FEDERAL COURT OF AUSTRALIA

Fitzgerald, in the matter of Advance Healthcare Group Ltd (Administrators Appointed) [2008] FCA 1604

CORPORATIONS – administration – deed of company arrangement – employee creditors not given priority – employee creditors fail to approve deed – circumstances in which court will approve deed

Corporations Act 2001 (Cth), ss 444DA, 445D, 555, 556, Pt 5.3A

Corporations Amendment (Insolvency) Act 2007 (Cth)

Corporations Amendment (Insolvency) Bill 2007 (Cth)

Corporations Regulations 2001 (Cth), Sch 8A

Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (Receivers and Managers Appointed) (Subject to a Deed of Company Arrangement) (2005) 145 FCR 220
Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2004) 22 ACLC 667
Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34
Re Ansett Australia Ltd (No 1) (2002) 115 FCR 376

Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth) 

Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake (Canberra, 2004)

IN THE MATTER OF ADVANCE HEALTHCARE GROUP LTD (ADMINISTRATORS APPOINTED)

LAURENCE ANDREW FITZGERALD (ADMINISTRATOR), STEPHEN ROBERT DIXON (ADMINISTRATOR) and GEOFFREY TRENT HANCOCK (ADMINISTRATOR)

VID 555 of 2008

FINKELSTEIN J

28 OCTOBER 2008

MELBOURNE

IN THE MATTER OF ADVANCE HEALTHCARE GROUP LTD (ADMINISTRATORS APPOINTED)

THE COURT ORDERS THAT:

1.                  In relation to Advance Healthcare Group Ltd (Administrators Appointed) the non-inclusion in a deed of company arrangement of a provision to the effect of that specified in s 444DA(1) of the Corporations Act 2001 (Cth) (“the Act”) is approved.

2.                  In relation to each of Advance Healthcare Group Ltd (Administrators Appointed) and Pharmeasy Pty Ltd (Administrators Appointed), pursuant to s 444B(2)(b) of the Act, the period within which they must each execute a deed of company arrangement is extended from 21 July 2008 to 6 August 2008 and direct that the deeds of company arrangement not be executed before 9.00 am on 6 August 2008.

3.                  A copy of this order be forthwith served upon each of the following persons:

            (a)        Mr James Law;

            (b)        Mr Kenneth Atkinson; and

            (c)        Ms Rebecca McGinn.

4.                  Reserve liberty to each of the persons referred to in order 3 above to apply to set aside these orders, any such application to be made returnable before 5 August 2008 and on reasonable notice to the Plaintiffs.

5.                  Liberty to apply generally.

6.                  The costs of this application be costs in the administrations of Advance Healthcare Group Ltd and Pharmeasy Pty Ltd.

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

IN THE MATTER OF ADVANCE HEALTHCARE GROUP LTD (ADMINISTRATORS APPOINTED)

REASONS FOR JUDGMENT

1                     The principal object of Pt 5.3A of the Corporations Act 2001 (Cth) is to provide a mechanism that will save an ailing company.  One method of achieving this object is through a deed of company arrangement that provides for the partial payment of debts due to creditors in full settlement of their claims.  For the most part, the legislation does not require creditors to be treated equally or that they be given the same priority as in a winding up.  There is one exception.  By s 444DA a deed of company arrangement must contain a provision that employee creditors be given at least the same priority as in a winding up unless a majority otherwise agree, or the court permits, a departure from that rule.  The court’s power to approve a deed is limited.  It can only make an order if it “is satisfied that the non-inclusion of the provision would be likely to result in the same or a better outcome for eligible employee creditors as a whole than would result from an immediate winding up of the company”:  s 444DA(5).  Such an order was made in relation to a deed proposed for Advance Healthcare Group Ltd (AHG).  It remains to explain why.

2                     AHG operates in the pharmaceutical industry through its trading subsidiary, Pharmeasy Pty Ltd.  Shares in AHG are quoted on the Australian Stock Exchange (ASX), although trading in those shares has been suspended.  On 28 April 2008, Mr Fitzgerald and Mr Dixon of BDO Kendalls, were appointed joint administrators of AHG.  Mr Fitzgerald and Mr Hancock, also of BDO Kendalls, were appointed joint administrators of Pharmeasy on the same day.  The appointor was Fulcrum Equity Limited, a major shareholder and the only secured creditor of AHG. 

