FEDERAL COURT OF AUSTRALIA

Pavlakis v Equmen Pty Limited (No 2) [2014] FCA 951

THE COURT ORDERS THAT:

1.    Service on the parties of the interlocutory process filed on 27 August 2014 under r 2.7(2) of the Federal Court (Corporations) Rules 2000 (Cth), be dispensed with.

2.    Pursuant to s 436B(2)(g) of the Corporations Act 2001 (Cth) (the Act), leave be granted to David Joseph Levi (the applicant) in his capacity as provisional liquidator of the defendant to appoint himself, by writing, as administrator of the defendant.

3.    Pursuant to s 447A of the Act, the provisions of Part 5.3A of the Act apply to the defendant as follows:

(a)    The need for convening and holding the first meeting of creditors pursuant to s 436E of the Act be dispensed with.

(b)    The convening period for the second meeting of creditors pursuant to s 439A of the Act be varied so that the convening period ends on 3 September 2014.

4.    The listing of the originating process for hearing for final relief on 3 September 2014 be varied so that the hearing be for directions only, not for final relief.

5.    When convening the meeting of creditors to be held under s 439A of the Act, the applicant is to draw to the attention of creditors their ability to appoint, at the meeting, a person other than the applicant as either administrator of any deed of company arrangement or as liquidator of the defendant, should the meeting resolve to do so.

6.    Leave be granted to any person demonstrating sufficient interest, to vary or discharge these orders on 2 days’ notice to the applicant and to the Court.

7.    The applicant’s costs of the interlocutory process filed on 27 August 2014 be costs in the provisional liquidation of the defendant.

8.    The applicant inform the plaintiff and the known creditors of the defendant of the making of these orders and their content as soon as practicable, either by email for those persons for whom a valid email address is known, or by notice sent by pre-paid ordinary mail.

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

REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT)

1    On 20 August 2014, I made orders appointing a provisional liquidator to Equmen Pty Limited (the defendant): Pavlakis v Equmen Pty Limited [2014] FCA 929. On the same day, the hearing of the originating process seeking the winding up of the defendant was listed for hearing at 10.15 am on 3 September 2014.

2    By interlocutory process filed on 27 August 2014, the provisional liquidator, Mr Levi, seeks an order under s 436B(2) of the Corporations Act 2001 (Cth) (the Act) that leave be granted to appoint himself as administrator of the defendant.

Background

3    The circumstances giving rise to this application can be stated briefly. On 7 August 2014, Mr Levi was appointed as administrator of Gavin Jones Communications Pty Limited (Gavin Jones Communications), Vibe Australia Pty Limited (Vibe) and Deadly TV Pty Limited (Deadly TV). At the time of those appointments, Gavin Jones Communications, Vibe, Deadly TV and the defendant were related entities. Gavin Jones Communications, Vibe and Deadly TV were also substantial creditors of the defendant.

4    Following his appointment as provisional liquidator, Mr Levi received written confirmation from the plaintiff, who is the Chief Executive Officer of the defendant, of his preparedness to make available a total of $300,000 to be used as part of separate deed funds for separate deeds of company arrangement for the defendant, Gavin Jones Communications, Vibe and Deadly TV.

5    Although that confirmation was only received recently, it is apparent from the evidence that the plaintiff and his lawyers have been in communication with Mr Levi since about mid-July 2014 in relation to the fate of the four companies, following the late Mr Jones’ sudden death on 12 July 2014. At the time of his death, Mr Jones was the sole director, or at least acting as the sole director, of each company, between whom there was not only intercompany indebtedness but also a degree of intermingling of funds. Given the plaintiff’s preparedness to contribute funds for the benefit of each company’s creditors, the real prospect now exists for deeds of company arrangement to be proposed in relation to each company.

The deed of company arrangement proposals

6    The overall proposal is as follows. The intercompany liabilities of each of the four companies will be released. A fund of money will be made available by the plaintiff in the total amount of $300,000: $50,000 is to be paid into a fund for Gavin Jones Communications; $100,000 is to be paid in a fund for Vibe; $50,000 is to be paid into a fund for Deadly TV; and $100,000 is to be paid into a fund for the defendant. The assets of each of the four companies will be sold and the proceeds - after the costs of sale and adjustments, and the payment of expenses and remuneration - will be paid, respectively, into the relevant deed fund for each company.

