FEDERAL COURT OF AUSTRALIA

ABC Learning Centres Limited, in the matter of ABC Learning Centres Limited; application by Walker (No. 8) [2009] FCA 994

Corporations Act 2001 (Cth) ss 435A, 435C, 436A, 436B, 436C, 437A, 437C, 439A, 440BA, 440BB, 440C, 440D, 440F, 446A, 447A, 447D

PETER WALKER & GREGORY MOLONEY (IN THEIR CAPACITY AS VOLUNTARY ADMINISTRATORS OF ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) ACN 079 736 664 & THE COMPANIES LISTED IN SCHEDULE 1 and ABC LEARNING CENTRES LTD (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED) ACN 079 736 664 & THE COMPANIES LISTED IN SCHEDULE 1

NSD 1846 of 2008

EMMETT J

20 AUGUST 2009

SYDNEY

IN THE MATTER OF ABC LEARNING CENTRES LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED)

THE COURT ORDERS THAT:

1.         The proceeding be adjourned to 9:30am on Friday 21 August 2009.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

IN THE MATTER OF ABC LEARNING CENTRES LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS & MANAGERS APPOINTED)

REASONS FOR JUDGMENT

1                          There are three applications before the Court.  The principal application is by the plaintiffs in the proceeding.  The first plaintiffs are Messrs Peter Walker and Gregory Moloney (the Administrators), who were appointed, pursuant to Part 5.3A of the Corporations Act 2001 (Cth) (the Corporations Act), as administrators of the 39 companies generally referred to as the ABC Learning Centres Group (the ABC Group).  The second plaintiffs are the 39 companies that constitute the ABC Group. 

2                          The Administrators were appointed as administrators of the ABC Group on 6 November 2008.  On the same day, Messrs Murray Smith, Christopher Honey and John Cronin (the Receivers) were appointed receivers and managers of the ABC Group by a consortium of banks to whom charges had been granted as security for advances made to the ABC Group by the banks. 

3                          Following the appointment of the Administrators, the Court ordered, on 27 November 2008, that the time for convening meetings of creditors of the ABC Group be extended up to and including 31 March 2009.  On 20 March 2009, the Court ordered that the time for convening meetings of creditors of the ABC Group be further extended up to and including 30 September 2009.  On that occasion, the Court reserved liberty to the plaintiffs to apply for further extensions of the convening period at any time prior to 30 September 2009.  The Court also granted liberty to any person who could demonstrate sufficient interest to make such application, to vary or discharge the orders made on that day, as that person was advised. 

4                          Pursuant to the leave granted on 20 March 2009, the Administrators and the ABC Group filed interlocutory process on 7 August 2009, seeking orders that the convening period be further extended to 31 March 2010.  That is the principal application presently before me.  The plaintiffs filed an amended interlocutory process on 19 August 2009.  The Receivers were joined as respondents to that application and have participated in the conduct of the proceeding. 

5                          By application of 21 July 2009, Orchard Capital Investments Pty Limited (Orchard) seeks an order that any further extension be refused and that the meeting of creditors of the ABC Group be held on or before 30 September 2009.  By application filed on 31 July 2009, Austock Fund Management Limited and Austock Property Management Limited (together the Austock Companies) claimed orders and directions that an extension be refused and, in the alternative, that leave be granted pursuant to s 440C of the Act for them to take possession of certain properties owned by them and leased to members of the ABC Group. 

6                          The Commonwealth has also intervened in the proceeding without opposition from any of the parties.  The receivership and administration of the ABC Group had attracted significant public, government and media attention, having regard to the nature of the child care industry and the potential implications of the collapse of the largest collective child care provider in Australia.  The Receivers have maintained discussions and consultation with the Commonwealth on various issues.  The Receivers continue to liaise with the Commonwealth and with the receivers of what is described as the ABC2 Group.  I have described the ABC2 Group in earlier reasons given in connection with the application by the Administrators (see [2009] FCA 454). 

7                          In their amended interlocutory process, the Administrators also asked for a direction, pursuant to s 447D of the Corporations Act, that they would be justified in seeking the further extension of the convening period claimed in their amended interlocutory process.  Section 447D relevantly provides that the administrator of a company under administration may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator’s functions and powers.  In the original form of the interlocutory process filed by the Administrators, the substantive application for an order extending the time was made conditional upon obtaining the direction sought.  The amended interlocutory process changed that position, such that the Administrators seek the substantive relief, irrespective of whether the direction is given. 