3                     The administrators conducted an investigation into the affairs of AHG and Pharmeasy.  They reached the conclusion that both were insolvent.  In particular, AHG had a shortfall of assets over liabilities that exceeded $8 million.  Its creditors were Fulcrum Equity, which was owed $3.4 million, priority creditors (employees) who were owed approximately $377,740 and unsecured creditors whose claims totalled $7,430,687.  The administrators were of the view that if AHG were wound up both employee and unsecured creditors would receive nothing.  In part this was because, in their view, a liquidator would have no claims against the directors for insolvent trading or breach of duty and neither AHG nor Pharmeasy had entered into any transaction that could be set aside as an unfair preference, unfair commercial transaction or unfair loan.

4                     The administrators received from Romfal Corporate Pty Ltd, acting on behalf of a syndicate of investors, a proposal that, if implemented, would have both AHG and Pharmeasy execute a deed of company arrangement that would see creditors’ claims compromised and AHG relisted.  Romfal has been involved in several reorganisations of public companies and their re‑quotation on the ASX.  The administrators put the proposal to the second meeting of creditors of each company.  A report in relation to each company was produced and provided to the creditors. The key features of each report were in similar terms as follows:

·                    The syndicate (or its nominees) will advance the sum of $1,275,000 in order to create a pool of funds for distribution to creditors;

·                    AHG will retain its existing assets and subsidiaries to enable it to requote on the ASX.  Pharmeasy will retain its assets;

·                    The distribution to creditors will be in full and final satisfaction of all creditors’ claims;

·                    Should Pharmeasy be required to trade prior to the formal handover to the syndicate, it is proposed that trading losses incurred between 28 April 2008 and the handover to the syndicate, be funded from the priority distribution of AHG to its secured creditor, Fulcrum Equity;

·                    The pool of funds will be raised through capital raisings by AHG, which will be subject to the receipt of shareholder approval.  The syndicate has informed the administrator that it has secured an underwriter;

·                    Existing shares in AHG will be consolidated on a one for 40 basis;

·                    The syndicate will bear the risk on the capital raisings;

·                    The administrator has received a $100,000 deposit which is refundable in the event that the conditions of the proposal are not satisfied;

·                    The directors of both AHG and Pharmeasy will be removed and replaced by nominees of the syndicate;

·                    Following shareholder approval, the deed of company arrangement will terminate and a trust fund established to hold the pool of funds for creditors.  AHG will advance the pool of funds to the Trustees of the Trust in full and final satisfaction of the syndicate’s offer in relation to the recapitalisation proposal;

·                    Fulcrum Equity will limit its entitlement to security pursuant to its charge over the assets of AHG to $600,000.  The administrator’s preliminary conclusion is that Fulcrum’s security is valid at least to the extent of fresh advances made in and around February/March 2008;

·                    Employee creditors retain their entitlement to priority for the amount they would receive under GEERS plus an additional 10%;

·                    Creditors of both AHG and Pharmeasy will be required to prove their debts to the Trustees of the Trust Fund;

·                    Creditors will become beneficiaries of the Trust Fund in those amounts;

·                    The Trustees of the Trust Fund will be Stephen Robert Dixon and Laurence Andrew Fitzgerald in the case of AHG and Geoffrey Trent Hancock and Laurence Andrew Fitzgerald in the case of Pharmeasy;

·                    The proposal is conditional on the ASX providing written confirmation to AHG that it will lift the suspension on the trading of AHG’s securities on completion of the capital raisings without the need to re-comply with chapters 1 and 2 of the ASX Listing Rules on finalising the deed of company arrangement; and

·                    The proposal is conditional upon the approval of AHG’s shareholders.

