter of Daisytek Australia Pty Ltd (Administrators Appointed)

[2003] FCA 768

CORPORATIONS – extension of time to register charge pursuant to s 266(4) – where charge void against administrators appointed pursuant to Pt 5.3A – where liquidation or deed of company arrangement is inevitable – whether discretion to extend time should be exercised

Corporations Act 2001 (Cth) Pt 2K.2 subss 266(1), 266(4), Pt 5.3A

Commercial Banking Co of Sydney Ltd v George Hudson Pty Ltd (in liq) (1973) 131 CLR 605 cited

In re Ashpurton Estates [1983] 1 Ch 110 cited

In re Barrow Borough Transport Ltd [1990] 1 Ch 227 referred to

National Australia Bank Ltd v Davis & Waddell (Vic) Pty Ltd 44 ACSR 296 cited

Re Application of Guardian Securities Ltd [1984] 1 NSWLR 95 cited

Vector Capital Ltd v SNS Software Network Systems Pty Ltd (1988) 12 NSWLR 1 cited

Australian Corporation Law Principles and Practice, Butterworths, 5.3A.0020

Gough, Company Charges, 2^nd ed, Butterworths, Sydney, 1996

IN THE MATTER OF DAISYTEK AUSTRALIA PTY LIMITED (ACN 075 675 795) (ADMINISTRATORS APPOINTED)

N 3026 OF 2003

GYLES J

SYDNEY

24 JULY 2003

IN THE MATTER OF DAISYTEK AUSTRALIA PTY LIMITED (ACN 075 675 795) (ADMINISTRATORS APPOINTED)

REASONS FOR JUDGMENT

1                     On 13 June 2003 I made orders on the application of GE Capital Finance Pty Limited (“GE”) extending the period for lodging notice of a registrable charge in relation to Daisytek Australia Pty Limited (Administrators Appointed) (“Daisytek”) on certain terms and conditions pursuant to s 266(4) of the Corporations Act 2001 (Cth) (“the Act”).  So far as the researches of counsel go, this is the first occasion upon which the application of that section has arisen in relation to the appointment of an administrator pursuant to Pt 5.3A of the Act.    I gave short reasons, and indicated that I would give somewhat fuller reasons in due course.  These are those reasons.

2                     A short chronology of events is as follows:

29 October 2002         Blocked account agreement between GE, Daisytek and Australian & New Zealand Banking Group Limited.

21 November 2002     Subordination deed between GE, Daisytek, Daisytek Australia (Queensland) Pty Limited (“Daisytek Queensland”), and Daisytek Incorporated of Texas in the United States of America (“Daisytek Inc”).

On or about 22Facility agreement between GE, Daisytek (as borrower) and Daisytek November 2002Queensland (as guarantor).

22 November 2002     Fixed and floating charge by each of Daisytek and Daisytek Queensland in favour of GE.

12 December 2002      Notification of Daisytek Queensland charge lodged.

6 January 2003            Effective last day for lodging notification of Daisytek charge.

4 March 2003              GE’s then solicitors realise that notification not lodged.

10 March 2003            Solicitors received executed notification.

14 March 2003            Notification of Daisytek charge lodged.

20 March 2003            GE notifies Daisytek of default under facility agreement.

16 May 2003               Directors of Daisytek resolve, pursuant to s 436A of the Act, that “the Company is insolvent, or is likely to become insolvent at some future time” and appoint administrators pursuant to Pt 5.3A of the Act.

19 May 2003               Daisytek International, a US corporation associated with Daisytek Inc, confirms to directors of Daisytek that there will be no request from Daisytek International, subsidiaries or associated companies for any repayment of inter-company accounts and that it is the group’s intention to capitalise all inter-company accounts effective 31 March 2003.

22 May 2003               Proceeding commenced.

23 May 2003               First meeting of creditors of Daisytek pursuant to s 436E of the Act.

16 June 2003               Date for second meeting of creditors of Daisytek pursuant to s 439A of the Act – extended to 4 July 2003.