8                          Such an application for directions is normally made ex parte.  I do not consider that it is appropriate for the Court to give the direction sought in this proceeding.  That is not because I am expressing a view one way or another as to what direction might be given.  However, I consider that there is a risk that the position of the Court could be compromised by giving such a direction in the very proceeding about which the Administrators seek the Court’s direction. 

9                          Orchard is the responsible entity for the Orchard Child Care Property Fund (the Orchard Fund).  The Orchard Fund was established in August 2003 as an open-ended, unlisted property trust and is registered as a managed investment scheme under the Corporations Act.  The Orchard Fund was established with the aim of acquiring and managing a geographically diverse portfolio of primarily purpose-built child care centre properties.  The centres were to be leased to reputable child care operators, including the ABC Group.  The Orchard Fund owns 212 properties.  Of those, 200 were leased or agreed to be leased to the ABC Group. 

10                        Austock Property Management Limited is the responsible entity of the Australian Education Trust and the Austock Childcare Fund.  A large proportion of the assets and income of those two funds is tied to the ABC Group.  Prior to the appointment of the Administrators, approximately 95% of the total property assets of both of those funds were leased to members of the ABC Group.  The Australian Education Trust is the single largest landlord of the ABC Group, with properties valued in excess of $300 million leased to various members of the ABC Groups. 

11                        The primary relief claimed by the plaintiffs is an order under s 447A of the Corporations Act extending the period within which the Administrators must convene meetings of creditors.  Orchard and the Austock Companies contend that, in the circumstances of the present application, it is not open to the Court to grant that relief.  Alternatively, they say that, if it is open to the Court to grant the relief, the Court should decline relief in the exercise of its discretion.  The Austock Companies also apply for relief under s 440C of the Corporations Act in the event that the Court is otherwise disposed to exercise its discretion to extend the time for convening the meeting of creditors.  Finally, the Austock Companies say that if, notwithstanding that contention, the Court is disposed to grant relief, relief should be granted only on terms.  The terms that would be appropriate have been the subject of some discussion and accord among the parties, other than Orchard.  Orchard contends that if the Court were disposed to grant relief, it should be on the basis to which I shall refer in due course. 

12                        It is desirable to say something about the statutory framework within which these applications are to be decided.  The proceedings arise out of the operation of Part 5.3A of the Corporations Act.  Section 435A states that the object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or 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.  The references to the continued existence of the business of an insolvent company have some significance, as will become apparent. 

13                        Section 436A of the Corporations Act relevantly provides that a company may, by writing, appoint an administrator of the company, if the board has resolved to the effect that, in the opinion of the directors voting for the resolution, the company is insolvent and an administrator should be appointed.  Sections 436B and 436C provide other circumstances where an administrator may be appointed. 

14                        Section 435C provides for the commencement and ending of an administration.  The administration of a company begins when an administrator of the company is appointed under ss 436A, 436B or 436C and ends on the happening of whatever event of the kind referred to in s 435C(2) or s 435C(3) happens first after the administration begins.  Under s 435C(2) the normal outcome of the administration of a company is that:

·          a deed of company arrangement is executed by the company,

·          the company's creditors resolve that the administration should end; or

·          the company's creditors resolve that the company be wound up.

15                        Division 3 of Part 5.3A deals with the assumption of control of a company’s affairs by an administrator.  Under s 437A(1), while a company is under administration, the administrator:

·          has control of the company's business, property and affairs;

·          may carry on that business and manage that property and those affairs;

·          may terminate or dispose of all or part of that business;

·          may dispose of any of that property; and

·          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.

By way of complementing those provisions, s 437C provides that, while a company is under administration, no other person may perform or exercise a function or power as an officer of the company. 

16                        Division 5 of Part 5.3A is the critical provision for the purposes of the present applications.  Division 5 deals with meetings of creditors to decide a company’s future.  Under s 439A(1), the administrator of a company under administration must convene a meeting of the company’s creditors within the convening period, as determined by the provisions of s 439A.  The convening period is, relevantly, the period of 20 days beginning on the day after the administration begins.  Under s 439A(6), however, the Court may extend the convening period on an application made during or after the period that constitutes the convening period.  However, if an application is made after the period, the Court may only extend the convening period if the Court is satisfied that it would be in the best interests of the creditors if the convening period were extended in accordance with the application.  Section 439C provides that, at the meeting convened under s 439A, the creditors may resolve that the company execute a deed of company arrangement, that the administration should end or that the company be wound up. 