5                     The aspect of the proposal that is important for present purposes is that under the deed the priority given to employee creditors would be limited to an amount equal to what “they would receive under GEERS plus an additional 10%”.  GEERS is the acronym for the General Employee Entitlements and Redundancy Scheme a non-statutory scheme established by the Commonwealth.  The scheme is administered by the Department of Education, Employment and Workplace Relations.  Under the scheme money granted by Parliament is distributed to employees whose employment has been terminated because their employer is insolvent, the employer has insufficient assets to pay their entitlements and there is no other source of funds available to pay those entitlements.  The entitlements covered by the scheme are unpaid wages, unpaid annual leave, unpaid long service leave, unpaid payment of notice and up to 16 weeks redundancy pay.  The scheme is discretionary.  The Department decides which employees are to benefit and in what amount.

6                     AHG had three employee creditors, Mr Atkinson, Mr Law and Ms McGinn.  The amounts they were owed were, respectively, $288,676, $55,856 and $33,140.  The fund to be put up by the investors was sufficient for these debts to be paid in full, however under the proposed deed the amounts they would receive would be less than the full amount.  According to the calculations made by the administrators, Mr Atkinson would receive between $85,796 and $11,166, Mr Law between $24,799 and $12,059 and Ms McGinn between $23,267 and $9,411. 

7                     The proposal could not go ahead without the employee creditors approval or court order.  In the first instance the administrators sought the approval of the employees.  They convened a telephone meeting of the employee creditors. Mr Atkinson and Mr Law attended the meeting.  Ms McGinn appeared by her proxy, Mr Harrison, a solicitor who acts for all three employee creditors.  The meeting was held prior to the finalisation of the proposed deed and was intended by the administrators as an opportunity to determine whether the employee creditors would be minded to approve a deed of company arrangement that did not contain a provision that gave them the same priority they would receive in a winding up.  The three employees attended the meeting as did their solicitor.  The solicitor advised the meeting that his clients were against the proposal.  He said Fulcrum Equity was responsible for the insolvency of AHG and that there were causes of action against the company which a liquidator could pursue, albeit his clients did not wish to become involved in such litigation.  He did not say what the actions were.  He did, however, say that his clients required Fulcrum Equity to contribute more to the proposed fund and that its level of participation in the distribution of the fund should be reduced.  Each employee also spoke.  Mr Law said the deed was unacceptable and that AHG should be wound up.  Mr Atkinson agreed.  Ms McGinn said she was prepared to write off all her entitlements in order that Mr Boyd, a director of Fulcrum Equity, receive nothing in the liquidation.  The minutes of the meeting record that the employee creditors did not agree to the non-inclusion of a provision in the proposed deed giving them the same priority as they would obtain in a winding up.  At a later meeting the employees voted down the proposal.

8                     While the employees of AHG would not support the proposed deed, it was approved by the general body of creditors.  So also was the deed proposed for Pharmeasy which was interdependent on the AHG proposal being implemented.  Incidentally, the deed proposed for that company contained a similar provision relating to the employees of Pharmeasy.  Those employees agreed unanimously to the non-inclusion of a provision giving them the same priority as in a winding up.  However, because the employee creditors of AHG voted down the proposal the whole arrangement could not go ahead without an order of the court. 

9                     Prior to 2007 there was a view that the distribution of the assets of an insolvent company under a deed of company arrangement otherwise than in accordance with the rules that apply in a winding up was contrary to the policy established by the Corporations Act.  See for example, Re Ansett Australia Ltd (No 1) (2002) 115 FCR 376; Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2004) 22 ACLC 667 and Lam Soon Australia Pty Ltd (Administrator Appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34, among other cases. The view was that if a deed did not adopt the pari passu rule in s 555, or the priorities established by s 556, the deed was liable to be set aside under s 445D.  According to that section, a deed may be terminated for a variety of reasons including that it is unfairly prejudicial to, or unfairly discriminatory against, a creditor, or that it should be terminated for some other reason.