7    Employee creditors of each company will prove in the deed fund applicable to them. It is anticipated that employee creditors will be put in a position equal to or better than the respective positions they would be in if all companies were placed into liquidation. Trade creditors of each company will prove in the deed fund applicable to them. It is anticipated that they will also be put in a position which is equal to or better than the respective positions they would be in if all companies were placed into liquidation.

8    On the basis of the creditors known to Mr Levi at the present time, and assuming a smooth running of the deed administration in respect of the defendant, Mr Levi estimates that all unrelated creditors of the defendant (ie, creditors other than each of the other three companies) will have their claims paid in full.

9    I should note that the deed of company arrangement proposal in respect of the defendant will be one that does not contemplate the defendant trading or incurring any new debts. I should also add that the defendant has not traded since Mr Levi’s appointment as provisional liquidator on 20 August 2014, other than in respect of the sale of stock in one line to corporate customers in the United Kingdom, United States of America and Australia.

10    Since his appointment as provisional liquidator, Mr Levi has carried out a range of tasks about which he has given evidence. These tasks include sending a circular to known creditors advising them of his appointment as provisional liquidator. The circular contained declarations of Mr Levi’s independence and of his relationships, including the circumstances of his appointment as provisional liquidator of the defendant and of his appointments as administrator of Gavin Jones Communications, Vibe and Deadly TV. In that circular, creditors were informed about the hearing of the winding up application in respect of the defendant on 3 September 2014.

11    Following the plaintiff’s confirmation of his preparedness to provide the funds to which I have referred, Mr Levi sent a circular to known creditors informing them of his intention to seek leave to appoint himself as administrator of the defendant. The circular was only sent yesterday morning (28 August 2014) shortly after 11.00 am. Thus, the notice to creditors has been short, given that confirmation of the plaintiff’s preparedness to contribute funds was only received the previous evening. Accepting that the notice to creditors has been short, no creditor has come forward to oppose leave being granted.

Legal principles

12    When considering the question of leave under s 436B(2), the Court does not generally concern itself with the question of whether placing the company into administration is advisable. Rather, the question for the Court is the appropriateness of, in this case, the provisional liquidator also being appointed as administrator. In Re Cobar Mines Pty Limited (rec & mgr apptd) (in liq) (1998) 30 ACSR 125, Bryson J, at 126-127 said:

The Corporations Law does not explicitly indicate the considerations upon which leave under s 436B(2) is to be granted or withheld. It seems natural that there should be some control over a decision by a liquidator to appoint himself to another office when the liquidator has made a decision which brought that office into being and made an appointment necessary. If it appears to the court that it is a proper course that the liquidator should have the position of administrator as well as that of liquidator, the court should give leave. The test for leave is not a high one, and an important part of its context is that the court does not control the decision whether or not there is to be an administrator, and is asked for leave only on the subsidiary question who that is to be. If attaining the office of administrator is seen by the court as an inappropriate or unnecessary advantage for the liquidator to have, leave should be refused. The power to grant or withhold leave is to be exercised on relevant grounds, but the ambit of relevance set by the purposes of the legislation is very wide. The grounds on which leave may be granted or withheld cannot bear much burden of exposition or jurisprudence, and the court's power must be addressed on each occasion with a view to whatever relevant considerations present themselves.

The liquidators’ solicitor referred me to reported cases in which courts have acted under s 436B(2) namely Re Depsun Pty Ltd (1994) 13 ACSR 644 (Young J) and DCT v Foodcorp Pty Ltd (1994) 13 ACSR 796 (Hodgson J); and to references to the powers in s 436B and related powers in Beatty v Brashs Pty Ltd (1998) 26 ACSR 685 (Finkelstein J). In my opinion it is difficult to take exposition to any greater particularity that [sic] the observation of Hodgson J in Foodcorp at 799:

In my view the main question in an application such as this is whether the liquidator or provisional liquidator is an appropriate person to be an administrator.