17                        Division 6 of Part 5.3A is significant for the position of Orchard and the Austock Companies.  That division creates a moratorium in relation to a company’s affairs during administration.  Thus, under s 440A(1) a company under administration cannot be wound up voluntarily, except as provided by s 446A.  Section 446A effectively operates where the creditors resolve that the company be wound up or the company fails to comply with various provisions relating to the execution of a deed of company arrangement.  Section 440B provides that, during the administration of a company, a person cannot enforce a charge on property of the company.  A similar restraint is imposed by s 440BA on the holder of a lien or pledge.  Section 440BB imposes a similar restraint in relation to distress for rent being carried out against the property of the company.  In each case, the restraint is subject to the consent of the administrator or the leave of the Court.  Section 440F restrains enforcement process and s 440D provides for a stay of proceedings except with the leave of the Court.

18                        For present purposes, the most important provision of Division 6 is s 440C, which provides that, during the administration of a company, the owner or lessor of property that is used or occupied by, or is in the possession of, the company cannot take possession of the property or otherwise recover it, except:

·          with the administrator's written consent; or

·          with the leave of the Court.

As I have said, the Austock Companies seek the Court’s leave pursuant to s 440C in relation to all of the properties owned by them and leased to the ABC Group.  Hitherto, the Administrators have declined any requests for consent pursuant to s 440C, although neither Orchard nor the Austock Companies have sought the consent of the Administrators. 

19                        Division 13 of Part 5.3A deals with the powers of the Court.  Section 447D, to which I have already averted, is contained in Division 13.  Section 447A(1) provides that the Court may make such order as it thinks appropriate about how Part 5.3A  is to operate in relation to a particular company.  Such an order may be made subject to conditions.  The company, creditor, the administrator and any other interested person are given standing to make an application under s 447A. 

20                        I have, in earlier decisions relating to the administration of the ABC Group, outlined the circumstances of the ABC Group and their business.  The basis of the present application for an extension of time is that the Receivers are endeavouring to sell the undertaking and business of the ABC Group as a going concern.  The Receivers have entered into possession of all of the assets and property of the ABC Group and the Administrators have no funds.  However, the application by the Administrators is supported by the Receivers and has been and will be funded by the receivers. 

21                        The evidence before me suggests fairly firmly that it is unlikely that there will be any surplus, after the consortium of banks have been paid, for distribution to unsecured creditors, including employees, assuming that the charges in favour of the consortium of banks are not set aside for any reason.  The essential complaint by Orchard and the Austock Companies is that the only purpose of the application is to facilitate the exercise by the Receivers of the powers conferred on them by the charges given by the ABC Group to the consortium of banks.  Orchard contends that the object behind the application is the wish of the Receivers to keep the administration alive, thereby maintaining the restraints imposed by Division 6, thus enabling the Receivers to enhance the return to the consortium of banks. 

22                        The question of the validity of the charges, pursuant to which the Receivers were appointed, is not presently before the Court.  However, the possibility of impugning the validity of the charges is being considered by the Administrators.  Orchard observes that, if there is a possibility of challenging the charges, it is curious why the investigation of that question has not been completed.  In any event, Orchard says that, if there is any possibility that anything could be achieved for the benefit of the unsecured creditors, by way of setting aside preferential, uncommercial orother voidable transactions, it is more appropriate that such action be undertaken by a liquidator rather than being investigated by the Administrators, who would not be able to do anything about it. 

23                        It cannot be disputed that the administration of the ABC Group is large and complex.  When the Administrators were appointed, there were over 1000 child care centres in Australia operated by the ABC Group.  Those child care centres processed over 100,000 child care transactions per week.  At the present time, the ABC Group continues to provide approximately 55,000 licensed child care places per week for approximately 71,000 children.  There are approximately 320 landlords who own some 714 centres operated by the ABC Group.  As at 31 July 2009, the business employed in excess of 13,700 people, of whom 947 were part time employees, and in excess of 4,100 were employed on a casual basis.  The annualised combined salary and wages for head office staff of the ABC Group is approximately $21 million and for the centre staff is approximately $306 million.  Approximately 18,820 creditors are owed a total amount of $1,761,284, 093. 

24                        The Administrators and Receivers claim to have been diligent in pursuit of their functions since the orders of the Court of 20 March 2009.  However, Orchard and the Austock Companies dispute that proposition.  The only apparent opposition to the extension of the convening period is from the Austock Companies and Orchard.  They say that they are unduly prejudiced by reason of the restraint imposed by s 440C in relation to the exercise of their rights as landlords.  Only one of the centres operated by the ABC Group is operated on a property owned by the ABC Group.  245 of the centres are owned by the Austock Companies and 115 are owned by Orchard.  The next largest landlord owns only six properties. 

