FEDERAL COURT OF AUSTRALIA

Sims, in the matter of Huon Corporation Pty Limited (Administrators Appointed) [2006] FCA 1201

CORPORATIONS – whether voluntary administrators incurred debt for services rendered – as did not s 447A order made to assist continuation of business

Corporations Act 2001 (Cth), ss 443A, 443D, 443E, 443F, 447A

Hawkins v Bank of China (1992) 26 NSWLR 562 cited

Molit (No55) Pty Ltd v Lam Soon Australia Pty Ltd (Administrator Appointed) & Macks (1996) 68 FCR 319 cited

Re Ansett Australia Ltd and Mentha (2001) 115 FCR 376 followed

Re Henry Walker Eltin Group Ltd (Administrators Appointed) (No 4) [2005] FCA 745 applied

Re Spyglass Management Group Pty Ltd (Administrator Appointed) (2004)51 ACSR 432; (2004) 23 ACLC 28 followed

Sons of Gwalia Ltd v Margaretic (2005) 149 FCR 227cited

IN THE MATTER OF HUON CORPORATION PTY LIMITED (ADMINISTRATORS APPOINTED) ACN 115 243 206

ANTHONY MILTON SIMS, SCOTT DARREN PASCOE AND KENNETH STEWART SELLERS IN THEIR CAPACITIES AS ADMINISTRATORS OF HUON CORPORATION PTY LIMITED (ADMINISTRATORS APPOINTED) ACN 115 243 206 AND HUON CORPORATION PTY LIMITED (ADMINISTRATORS APPOINTED) ACN 115 243 206

NSD 1517 OF 2006

GYLES J

1 SEPTEMBER 2006

SYDNEY

IN THE MATTER OF HUON CORPORATION PTY LIMITED (ADMINISTRATORS APPOINTED) ACN 115 243 206

THE COURT ORDERS THAT:

Pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act), Pt 5.3A of the Act is to operate in relation to Huon Corporation Pty Limited (Administrators Appointed) ACN 115 243 206 (Huon) so that, by the first plaintiffs entering into the agreements dated 25 July 2006 with Huon and each of the following companies:

(a)                GM Holden Ltd ACN 006 893 232;

(b)               Toyota Motor Corporation Australia Ltd ACN 009 686 097;

(c)                Ford Motor Company of Australia Limited ACN 004 116 228; and

(d)               ZF Lemforder Australia Pty Ltd ACN 107 494 253

(together, the Supply Agreements) in their capacities as administrators of Huon, and Huon incurring liabilities (whether arising during the administration or after) from the obligations under cl 6 of the Supply Agreements, the first plaintiffs will, subject to the limitations on the liability of Huon contained in those documents, be deemed to have incurred debts in the performance and exercise of their functions and powers as administrators of Huon pursuant to s 443A(1) of the Act for services rendered.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF HUON CORPORATION PTY LIMITED (ADMINISTRATORS APPOINTED) ACN 115 243 206

REASONS FOR JUDGMENT

1                     This case concerns one ramification of arrangement made in an endeavour to keep a significant, but insolvent, supplier of car parts to the Australian automotive manufacturers in business for the time being. The particular point concerns the effect of liabilities that may arise out of agreements reached between the voluntary administrators of Huon Corporation Pty Limited ACN 115 243 206 (Huon) and several automotive manufacturers.

2                     On 30 June 2006 Anthony Milton Sims, Kenneth Stewart Sellers and Scott Darren Pascoe were appointed as joint and several voluntary administrators of Huon pursuant to s 436A of the Corporations Act 2001 (Cth) (the Act). Evidence has been given in some detail as to the history of Huon, the financial position of Huon at the time of the appointment of the administrators, the nature of the substantial business being conducted and the various steps that the administrators had taken.

3                     The administrators formed the opinion that the maintenance of the business of Huon as a going concern is crucial in order to obtain the best value for the assets of Huon for the benefit of creditors. It is their view that, if Huon cannot be sold as a going concern, it will very likely reduce the value the administrators can obtain for the assets which will, in turn, reduce the ultimate return available to creditors. That is a matter of business judgment. The administrators worked towards that end with some urgency because, following certain redundancies on or about 14 July 2006, the employees of all of the business units of Huon went on strike. Negotiations ensued with customers, trade unions and the Victorian State government. Arising out of those negotiations, the administrators entered into agreements dated 25 July 2006 with Huon and each of the following customers:

(1)               GM Holden Ltd ACN 006 893 232;

(2)               Toyota Motor Corporation Australia Ltd ACN 009 686 097;

(3)               Ford Motor Company of Australia Limited ACN 004 116 228; and

(4)               ZF Lemforder Australia Pty Ltd ACN 107 494 253;

(the Supply Agreements). An agreement was also entered into with another customer, PBR Australia Pty Ltd, which is not in issue in this proceeding.