3                     In order to understand how the contention in the matter arises, it is necessary to explain briefly the business and financial circumstances of Daisytek.  I will not endeavour to summarise all of the relevant evidence.  Indeed, of necessity, there is much estimation involved in it.  I shall state conclusions which are sufficient for present purposes.

4                     Daisytek carried on a substantial business of selling computer equipment supplies.  In November 2002 sales turnover was in excess of $10 million.  The GE facility was to provide working capital to finance the business.  The balance sheet of Daisytek in November 2002 showed little in the way of tangible assets apart from stock on hand, and little in the way of capital.  Apart from the GE loan (which stood at a little over $15 million), the other source of working capital was an inter-company liability of nearly $15 million.  The only effective security available was trade receivables and stock on hand.  The latter was complicated by reason of retention of title clauses in favour of vendors.  The GE security documents and the procedures for making advances were structured with the nature of the business of Daisytek in mind, and involved monitoring of the progress of that business.

5                     Sales turnover was over $12 million in December 2002, over $15 million in January 2003, over $10 million in February 2003, and over $11 million in March 2003.  The business was running at a revenue loss throughout the period.

6                     The GE loan balance commenced at $15,300,000.  It is claimed that by the end of November 2002 it was $20,158,307, at the end of December it was $20,849,151, at the end of January 2003 it was $24,274,656, at the end of February 2003 it was $25,593,162, at the end of March 2003 it was $17,722,206, at the end of April 2003 it was $14,810,241 and at         15 May 2003 it was $15,408,941.  At or about that date, the inter-company indebtedness was claimed to be $13,100,000 and trade creditors were claimed to be about $10,900,000.  It was estimated that priority debts for costs and employee entitlements were $5,400,000.  The administrators estimate that the GE claim had been reduced to $12,500,000 after collections from customers (if the security is good), and that the total likely to be received from realisation of assets is $13,400,000, assuming the validity of retention of title claims to stock.

7                     Factors which complicate the situation are the arrangement for capitalisation of inter-company debt and the effect of the subordination deed between (inter alia) GE and Daisytek Inc as to the subrogation of GE in relation to that debt.  It is submitted that the subordination deed is not affected by the failure to notify the charge.  I cannot determine those issues in this proceeding and, in any event, the resolution of them will depend upon commercial as well as legal considerations.

8                     Daisytek continued to partially trade after appointment of the administrators.  The administrators considered that this was likely to improve the chances of selling the business on a going concern basis, and would also assist in collecting accounts receivable.  On 4 June 2003 Lindgren J granted an extension for the convening of the second creditors’ meeting to   4 July 2003.  It was desirable that the result of this application be known well before then.  In view of this, the matter was accorded expedition and I made orders without full reasons.

9                     A letter was sent by the administrators to all creditors and shareholders known to them, which outlined the short facts, explained the nature of the application to the Court and advised details of this proceeding, inviting either direct appearance or the lodging of submissions with the administrators.  The same information was given at the first meeting of creditors.  Various parties indicated an interest in the matter in one way or another.  In the end, the only party which appeared to contest the orders was Hewlett Packard Australia Pty Limited (“Hewlett Packard”), which had been the major supplier of equipment to Daisytek.  It was submitted on behalf of GE that Hewlett Packard claimed retention of title in relation to the stock representing the amounts claimed to be owed to it, and also that there was no proper proof that the correct contracting Hewlett Packard entity was before the Court.  I was satisfied that Hewlett Packard was an appropriate contradictor and, although not strictly representative of other creditors, could satisfactorily present the arguments which needed to be considered.  The administrators, on behalf of Daisytek, were also represented.  In the result, I was satisfied that there was adequate evidence and argument to enable the issues to be properly determined, and that there had been a proper opportunity for creditors to put their points of view.