25                        The application by the Administrators is supported by the Receivers and, indeed, the Receivers have had the principal carriage of the proceeding seeking the extension of the time for convening the meeting of creditors.  The extension of time, the Receivers say, is sought for the specific purpose of conducting an orderly sale of the business of the ABC Group as a going concern.  The Receivers say that such a sale would be almost impossible if an extension is refused.  They contend that such an orderly sale is the only practical means of preserving the business of the ABC Group and maximising the chances of the business continuing in existence under new operators.  Such a sale would also maximise the return to creditors although, as I have said, the evidence rather suggests that, unless the charges to the consortium of banks are set aside, the secured creditors will be entitled to the whole of the proceeds of sale. 

26                        Great emphasis has been placed by the Receivers and the Administrators on a matter that appears to be common to all parties in the proceeding.  That is the desire to preserve the jobs and entitlements of the thousands of employees of the ABC Group and to preserve the facilities that will be available for the provision of child care services, by the continued operation of the ABC Group.  I have already adverted to the fact that the ABC Group is at present the largest operator of child care services in Australia. 

27                        The position of the Administrators is based very much on what is said by the Receivers.  The Administrators accept the advice of Mr Honey that an extension of the moratorium imposed by Division 6 is needed to market, in the best way, the business of the ABC Group of operating the child care centres.  They say that the best way to market the business is in one line, in order to maximise the price and maintain the livelihood of the employees and the provision of service of child care for parents of children.  Mr Moloney, one of the Administrators, has provided the Court with his opinion that, on balance, he considers the extension is appropriate.  Further, he does not consider that it is yet possible to say with any certainty that there is no prospect of any return to unsecured creditors, bearing in mind the possibility that the charges may be set aside. 

28                        The Receivers and the Administrators place some emphasis on the objects of Part 5.3A as being to save so much of a company’s business as is possible as a going concern.  That indicates acceptance by the Parliament that it is not only the wellbeing of the creditors that is at stake but the possibility of the continuation of the business of a company for the benefit of its employees and its customers.  Those considerations are to be taken into account, as well as the possibility that a particular course will benefit creditors, both unsecured and other creditors. 

29                        The Austock Companies and Orchard complain about the prejudice to their interests that would flow from the grant of the relief now claimed.  Mr Vincent Harink is a director of Colvin Management Pty Ltd, which has a consulting contract with Orchard.  Mr Harink says that the extended administration has had significant commercial and practical consequences for the Orchard Fund.  Mr Harink asserts that the Receivers are not complying with the covenants of the leases regarding repairs, maintenance and redecoration.  That is a matter of some contention, and I shall come back to that.  Mr Harink also asserts that the Receivers are exploiting the moratorium imposed by Division 6 in order to conduct what he describes as an ongoing process of “cherry picking” the best child care centres in the ABC Groups’ portfolio and disclaiming the balance.  Mr Harink says that the centres that have been disclaimed were stripped of furniture and fittings, thereby sustaining damage requiring repair.  The child care licences in respect of those premises were surrendered.  Mr Harink says that that has compromised the Orchard Fund’s ability to mitigate the effects of the disclaimer of premises by, for example, finding suitable replacement tenants.  Mr Harink also gave evidence about considerable increases in the costs of maintaining finance facilities that have been occasioned by the continuation of the present administration. 

30                        Mr Nicholas Anagnostou is employed by Austock Property Funds Management Limited as the fund manager and executive director of each of the Australian Education Trust and the Austock Child Care Fund.  Mr Anagnostou asserts that those funds are suffering serious and ongoing prejudice as a result of the continuation of the receivership and administration of the ABC Group.  He describes what he says is deterioration of the premises by reason of the Receivers’ non-compliance with maintenance and repair covenants.  Specifically, he refers to an alleged risk of grave harm to the premises and its occupants by reason of the Receivers’ failure to comply with essential safety measures. 

31                        The continuation of the administration and the possibility of disclaimer of other leases gives rise to continuing uncertainty from the point of view of the Austock Companies, coupled with financial prejudice in the form of increased funding costs, more restrictive lending covenants, inability to raise capital, lost rent from vacated premises, mounting contingent liabilities for repairs that should be undertaken in accordance with the terms of the leases and the stripping and removal of plant and equipment from premises following disclaimer. 

32                        The Austock Companies placed considerable emphasis on the alleged failure by the Receivers to comply with the essential services regime that is applicable under State legislation relating to the various leased premises.  It is clear that the question of essential services is complex and requires specialist knowledge in those charged with complying with the legislation involving essential services.  The Austock Companies made detailed submissions concerning the essential safety measures relating to life and fire safety systems required in commercial, industrial and public buildings to ensure the safety of occupants in the event of fire or emergency.  Particular attention must be given to the Building Code of Australia, applied on a State by State basis to places of assembly, including primary or secondary schools. 