4                     The Supply Agreements relate to the business unit of Huon known as Empire Rubber, which operated from a property at Bendigo. They are virtually identical. A satisfactory summary of the key terms of the agreements is as follows:

(1)               The customer acknowledges that nothing contained in the Supply Agreement gives rise to any personal liability on the part of the administrators other than any liability that the administrators have under the Act or at law (cl 1.5(c)).

(2)               Huon agrees to supply to the customer and the customer agrees to purchase the products and volumes for the months of July, August, September and October 2006 set out in Schedule 1 to the Supply Agreement or the latest delivery schedules submitted by the customer to Huon prior to the commencement of the Supply Agreement (cl 4.1).

(3)               The customer agrees to a 35 per cent increase in the price that the customer was required to pay for equivalent products prior to the commencement of the Supply Agreement (the Price Increase). This increase is payable in order to reflect the estimated additional operating expenses of running the Empire plant during the period of the Supply Agreement (cl 5.1).

(4)               In consideration of the customer agreeing to the Price Increase, Huon agrees to grant the customer a price rebate (Price Rebate)(cl 6.1). The Price Rebate for each customer comprises its share of the total Price Increases for all of the customers multiplied by:

(a)                Any cash surplus from revenue earned by Huon from the supply of products from the Empire plant during the period of the Supply Agreement after all operating expenses have been fully satisfied (Surplus).‘Operating Expenses’ is defined as ‘the costs, remuneration and expenses of the administrators relating to the conduct of the business but excluding any employee entitlements accrued prior to the appointment date or any redundancy entitlements’.

(b)               Any excess of the sale proceeds from the sale of the Empire business as a going concern and/or the Bendigo property, once the amounts owing to the secured creditors in respect of the Empire business and the Bendigo property and the costs, remuneration and expenses (including trading losses) of the administrators relating to the conduct of the Empire business have been paid.

(5)               Pursuant to cl 6.2 and cl 6.3 of the Supply Agreements, the maximum amount payable by Huon to each of the customers is the total amount of the Price Increase paid by that customer.

(6)               Clause 6.5 of the Supply Agreements provides that the administrators must make application to either the Federal Court of Australia or the Supreme Court of Victoria as soon as practicable after the commencement of the Supply Agreements (being 25 July 2006 in each case) for orders to give effect to cl 6.

(7)               If there is no Surplus or excess sale proceeds from the sale of the Empire business or the Bendigo property, then no part of the Price Increase is repayable to the customers by Huon.

5                     It should be noted that the administrators, Huon and GE Commercial Corporation (Australia) Pty Limited ACN 000 974 747 (a secured creditor pursuant to a floating charge) have entered into a Deed of Funding and Consent, which has established a priority regime. The effect of cl 5.1 of that Deed is to give first priority to moneys owed by Huon to the administrators supported by the statutory indemnity and lien pursuant to s 443E and s 443F of the Act.

6                     The Price Rebate obligations undertaken in cl 6 of the Supply Agreements give rise to the issue. The promises in that clause are made by Huon. It is provided in cl 1.5 that the administrators are acting as agents of Huon pursuant to s 437B of the Act and nothing contained in the agreement gives rise to any personal liability on the part of the administrators other than any liability the administrators have under the Act or at law.

7                     Section 443A (which appears in subdiv A of Div 9 of Pt 5.3A of the Act) is as follows:

‘(1) The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for:

(a) services rendered; or

(b) goods bought; or

(c) property hired, leased, used or occupied.

(2) Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator’s rights against the company or anyone else.’

8                     The relevant portions of ss 443D, 443E and 443F (which appear in subdiv B of Div 9 of Pt 5.3A of the Act) are as follows:

‘443D The administrator of a company under administration is entitled to be indemnified out of the company’s property for:

(a) debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(3); and

(b) his or her remuneration as fixed under section 449E.