10                  Section 266 of the Act (so far as is relevant) is as follows:

 ‘(1)     Where:

            (a)       an order is made, or a resolution is passed, for the winding up of a company;  or

            (b)       an administrator of a company is appointed under section 436A, 436B or 436C;  or

            (ba)     a company executes a deed of company arrangement;

a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company, or the deed’s administrator, as the case may be, unless:

            (c)        a notice in respect of the charge was lodged under section 263 or 264, as the case requires:

                        (i)         within the relevant period; or

                                    (ii)        at least 6 months before the critical day;

…

(4)       The Court, if it is satisfied that the failure to lodge a notice in respect of a charge, or in respect of a variation in the terms of a charge, as required by any provision of this Part:

         (a)          was accidental or due to inadvertence or some other sufficient cause;  or

         (b)          is not of a nature to prejudice the position of creditors or shareholders;

or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order.’

The GE charge was void as against the administrators from 16 May 2003, the date of their appointment. 

11                  I was satisfied that the failure to lodge the notice in respect of the charge was both accidental and due to inadvertence within the meaning of s 266(4)(a).  I do not need to set out  the detailed facts which lead to that conclusion.  The issue which required close consideration was whether the discretion this triggered should be exercised and, if so, on what terms and conditions (if any).

12                  Chapter 5 of the Act deals with External Administration, including the following Parts:

Part 5.1            Arrangements and reconstructions

Part 5.2            Receivers, and other controllers, of property of corporations

Part 5.3A         Administration of a company’s affairs with a view to executing a deed of company arrangement

Part 5.4            Winding up in insolvency

Part 5.4A         Winding up by the Court on other grounds

Part 5.4B         Winding up in insolvency or by the Court.

13                  Part 5.3A was introduced in July 1993, in response to the Report of Law Reform Commission of Australia on the General Insolvency Inquiry (ALRC 45), known as the Harmer Report.  The intention was to introduce a procedure which integrated some of the features of voluntary winding up and of schemes of arrangement and which would take over from official management.  The provisions have similarities with, although are by no means identical to, insolvency regimes in other jurisdictions, most particularly the administration order regime which has been available in England and Wales since 1986 (Australian Corporation Law Principles and Practice, Butterworths, ¶ 5.3A.0020).

14                  Relevant provisions of Pt 5.3A include the following:

 ‘435A  Object of Part

The object of this Part is to provide for the business, property and affairs of an insolvent company 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 members than would result from an immediate winding up of the company.

…

435C  When administration begins and ends

(1)       The administration of a company:

            (a)       begins when an administrator of the company is appointed under section 436A, 436B or 436C; and

            (b)       ends on the happening of whichever event of a kind referred to in subsection (2) or (3) happens first after the administration begins.

(2)       The normal outcome of the administration of a company is that:

            (a)       a deed of company arrangement is executed by both the company and the deed’s administrator; or

            (b)       the company’s creditors resolve under paragraph 439C(b) that the administration should end; or

            (c)        the company’s creditors resolve under paragraph 439C(c) that the company be wound up.

…

436A  Company may appoint administrator if board thinks it is or will become insolvent

(1)       A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:

            (a)       in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

            (b)        an administrator of the company should be appointed.

…

437A  Role of administrator

(1)       While a company is under administration, the administrator:

            (a)       has control of the company’s business, property and affairs; and

            (b)       may carry on that business and manage that property and those affairs; and

            (c)        may terminate or dispose of all or part of that business, and may dispose of any of that property; and

            (d)       may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

(2)       Nothing in subsection (1) limits the generality of anything else in it.

437B  Administrator acts as company’s agent

When performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company’s agent.

…

438A  Administrator to investigate affairs and consider possible courses of action

As soon as practicable after the administration of a company begins, the administrator must:

            (a)       investigate the company’s business, property, affairs and financial circumstances; and

            (b)        form an opinion about each of the following matters:

                       (i)        whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement;

                       (ii)       whether it would be in the creditors’ interests for the administration to end;

                       (iii)      whether it would be in the creditors’ interests for the company to be wound up.

…

439A  Administrator to convene meeting and inform creditors

(1)       The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6).