33                        There has been some considerable disputation between the landlords and the Receivers as to the extent to which the Receivers have caused the ABC Group to comply with their obligations under their leases and legal requirements relating to essential services.  Considerable effort has been made on behalf of the Austock Companies to put before the Court particulars of their leasehold arrangements with the ABC Group.  By way of example, leases contain covenants that the lessee must comply with and observe, at its cost, all requirements of any statute in relation to or affecting the demised premises and the lessee’s use and occupation of the demised premises.  Another covenant imposes an obligation on the lessee to keep and maintain the demised premises in good and substantial repair and condition.  Specifically, the lessee is required to effect and maintain, with reputable specialist contractors, comprehensive service, maintenance and repair contracts on such terms and condition as the lessor may reasonably require in respect of all plant and equipment in the demised premises.  While the language is not identical in all leases, the substance is to be found in all of the leases relating to the Austock Companies and, I would infer, in relation to the leases from Orchard. 

34                        It is important to have regard to the fact that there is a genuine concern felt by the Austock Companies and Orchard as to the way in which the Receivers have exercised their powers.  There is no doubt that there has been antagonism between the Receivers, on the one hand, and the Austock Companies and Orchard, on the other.  The Austock Companies and Orchard complain of the attitude shown by employees of the ABC Group who act in relation to the affairs of the ABC Group in accordance with the directions of the Receivers.  Strictly, of course, they act in accordance with the instructions of the Administrators.  However, the Receivers, having entered into possession of the property of the ABC Group pursuant to the charges, are in a position to control the way in which the business of the ABC Group is conducted. 

35                        Clearly enough, the Receivers have an obligation to the consortium of banks to act in a way that is most likely to maximise the return to them.  The Receivers, however, have been criticised by Orchard.  Specifically, I was invited to find that Mr Honey, who gave evidence on behalf of the Receivers, is not a truthful witness.  That submission was made on the basis that the Court is being invited by Orchard to reject the stance presently adopted by the Receivers that they will endeavour to co-operate with and work together with the landlords to develop the best way to sell the child care centres for the benefit, not only of the consortium of banks, but for the benefit of everyone concerned, including employees and parents and children.  Orchard contends that Mr Honey has not manifested the slightest indication in the past of such co-operation and that there is no reason to suppose that he has a genuine intention to do so in the future.  Orchard contends, rather, that there is every reason to suppose that Mr Honey’s intention is to fulfil what he perceives his duty to be, namely, to get the best possible price for the business of the ABC Group, even if that involves selecting as buyer a less reputable operator or an operator who has a lower capacity to continue operating the centres on a viable basis over a number of years.  Orchard says that, so far as the Receivers are concerned, their only interest is to get the maximum proceeds of sale, irrespective of the long-term interest of the landlords, the children and their parents and the employees, in having good, reputable, honest, capable and competent operators of the centres.  

36                        Specific reliance was placed on the approach adopted by Mr Honey in relation to the disclaimer of premises, to which I have referred.  It was put to Mr Honey that he deliberately engineered a situation in which it would be difficult to re-open the child care centres that were disclaimed.  That was denied by Mr Honey.  When it was put to him that he made sure that the licences were not available to be passed on to anyone who was taking over the disclaimed premises, his response was that the licence was held in the name of the relevant ABC Group company and Mr Matthew Horton.  Mr Horton is the General Manager of the ABC Group.  Mr Honey denied that he made sure that the licences were not available to be passed on. 

37                        When it was put to Mr Honey that Mr Horton took his instructions from him, Mr Honey’s response was that Mr Horton is the licensee and Mr Horton must bear in mind his own responsibilities.  However, he accepted that Mr Horton takes instructions from the Receivers on the day to day operations of the business of the ABC Group.  When asked whether, if Mr Horton were instructed to arrange things in such a way as to ensure that the licences could be passed on to new licensees, that would occur, Mr Honey responded that that was a matter for Mr Horton.  Mr Honey confirmed, however, that Mr Horton acts in accordance with his instructions as one of the Receivers of the ABC Group and that, if he had instructed Mr Horton to make licences available to a new operator, Mr Horton would have complied to the extent that he was legally capable of doing so.  Mr Horton, when cross-examined, accepted that he had no real knowledge at all of the process under which some 55 of the child care premises were disclaimed and closed, although he accepted that, at the end of the day, he took his instructions directly from Mr Honey and he signed what he was told to sign. 