443E (1) Subject to section 556, a right of indemnity under section 443D has priority over:

(a) all the company’s unsecured debts; and

(b) subject to subsections (2) and (3) of this section, debts of the company secured by a floating charge on property of the company. …

443F (1) To secure a right of indemnity under section 443D, the administrator has a lien on the company’s property.

(2) A lien under subsection (1) has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge.’

9                     The administrators contend that the obligations under the Supply Agreements fall within s 443A and seek a direction to that effect. There is an initial question as to whether any liability which ensues would properly be described as a ‘debt’. Counsel has properly referred me to the decision of Branson J in Molit (No55) Pty Ltd v Lam Soon Australia Pty Ltd (Administrator Appointed) & Macks (1996) 68 FCR 319 in which a strict instruction of the term ‘debt’ is adopted, drawing a distinction between a debt and a liability for unliquidated damages in this section. Counsel has pointed out that, in other sections, the words such as ‘debt’ and ‘creditor’ have been given a wider construction. The provision for insolvent trading is one example. Another is the construction of s 563A in Sons of Gwalia Ltd v Margaretic (2005) 149 FCR 227. There is also a question as to whether the liabilities are ‘incurred’ by reason of cl 6, at least unless and until there is a surplus to be distributed. Counsel has referred to the decision of the New South Wales Court of Appeal in Hawkins v Bank of China (1992) 26 NSWLR 562 which dealt with whether a relevant debt was incurred when a company entered into a guarantee under which it was obliged to pay a liquidator an amount contingent upon demand following default.

10                  It is not necessary for me to decide those interesting questions because, in my opinion, it is clear that any liability which ensues would not be for any of the topics enumerated in s 443A(1). The only possible argument is that the liability would be for services rendered. I cannot view what is involved in cl 6 of the Supply Agreementsas incurring a liability for services rendered. In that respect, I would adopt the reasoning of Goldberg J in Re Ansett Australia Ltd and Mentha (2001) 115 FCR 376 at [45]–[46]. (See also Re Spyglass Management Group Pty Ltd (Administrator Appointed) (2004) 51 ACSR 432; (2004) 23 ACLC 28 at [4].) I decline to give the direction sought.

11                  In the alternative, it is submitted that I should make an order pursuant to s 447A that Pt 5.3A of the Act is to operate in relation to Huon so that liabilities incurred pursuant to cl 6 should be deemed to have been debts incurred pursuant to s 443A for services rendered. Such an order has substantive effect compared with the giving of directions (cf Gidley Re Aliance Motor Body Pty Ltd (2006) 150 FCR 345 at [3]–[4]). Because of this, it is necessary to ensure that notice has been given to those affected. On the other hand, the application is not a lis between parties or adversary litigation. There is no need to manufacture a contradictor if there is not one. I am satisfied that all those who might be affected by an order have been effectively given notice of the proceeding and none has appeared to oppose. Indeed, there is actual consent on the part of almost all of those affected. In particular, those most affected, the secured creditor and those representing employees with priority claims, have indicated consent and do not appear to oppose. That does not lessen the scrutiny to be applied to the proposed application of s 447A. That section grants a most unusual power to the Court that requires careful consideration before exercise. It is not easy to grasp all of the ramifications of such an order in the absence of a contradictor, notwithstanding the assistance of counsel for the applicant.

12                  The arrangement is fundamentally a financing mechanism to enable the business to continue as a going concern but is more than that. The arrangement guarantees the sale on favourable terms of the products manufactured by the business and virtually ensures that the business will be profitable in the short term. The business risk has largely passed to the customers. This is to the benefit of other creditors who stand to gain from sale of the business as a going concern. The only hesitation I have is whether it is appropriate to potentially include the surplus on the sale of the Bendigo property as part of Price Rebate. That potentiality is by way of being part of the security for repayment of the advances. However, it is difficult to unpick parts of an arrangement like this, which was the result of heavy negotiation between the interested parties and which, on the evidence, has the support of those most interested in the outcome.

13                  The decisions of Goldberg J in Re Ansett Australia Ltd and Mentha (2001) 115 FCR 376 and of Finkelstein J in Re Spyglass Management Group Pty Ltd (Administrator Appointed) (above) and the orders made by Hely J in Re Henry Walker Eltin Group Ltd (Administrators Appointed) (No 4) [2005] FCA 745 provide support for making the order. Order 2 as sought will be made.

Associate:

Dated: 1 September 2006