…

(4)       The notice given to a creditor under paragraph (3)(a) must be accompanied by a copy of:

            (a)       a report by the administrator about the company’s business, property, affairs and financial circumstances; and

            (b)       a statement setting out the administrator’s opinion about each of the following matters:

                       (i)        whether it would be in the creditors’ interests for the company to execute a deed of company arrangement;

                       (ii)       whether it would be in the creditors’ interests for the administration to end;

                       (iii)      whether it would be in the creditors’ interests for the company to be wound up;

                        and his or her reasons for those opinions; and

            (c)        if a deed of company arrangement is proposed—a statement setting out details of the proposed deed.

…

439C  What creditors may decide

At a meeting convened under section 439A, the creditors may resolve:

            (a)       that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or

            (b)        that the administration should end; or

            (c)        that the company be wound up.

440A  Winding up company

(1)       A company under administration cannot be wound up voluntarily, except as provided by section 446A.

(2)       The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up.

(3)       The Court is not to appoint a provisional liquidator of a company if the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than have a provisional liquidator appointed.

440B  Charge unenforceable

During the administration of a company, a person cannot enforce a charge on property of the company, except:

            (a)        with the administrator’s written consent; or

            (b)        with the leave of the Court.

…

440D  Stay of proceedings

(1)       During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:

            (a)        with the administrator’s written consent; or

            (b)       with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

(2)       Subsection (1) does not apply to:

            (a)        a criminal proceeding; or

            (b)        a prescribed proceeding.’

Division 7 of Pt 5.3A deals in some detail with the rights of chargee, owner or lessor.  Division 8 deals with the powers of the administrator.  Division 9 deals with the administrator’s liability and indemnity for debts of the administration.  Division 10 deals with the execution and effect of a deed of company arrangement.  Division 11 deals with the variation, termination and avoidance of a deed of company arrangement.  Division 12 deals with the transition to creditors’ voluntary winding up.  Division 13 deals with certain miscellaneous powers of the Court.  Division 14 deals with qualifications of administrators.  Division 15 deals with the removal, replacement and remuneration of administrators.  Division 16 deals with notices about steps to be taken under the Part.  Division 17 contains miscellaneous provisions.

15                  The deed of company arrangement which is referred to in s 266(1)(ba) is a deed pursuant to Pt 5.3A rather than a scheme of arrangement pursuant to Pt 5.1. 

16                  In my opinion, the financial position of Daisytek was such that, for all practical purposes, the chances of the company returning to the control of its directors without liquidation or entry into a deed of company arrangement can be discounted.  The consequence is that the avoidance of the charge against the administrators is likely to be continued as against a liquidator or the administrator of a deed unless the extension of time is granted.  The intention of the legislature expressed in s 266(1) is that void securities should not disturb insolvent administration, whether by way of liquidation or deed of company arrangement, company administration being a precursor to each.  This reflects what was described by Menzies J (a master of company law) as:

‘… a deeply rooted principle of company law that, when liquidation has commenced, one creditor should not be assisted by the Court to improve its position vis-à-vis other creditors.’

(Commercial Banking Co of Sydney Ltd v George Hudson Pty Ltd (in liquidation) (1973)  131 CLR 605 at 613).  Section 266 has a long pedigree, both in Australia and in the United Kingdom, although not, of course, in relation to the new form of company administration, although it did apply in relation to its predecessor, official management. 

17                  It is to be observed that s 266(4) applies as soon as default has occurred, regardless as to whether administration or winding up has intervened, and whether or not the company is insolvent.  Indeed, in the usual case, the company will be solvent, or, at least, insolvency will not be apparent.  However, the effect of the default only bites if and when an administrator, a liquidator or a deed administrator is appointed, and notice was not lodged at least six months before the date of appointment.  That is similar in principle to the Companies Code, which replaced the Companies Act 1961 (NSW), under which, by way of contrast, a failure to register a charge within the prescribed time rendered the charge void not only against the liquidator, whenever a winding up may have been commenced, but also against “any creditor of the company”.  The effect of the change was examined by McLelland J in Re Application of Guardian Securities Ltd [1984] 1 NSWLR 95.  I cannot improve upon his Honour’s clear exposition of the history of, and practice in relation to, the relevant provisions.  His Honour summed up the position as follows (at 97-99):