10                  My own view was that Part 5.3A did not require creditors to be treated equally.  Nor did it require adoption of the priorities that applied in a winding up.  I explained why in Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (Receivers and Managers Appointed) (Subject to a Deed of Company Arrangement) (2005) 145 FCR 220.  I provided examples of circumstances in which ordinary commercial commonsense dictated that the priority given to employees in a winding up should be altered and that unsecured creditors should not be treated equally.  One example was that of a company trading from leased premises that were purpose built and in an ideal location.  The interests of all creditors would be best served if the arrears of rent were paid to prevent a forfeiture of the lease notwithstanding that other creditors only received a portion of their claims.   Another example was of a business that employs both skilled and unskilled workers.  The skilled workers may be difficult to replace.  To ensure that the business survived it may be necessary to pay the skilled workers in full and let the others go.  Put rather more directly, there will be cases where the equal treatment of creditors and the maintenance of priorities will thwart an attempt to revive an ailing company.

11                  My view has not survived, at least so far as priority claims are concerned.  In 2004 the Parliamentary Joint Committee on Corporations and Financial Services published its review of corporate insolvency laws.  The Joint Committee found that in some circumstances it may be appropriate that a deed provide for the different treatment of creditors:  Parliamentary Joint Committee on Corporations and Financial Services, Corporate Insolvency Laws: A Stocktake (Canberra, 2004) at para 11.16.  However, as regards employees, the Joint Committee recommended that the Corporations Act be amended to make it mandatory for a deed of company arrangement to reserve the priority available to creditors in a winding up unless affected creditors agreed to waive their priority:  para 11.20.  The Joint Committee added that the amendment should allow creditors or the administrator the right to initiate court proceedings to have the deed upheld if in the court’s view the deed offered the dissenting creditors a better return than they would obtain in a liquidation.

12                  This aspect of the Joint Committee’s report was implemented in substance by the Corporations Amendment (Insolvency) Act 2007 (Cth).  That statute introduced a range of measures to modernise the insolvency provisions in the Corporations Act.  One was the introduction of s 444DA.  The Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth) said (perhaps by way of overstatement) that it was implicit in the then current law that the priorities provided for in a liquidation would generally be observed in the deed of company arrangement:  para 4.1.  This was for the reason that the model deed in Sch 8A of the Corporations Regulations 2001 (Cth) preserves to creditors the priorities applicable in a winding up.  Yet there was no obligation to adopt the model deed.  If it was not adopted the only remedy to affected creditors was to apply to have the deed set aside.  That would be difficult for employee creditors having regard to the cost of court proceedings.  Thus “To enhance the standing of employee creditors in voluntary administrations, the Bill will amend the law to make it mandatory for a [deed] to preserve the priority available to employee creditors in a winding up unless employees agree to waive their priority”:  Explanatory Memorandum at para 4.3.  The provision in the Bill (Sch 1, item 1) recognised that the priority of employee entitlements should be safeguarded in deeds but not in the precise terms proposed by the Joint Committee:  Explanatory Memorandum at para 3.42. 

13                  It has long been a public policy objective to protect employee entitlements in the insolvency of the employer.  Employees have been accorded a measure of priority in both private bankruptcies and company liquidations for many years, not only in Australia but in many other jurisdictions as well.  Part 5.3A does not apply to companies that are being wound up.  Its main object is to keep corporations alive.  It is possible that object will be compromised by the new s 444DA if a company in difficult financial circumstances cannot be saved because priority must be given to its employees.  This will be to the disadvantage not only of the employee creditors but also to the creditors as a whole.

14                  Fortunately that will not happen in this case.  First of all, as the administrators explained, having regard to the financial position of AHG in a winding up the employees could not do better than what they might obtain under GEERS.  Accordingly, the condition to the operation of s 444DA(5) was satisfied.  It is difficult to understand why the employees were prepared to forego the possibility of obtaining a significant sum for no apparent gain.  Most likely their objective was to achieve a better offer.  In other words, they were engaging in commercial blackmail of sorts.  History shows they were not successful.  The other possibility is they were motivated by spite.  If that is the case they deserve little sympathy.  Whatever the employees’ motives it was clearly in the interests of the general body of unsecured creditors for the proposal to go ahead.  In a winding up they stood to get nothing.  Under the proposal they were to receive a significant distribution.  The only thing that stood in their way was the intransigence of the employee creditors.  Their reasons (whatever they may be) for not wanting the proposal to go ahead could not be allowed to stop an otherwise beneficial outcome. 

Associate:

Dated:         28 October 2008