38                        Finally, Mr Honey accepted that he specifically instructed Mr Horton to surrender the licences for the disclaimed premises when they were closed for the last time.  However, he would not accept that it followed that they would not be available for transfer to a new tenant.  His response was that consideration was not given to such a matter.  When it was put to him that, by ensuring that the licences of closed centres could not be transferred, the goodwill of the remaining centres would be protected, Mr Honey maintained the position that the Receivers were justified in protecting the goodwill by removing children and staff to existing centres elsewhere.  The response was not entirely responsive. 

39                        It may be fair to observe that Mr Honey appeared to lack co-operation to some extent in answering questions along the lines that I have indicated.  Mr Honey was certainly prepared to defend his position, perhaps understandably, in the face of fairly firm cross-examination on behalf of Orchard.  However, I do not consider that the criticism of Mr Honey is justified.  I do not consider, from my assessment of Mr Honey in the witness box, that he exhibited such a degree of lack of co-operation as to suggest that assurances that might be given as to the future could not be accepted.  As will become apparent, that is a matter of some significance if the present application is acceded to on terms that involve assurances on behalf of the Receivers as to the conduct of the sale of the business of the ABC Group. 

40                        I have no doubt that there is a bona fide and genuine concern on the part of the Austock Companies and Orchard that their interests have not been at the forefront of the Receivers’ considerations in the conduct of the administration to date.  However, the administration has now entered upon a new phase, and that is significant. 

41                        Mr Honey’s initial position was that he was in the process of deciding the timing of the appropriate sale process that should be undertaken.  He said that the sale process would either commence this year, with a view to an exchange of contracts by the end of the year and completion within the first two months of 2010, or would commence early next year, with a view to an exchange of contracts by the end of the financial year and completion within two to three months thereafter.  If the latter timing were adopted, it may well be necessary for a further application to the Court for a further extension of the time for convening the creditors’ meeting in order to preserve the moratorium of Division 6. 

42                        Mr Moloney indicated, in giving his oral evidence, that his preference was for the first of Mr Honey’s options, so far as timing is concerned.  Mr Honey indicated, in giving oral evidence, that he has now decided that the earlier timing is appropriate.  Mr Honey has made it clear that it is his intention to endeavour to proceed with the sale of the business of the ABC Group as a going concern, in one line if possible, with completion to be achieved by January or February 2010.  That decision has removed some of the concern that was indicated on behalf of the landlords that it may be well into next year before any finality will be achieved. 

43                        The notion of sale in one line is of significance for all parties.  It seems to be common ground that some child care centres are more profitable than others.  Part of the work that has been done to date by the Receivers has been to determine which of the centres are profitable and which should be closed down.  At present, the Receivers have concluded that there is no need to close down any further centres, although no undertaking or commitment to that effect has been proffered.  Nevertheless, the work that has been done to date may give some comfort that, in the ordinary course, the centres that are now operating will be the subject of invitations to tender or offers for sale to be made by the Receivers. 

44                        The question of continuing compliance with the covenants of the leases under which the various properties are held by the ABC Group is a matter of concern.  As I have said, I have no doubt that bona fide concerns are held by Orchard and the Austock Companies.  However, it is significant that no formal notice requiring rectification of breaches of covenant has been given to the ABC Group by either Orchard or the Austock Companies.  They say there would have been no point in doing so, because of the operation of s 440C.  However, s 440C would not prevent a landlord from purporting to forfeit a lease by reason of breach of covenant.  On the other hand, s 440C would prevent the landlords from re-entering and the Receivers and the Administrators would be entitled to continue to remain in possession so long as they continued to pay the rent reserved in the leases and any other outgoings which the leases require to be paid by the tenants. 

45                        In the absence of a breach of covenant, the only basis upon which they would be entitled to re-enter, if s 440C did not prevent them, is the event of default constituted by the appointment of the Administrators and Receivers.  I make no finding as to whether there is any ground for giving notice of breach of covenant. 

46                        The Receivers have adduced evidence of substantial arrangements that are in place to ensure compliance with the covenants of the leases to repair and maintain demised premises.  Further, the commercial imperatives binding the Receivers are likely to ensure substantial compliance with the obligations to repair and maintain the premises.  The Receivers have an obvious commercial interest, over and above the legal obligations of the ABC Group, to comply with the repair and maintenance requirements imposed both by the leases and by the terms and conditions of child care licences. 