 ‘The courts took the view that it was existing rather than potential or future unsecured creditors who had a legitimate claim to consideration including, in particular, those who may have dealt with the company during the period when the charge should have been on the Register and thus publicly known, but was not.  The practice arose of requiring full evidence to be given, on an application for extension of time, as to the financial position of the company at the time the application was made, including evidence as to the existence of any outstanding judgments or pending winding up proceedings, so as to enable the court to determine whether there was any real prospect of an order for extension operating to the prejudice of existing unsecured creditors (see the cases already cited).  If the evidence established a degree of solvency sufficient to remove any such prospect then, as a matter of practice, it was not considered necessary to take any other steps to protect the interests of unsecured creditors:  see eg Re Dalgety & Co.  If insufficient or no evidence of solvency was adduced then either:  (1) one or more unsecured creditors might be joined as representative parties:  see eg Re Dudley Engineering Pty Ltd;  (2) directions might be given as to notification of unsecured creditors of the application with a view to their being heard in opposition to it, if they so desired:  see generally Re Flinders Trading Co Pty Ltd;  or (3) the extension of time might be granted reserving, however, a right to the company or any unsecured creditor or any person representing the interests of unsecured creditors to apply at a later stage to discharge or vary the order:  see eg Re  A Limited Company;  Re Cinema Art Films and Re LH Charles & Co Ltd …

There is no reason why the practice established under the Companies Act 1961, and equivalent legislation, requiring satisfactory evidence of solvency or, in the absence of such evidence, adopting some procedure to protect the interests of unsecured creditors, should not be continued in relation to applications under the Code.

… The solvency or insolvency of the company is a relevant but not a governing consideration as Street J said in Re Dudley Engineering Pty Ltd (at 331).  His Honour went on to say:

            “It represents but one of the overall complex of facts upon which the court must exercise its discretion in deciding whether or not an order should be made and, if so, upon what terms and conditions.”

I have come to the conclusion that in the present case the convenient course is to make an order for extension of time in relation to each charge but subject to a reservation to the effect that the company or any liquidator or official manager or unsecured creditor of the company is to be at liberty to apply to discharge or vary the order in the event of the appointment of a liquidator in any winding up which commences or the appointment of an official manager of the company, in either case within six months of the date of lodgment of notice of the respective charges under s 201:  cf Atkins – Court Forms, vol 9 (1982 Issue) Precedent 170.’

18                  There was a firm practice in Australia and the United Kingdom that the extension would be refused once winding up commenced, based upon the crystallisation of the rights of unsecured creditors which that involved, reflecting the policy referred to by Menzies J.  This has continued to be the position in the United Kingdom as shown by the authorities reviewed by Lord Brightman on behalf of the Court of Appeal in In re Ashpurton Estates [1983]          1 Ch 110, although it was said to be a matter of discretion and not of law (at 124) (cf Gough, Company Charges, 2^nd ed at 774-776).

19                  Counsel for GE submits that the decision of Needham J in Vector Capital Ltd v SNS Software Network Systems Pty Ltd (1988) 12 NSWLR 1 correctly outlines the principles which should guide the exercise of my discretion in this case.  Needham J examined the authorities with some care and, in particular, took into account the differences between the Code and the previous regime.  In his opinion, the fact of winding up was relevant to the exercise of the discretion, but did not require that the discretion be exercised in one way (at 8A).  There are also undoubted similarities between the facts of that case and the facts of this case, and his Honour extended time without imposing conditions, although a winding up order had been made. 