13    In Parkes Leagues Club Co-op Limited (in liq) [2004] NSWSC 16, Hamilton J discussed Bryson J’s observation that the test for leave is not a high one. His Honour said:

5    Bryson J has stated in Cobar at 126 that the "test for leave is not a high one". What his Honour meant by that, I take it, is that, bearing in mind the desirability of continuity of those in charge of the management of the company and the implementation of the proposal, a liquidator who has commenced the process should generally be given leave to appoint himself as the administrator, unless there is some distinct reason why he should not be deemed a suitable person in the circumstances. Such a consideration might arise from doubts as to his independence, a suggestion that was considered but rejected by Barrett J in Nardell at [9]–[10]. There is no suggestion in the material laid before me in this matter that there is any reason from that point of view why Mr Wykes should not become the administrator, nor does any other reason appear from the material as to why it should not be himself that he appoints. In those circumstances I am prepared to grant leave under s 436B(2).

14    In Peter Ngan re JKB Constructions Pty Limited (in liq) (2006) NSWSC 1040, Barrett J referred to Re Cobar Mines and Parkes Leagues Club, as well as a number of other cases, and observed:

5    In the case of Re Cobar Mines Pty Ltd (1998) 30 ACSR 125 and succeeding cases (eg, Re Nardell Coal Corporation Pty Ltd (2003) 47 ACSR 122; Re Parkes Leagues Club Co-operative Ltd [2004] NSWSC 16; Re Taylor; Origin Internet Solutions Pty Ltd [2004] FCA 382; Hall v Arrernte Council of Central Australia Aboriginal Corporation [2004] FCA 1738; Rupert Co Ltd v Chameleon Mining NL [2005] NSWSC 719), it is made clear that the burden to be discharged upon an application such as the present is not a particularly onerous one and that the main question is whether the liquidator is an appropriate person to be administrator. There is particular focus on any possibility of conflict of interest. Nothing is suggested in this case that would make Mr Ngan other than a suitable administrator and his application in that respect should be granted.

15    Although these cases talk about the test not being a high one or an onerous one, in In the matter of Keldane Pty Limited (in liq) (subject to deed of company arrangement) [2011] VSC 385, Pagone J (when in the Supreme Court of Victoria) observed that the granting of leave is not something to be treated as “a mere formality, or mere procedural obstacle”. His Honour continued:

13    … Section 436B is the expression of a legislative policy designed to keep separate the roles, tasks, duties and privileges of liquidators on the one hand and of administrators of a company on the other. Its terms require compliance and dispensation from its requirements should not be given lightly.

Submissions

16    Counsel, on behalf of Mr Levi, has put forward three reasons why leave should be granted in the present case.

17    First, he submits that since the affairs of the defendant are intermingled with companies of which Mr Levi is already administrator, there are obvious efficiencies and economies involved in Mr Levi also being appointed as administrator of the defendant, rather than a third party being appointed.

18    Secondly, he submits that, given that Mr Levi has already taken investigative steps and familiarised himself with the affairs of the defendant, it is obviously desirable that this work not be duplicated by another person, particularly where the defendant is apparently insolvent, and the duplication of costs would need to be borne from the defendant’s estate. In that connection, he also submits that it is desirable for continuity to be maintained in respect of the present management of the defendant.

19    Thirdly, he submits that, given that Mr Levi has already been involved in negotiations with the plaintiff, in respect of the proposed deeds of company arrangement, it would be wasteful and time-consuming for a third party to take Mr Levi’s place in those negotiations, given that they are at an advanced stage.

Consideration

20    It seems to me that, in the present case, the first two reasons advanced are really neutral considerations. I accept that there are obvious efficiencies and economies involved in a provisional liquidator such as Mr Levi being appointed as administrator. However, this is likely to be the case in many applications brought for leave under s 436B(2) and Mr Levi’s appointment as provisional liquidator has only been for a short time.

21    The third reason seems to me to be more compelling. As I have said, the evidence indicates that Mr Levi has been in discussions with the plaintiff and his solicitors for some time and that this has resulted in proposals that appear to be beneficial for the creditors of all the companies and, in particular, the defendant. That success is no doubt due in part to Mr Levi’s involvement. As such, it may not be wise to introduce another party as administrator, particularly at such an advanced stage of the negotiations.

22    The evidence does not reveal any apparent conflict in interest between Mr Levi’s position as provisional liquidator of the defendant and the position of administrator of the defendant, should he occupy that position. Further, the evidence does not reveal any apparent conflict in interest between Mr Levi’s position as administrator of the defendant, should he occupy that position, and his position as administrator of each of the other three companies.