47                        The object of the continued administration has been to endeavour to demonstrate a positive cash flow and a profitable business that might be attractive to prospective buyers.  It is unlikely that a process of rehabilitation of the name of the ABC Group, in order to attract higher occupancy and profitability, would succeed without great attention being given to the condition of the premises on which the business is conducted.  Poorly maintained child care centres would be unlikely to attract favourable interest from potential buyers.  Further, failure to comply with the terms of covenants would permit landlords to withhold their consent to the assignment of leases and to terminate leases.  That, in a sense, is the most powerful bargaining point from the point of view of the landlords.  It may be cold comfort, but it is very significant, in my view, that the Receivers will not be able to achieve the sale of the business as a going concern, including with the leasehold interests in the child care centres, without the cooperation of the landlords. 

48                        The Receivers will be able to sell the business as a going concern only if they are able to persuade the landlords to consent to an assignment of leases to any prospective purchaser or purchasers.  It is in the interests of both Orchard and the Austock Companies to ensure that the premises continue to be used as day care centres.  It appears that the vast majority of the centres have been purpose built and it is appears unlikely, therefore, that the landlords’ return would be maximised by any use otherwise than as child care centres.  The same considerations, of course, apply to other landlords who have not been joined as parties to these proceedings or those who have not made any application for relief under s 440C.

49                        I have no doubt that there have been some failings on the part of the ABC Group, while under the control of the Receivers, in the carrying out of repair and maintenance obligations.  There is evidence from outside consultants indicating that there have been such failings.  However, it is by no means clear whether those failings occurred only during the period of the administrations or whether they occurred before the Receivers and the Administrators were appointed. 

50                        Much of the financial prejudice suffered by Orchard and the Austock Companies is the consequence of the insolvency of the ABC Group.  There is nothing very much to suggest that the immediate termination of the operation of Division 6 or the granting of leave pursuant to s 440C would alleviate the financial prejudice that has been suffered and is continuing to be suffered by the landlords as a result of the failure of the ABC Group to discharge their obligations. 

51                        The operation of division 6 is Draconian in some senses, in that it imposes very severe restrictions on the exercise of legal and proprietary rights that are bargained for by persons such as landlords in entering into arrangements with companies.  However, that, of course, is the consequence of dealing with limited liability companies.  Rightly or wrongly, the Parliament has introduced the regime of administration for insolvent companies. 

52                        Certainly, the expectation underlying Part 5.3A is that, in the ordinary course, an administration will come to an end within a relatively short period of a matter of weeks.  Much has been made of the fact that the present administration may well be longer than any other administration since the regime was introduced into the Corporations Act.  Be that as it may, there is a balancing exercise to be engaged in, in determining whether or not there should be an extension that will have the effect of prolonging the moratorium created by Division 6. 

53                        I am not persuaded that the Court does not have power in the circumstances of this case, to extend the time further for convening the meeting of creditors and prolonging the moratorium.  The extension is opposed because the only basis advanced in support of it is that a continuation is desirable, not for the purpose of the administration by the Administrators, but for an entirely ulterior and collateral purpose.  That ulterior and collateral purpose is said to be to extend the moratorium, which is an incident of the continuing administration, thereby preventing the landlords from exercising rights of re-entry, with the consequence that the Receivers are able to complete a disposition of the ABC Group’s assets in the manner that the Receivers conceive is best calculated to maximise the return to the consortium of banks.  It is put that the sole purpose of the proposed extension is to alter the respective rights and remedies of the banks and the landlords, with a view to placing the former in a more advantageous position at the expense of the latter. 

54                        Orchard and the Austock Companies frankly accept that they do not necessarily have an immediate intention of exercising rights of re-entry, if the extension were refused or if relief were given under s 440C.  As I understand their position, they accept that the best prospect of maximising their return and preserving their position is for the Receivers to achieve a beneficial sale of all, or as many as possible, of the ABC Group’s centres in one line or in several lines. 

55                        The notion of bundling was described by Mr Ian Townsing, who gave evidence on behalf of the Austock Companies.  It is not uncommon for commercial properties to be bundled together and handed to operators as a group.  That bundling allows lessors to provide a group of properties that, taken together, will provide a suitable return for the tenant, whereas they may not be commercially viable or attractive taken individually.  Thus, a lessor might grant leases to a tenant in a bundle consisting of two under-performing properties, one property with average performance and two properties with excellent financial performance.  Such a bundle is attractive for the tenant, whereas the two under-performing properties would be not be attractive taken alone. 

56                        The possibility that the Receivers might vacate poorer performing properties was a matter of concern to which I have referred earlier.  That matter leads to the conclusion that it is in the interests of both the Austock Companies and Orchard for the Receivers to be able to sell the centres in a single line as far as possible.  It is for that reason that it is unlikely that the landlords, if they were able, would re-enter and eject the ABC Group from the centres, so long as there was still a possibility of the sale of all of the centres in a single line, thus achieving the benefits of bundling. 