20                  I have been taken to a number of subsequent cases in various Australian jurisdictions which have considered the issue.  Counsel for GE stressed some of them and counsel for Hewlett Packard stressed others of them.  There are discernable differences of approach between various of the judgments.  Generally speaking, it is accepted that once winding up intervenes the secured creditor is required to show exceptional circumstances before time will be extended.  That view was said by Hansen J to be consistent with the balance of the authorities in his recent comprehensive review of them (National Australia Bank Ltd v Davis & Waddell (Vic) Pty Ltd 44 ACSR 296 at [77]).  That review identifies the relevant authorities.  It is not for a single judge to endeavour to rationalise them all.  It is fair to say that the actual decision in that case (and in some others relied upon by counsel for GE) indicates a more benign view of what might constitute “exceptional circumstances” than has been taken by some other judges.

21                  In exercising the discretion once liquidation ensues, I would have no difficulty in requiring the secured creditor to make a positive case for extension.  The provisions for notification of a security are for the protection of the public which deals with companies.  Failure to comply carries the risk of avoidance of the security, and this risk is not to be rendered illusory by the mere presence of s 266(4), as some of the submissions for the applicant tended to suggest.  As counsel for Hewlett Packard correctly put, the starting point is that the security is void.  In my opinion, the approach should be the same where there is the intervention of administration.  As I have said, for all practical purposes, some form of insolvency administration will follow this administration, and it is clear from s 266(1) that the security is avoided equally against the scheme administrator as it is against a liquidator.  Although care needs to be taken in considering United Kingdom authorities because of the different statutory regimes and the rather more inflexible approach prevailing there on winding up, there is enough similarity to make persuasive the analysis by Millett J in            In re Barrow Borough Transport Ltd [1990] 1 Ch 227, particularly at 235.

22                  Counsel for GE referred to a number of considerations which indicated that, apart from the default itself, there were no circumstances pointing to fault on the part of GE, or to any prejudice to creditors beyond that occasioned by the default itself.  That is substantially correct.  In particular, the security relates to current advances which, apart from the revenue losses which were being incurred, should have been reflected in current assets such as stock on hand or receivables.  Nonetheless, the fact is that Daisytek was trading at considerable velocity without this charge being notified when it should have been.  It was argued for GE that no creditor has come forward and claimed actual prejudice through searching the Register, and also that most (if not all) of the ultimate unsecured creditors dealt with, or continued to deal with, Daisytek after notification was made.  Whilst the interests of those who deal with a company during the period that the charge should have been notified but was not is a legitimate focus of attention, counsel for Hewlett Packard correctly submits that the grant of an extension of time affects the interests of unsecured creditors generally and that it is not possible, on an application of this kind, to require close proof of actual prejudice.

23                  Counsel for GE contended that, given the effect of the subordination deed, the extension of time would work little practical detriment to unsecured creditors.  There was some support for this in various scenarios painted by the administrators.  I agreed with the criticisms by counsel for Hewlett Packard of that conclusion, which depended upon the future resolution of issues of fact and law, and the ultimate result of the realisation of assets and the assessment of liabilities, which did not enable any precise prediction to be made.

24                  When I indicated to counsel for GE that I was concerned that no condition had been offered which might alleviate the potential prejudice caused to unsecured creditors by an extension of time, conditions were proposed.  These were the subject of consideration by both the administrators and Hewlett Packard, as a result of which some revision occurred.  The revised conditions adequately appear from the orders which were made.  Counsel for Hewlett Packard contended that the conditions offered were of little comfort to the body of unsecured creditors as the effect of them was quite uncertain, and continued to oppose the order.  The explanations given by counsel, which are recorded in the papers, are all very well as far as they go.  I accept that the ultimate impact of the conditions is not easy to determine because of the many uncertainties inherent in the realisation of assets and crystallisation of liabilities.  I was satisfied, however, that the offer was a reasonable endeavour to alleviate prejudice to unsecured creditors of Daisytek, and that the stage at which the decision was to be made did not allow for certainty or anything like it.  I thus granted the extension of time.

25                  Preparation of these reasons has revealed some questions as to the proper identification of documents referred to in the orders which will need to be answered. 

Associate:

Dated:              24 July 2003