23    Absent any compelling reason against granting leave, it seems to me that leave under s 436B(2) should be granted to Mr Levi to appoint himself administrator of the defendant. The effect of this appointment will be that, while the defendant is in administration, Mr Levi will not perform or exercise his functions or powers as provisional liquidator: see s 437C(1) of the Act.

Relief under s 447A to coordinate creditors’ second meetings

24    Mr Levi also seeks relief under s 447A as to how Pt 5.3A of the Act is to operate in relation to the defendant, so far as concerns the convening of creditors’ meetings. Mr Levi seeks dispensation with respect to the requirement under s 436E of the Act for the holding of a first meeting of creditors. He also seeks to have the convening period in relation to the second meeting of creditors with respect to the defendant varied, so that it ends on 3 September 2014. The purpose of these modifications to the operation of Pt 5.3A, in relation to the defendant, is to have the second creditors’ meetings in respect of all four companies involved in the deed of company arrangement proposals, at the same time.

25    The purpose of the first meeting of creditors of a company in administration is to determine whether or not to appoint a committee of creditors. It also gives the creditors an opportunity to remove an existing administrator and appoint an alternative administrator. Counsel submits that, in the present case, the loss of opportunity to appoint a committee of creditors or to replace Mr Levi as administrator is significantly outweighed by the potential benefit to creditors which would flow from the deed of company arrangement that is proposed.

26    Given that the proposed deeds of company arrangement are essentially interlinked, in that each company will forgive the debts of the others, he also submits that it is likely that the proposals will stand or fall together. For this reason, he submits, it is desirable that the second meetings, at which the deed of company arrangement proposals will be considered, be held at the same time. Counsel also refers to the fact that there will be cost-savings and other efficiencies if the second meeting of creditors of each company is held at the same time.

27    Finally, counsel submits that, although by dispensing with the requirement for a first meeting, creditors of the defendant will not have the opportunity to replace Mr Levi as administrator, they will have the opportunity to choose a different deed administrator under s 444A(2) of the Act, should the deed of company arrangement proposal in respect of the defendant be acceptable. Alternatively, if the creditors choose to place the defendant into liquidation under s 446A(1)(a), then, under s 499(2A)(a), they will have the opportunity to choose whom they wish to be liquidator.

28    I am not persuaded that the potential benefits of the deed of company arrangement proposal in respect of the defendant are such that, alone, they outweigh the loss of opportunity to creditors that would result from dispensing with the first creditors’ meeting. Nonetheless, if dispensation is granted, an opportunity to replace Mr Levi as administrator of the company will remain, although not in the convenient way provided by s 436E(4). Further, should the creditors wish to appoint a committee of creditors, this can be achieved by application under s 447A of the Act, although, once again, not in the convenient way provided by s 436E(1). Thus, the issue is, really, one concerning the loss of convenience to creditors of the mechanisms provided by s 436E.

29     In considering that matter, I take into account the fact that Mr Levi has already communicated by circular with the known creditors, the background to, and reasons for, his appointment as provisional liquidator, and his intention to seek leave to appoint himself as administrator of the defendant. In those circumstances, he has given notice of the hearing before the Court, at which creditors may come forward to oppose either his appointment as provisional liquidator or as administrator. No person has come forward today to oppose the leave application or to make any other application in respect of Mr Levi’s appointment presently as provisional liquidator.

30    In all the circumstances, I am persuaded that the operation of Pt 5.3A of the Act should be modified in the way sought. I think that it is highly desirable that the second meeting of creditors of each company be coordinated, so that they occur on the same day, and approximately at the same time, given the practical interdependence of each proposal. I accept that cost-savings and other efficiencies will be achieved. However, I think, as counsel has suggested, that it is highly desirable that when convening the meeting of creditors, at which the deed of company arrangement proposal in respect of the defendant is to be considered, the attention of creditors be drawn to the existence of their right to appoint a different person as either administrator of any deed of company arrangement or, if the defendant were to be placed into liquidation, to appoint a different person as liquidator of the defendant.

31    Mr Levi seeks a vacation of the hearing appointed for 3 September 2014. I am not minded to adjourn that hearing now, for the reason that some creditors, having notice of that hearing, may not have sufficient notice of today’s hearing. I will, however, change the listing to one for directions only, so that it is not one for final hearing.

Disposition

32    For these reasons, relief substantially as sought by Mr Levi, should be granted.

Associate:

Dated:    29 August 2014