57                        To that extent, it might be fair to say that the issue between the parties presently before me is one of negotiation and strategy.  The landlords complain that the effect of the extension of the administration is to put them in a worse position, from a bargaining point of view, than they would be in if they were able to threaten re-entry.  Orchard, in particular, suggests that what the Receivers are endeavouring to do is to put the consortium of banks in the position they might have been in had they negotiated appropriate terms with the landlords as part of their security.  For the reasons I have endeavoured to explain, I do not consider that that is a matter that necessarily determines the outcome of this application. 

58                        I am not persuaded that the purpose of this present application can fairly be characterised as an ulterior or collateral purpose, such that the extension should be refused in limine.  I have concluded that there should be an extension of the convening period up to and including 31 March 2010 and that, at this stage, leave under s 440C should be refused. 

59                        It is of some significance that the Commonwealth, after sitting on the fence for some time, finally jumped onto the side of the Receivers and Administrators, in supporting the application for an extension on the basis of the public interest in maintaining the ABC Group’s business as a going concern, such that the child care centres will continue to provide services for parents and children.

60                        The Commonwealth, of course, has an interest as a creditor, insofar as the GEERS scheme has been applied pursuant to an order made by the Court on 22 December 2008, as though the ABC Group were in liquidation (see [2008] FCA 2009).  To the extent that the Commonwealth has, through the GEERS scheme, provided funds for the meeting of entitlements of employees, the Commonwealth is entitled to be treated as a creditor.  However, as I understand the position, the Commonwealth has adopted the position that it is in the public interest for there to be an extension of the time for convening the creditors’ meeting and therefore an extension of the moratoriums under Division 6.  Nevertheless, the Commonwealth has suggested that it is appropriate that any extension should be on some terms. 

61                        That then brings me to the question of the terms upon which any extension should be granted.  Orchard proposed that it should be a term of any extension that an order be made under s 447A that, with effect from 1 October 2009, Part 5.3A is to operate as if the reference to “property” in s 440C were a reference only to a property in respect of which the Receivers have, not later than 30 September 2009, expressly adopted the lease in their capacity as receivers of the ABC Group.  As I understand the position, it is intended that the Receivers become personally liable under such leases.  I do not consider that such a term is appropriate or necessary.

62                        The Receivers may well be entitled to an indemnity from their appointors in respect of any liability that they may incur.  However, I do not consider that the imposition of such a liability is necessary to ensure the result that is contemplated by Part 5.3A.  There is a balancing exercise involved in weighing up the interests of landlords, whose proprietary rights are substantially qualified by the operation of s 440C, and the object of endeavouring to preserve the business of the ABC Group as a going concern, if not so much for the benefit of unsecured creditors, at least for the benefit of employees and parents and children who use the facilities of the child care centres.  There is, of course, the perhaps faint possibility that unsecured creditors may benefit from the results of a sale by the Receivers, if the charges in favour of the consortium of banks are successfully impugned. 

63                        The Austock Companies and the Receivers and Administrators have reached some accord in relation to the proposed terms upon which an order for extension might be made, if the Court were otherwise disposed to grant the extension and decline to give relief under s 440C.  The terms generally involve the Receivers undertaking to commence the sale process forthwith and to use their best endeavours to follow the timing set out by Mr Honey in his affidavit of 10 August 2009.  By that affidavit and his oral evidence, as I have previously foreshadowed, Mr Honey expressed the intention to endeavour to achieve completion of a sale by January or February 2010.  Significantly, the terms involve the Receivers providing significant information to the landlords in relation to any bid that may be received by them, and to act generally to ensure that the landlords have some participation in that process.  The Receivers are also to undertake to use their best endeavours to procure a sale of all the child care centres operated by them, thereby at least to some extent obviating the risk of what has been described as “cherry picking”.  Further terms are provided to ensure some degree of comfort to the landlords in relation to the compliance with obligations arising under the leases and under the law generally concerning essential services.  The terms agreed on between the Austock Companies and the Receivers and the Administrators are, I consider, I appropriate for the protection of landlords.  It would be appropriate that similar arrangements be proffered to other landlords who seek such arrangements from the Receivers and the Administrators. 

64                        I propose to invite the parties to indicate the orders that they now ask me to make, in the light of the conclusions that I have reached. 

Associate:

Dated:         20 August 2009

Schedule 1

All in Administration

Receivers and Managers Appointed