FEDERAL COURT OF AUSTRALIA

Weston, in the matter of Flush Fitness Pty Ltd (Administrator Appointed)

[2017] FCA 172

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act), the period within which the plaintiff must convene a meeting of creditors of Flush Fitness Pty Ltd (administrator appointed) (the company) under s 439A of the Act be extended by 90 days, up to and including 5 May 2017.

2.    Pursuant to s 447A(1) of the Act, the meeting of the creditors of the company required by s 439A of the Act may be held at any time during, or within 5 business days after the end of, the convening period as extended by Order 1 notwithstanding the provisions of s 439A(2) of the Act.

3.    Liberty be granted to the plaintiff to apply to the Court for any further extension of the convening period referred to in Order 1 at any time prior to 5 May 2017.

4.    With respect to:

(a)    those creditors (including persons claiming to be creditors) of the company (or any of them) for whom the plaintiff has a current postal, facsimile or email address (known creditors); and

(b)    the Australian Securities and Investments Commission (ASIC),

the plaintiff inform the known creditors and ASIC of these orders by means of circular forwarded by post, facsimile or email address (as appropriate) by 4:00 pm on 14 February 2017.

5.    The plaintiff place on the website of Pitcher Partners, with respect to the company, notice of the making of these orders by 4:00 pm on 17 February 2017.

6.    Liberty to apply be granted to any person including any creditor who can demonstrate sufficient interest to make such application as he, she or it may be advised, to vary or discharge these orders upon 3 days' written notice being given to the plaintiff and to the Court.

7.    The costs of this application be paid out of the administration of the company.

8.    Liberty be granted to the plaintiff to apply for the purpose of implementing these orders.

9.    These orders be entered forthwith.

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

REASONS FOR JUDGMENT

YATES J:

1    The plaintiff, Mr Weston, is the administrator of Flush Fitness Pty Ltd (administrator appointed) (the company). He was appointed on 13 January 2017 pursuant to s 436A(1) of the Corporations Act 2001 (Cth) (the Act).

2    On 10 February 2017, Mr Weston applied pursuant to s 439A(6) of the Act to extend the period under s 439A(5) for convening the second meeting of creditors of the company. But for the extension, the convening period would expire on 14 February 2017.

background

3    The company is the trustee of the Flush Fitness Business Trust (the Trust), the named beneficiary of which is Steven Richard Hines. Mr Hines is also the sole director of the company and the appointer under the Trust.

4    In its capacity as trustee, the company carries on business as an importer and wholesaler of fitness related supplements. The business is carried on from premises at 288 Lorimer Street, Port Melbourne, Victoria. The supplements are sold to major retailers in Australia (including Woolworths, Coles and Chemist Warehouse), gyms and smaller retailers in the health and fitness industry.

5    Based on book value, the Trust has total estimated assets of approximately $7.239 million and total estimated liabilities of approximately $18.328 million, resulting in an estimated net deficiency of assets of approximately $11.088 million. The sole secured creditor is Bank SA, which is owed approximately $8.894 million. The Trust has priority creditors who are owed approximately $0.219 million in respect of employee superannuation entitlements, and unsecured trade creditors who are owed approximately $9.214 million. The trade creditors comprise both local and overseas creditors.

6    Since his appointment, Mr Weston has continued to trade the business with a view to selling it as a going concern. At the time of Mr Weston’s appointment, the company had no available funds to meet critical payments required to obtain the release of key goods held by freight forwarders and carriers. Mr Weston has now obtained third party funding to allow short term trading to continue.

7    Mr Weston’s investigations to date have revealed:

    possible instances of fraudulent activity by Mr Hines;

    the possibility that the company may have been insolvent from at least February 2016 and that a significant insolvent trading claim may be available to a liquidator, if appointed;

    the fact that a large number of payments may have been made as voidable transactions; and

    potential contraventions by the company of the National Measurement Act 1960 (Cth), with the respect to the sale of stock that had previously been withdrawn from sale by the National Measurements Institute in about October 2016.

8    As at 10 February 2017, Mr Weston had received some 19 expressions of interest to purchase some or all of the assets of the Trust, including the business as a going concern. Mr Weston wishes to continue to trade the business for up to eight weeks (that is, until about 7  April  2017) so that a sale process, involving the following possible steps, can be undertaken:

    advertising the sale in the Australian Financial Review newspaper, trade magazines and other suitable media;

    preparing and issuing information memoranda and setting up a virtual data room;

    implementing a two week tender process;

    undertaking contract negotiations for a further two week period, which would also allow due diligence to be undertaken; and

    providing for contract execution and business handover for a further week.

9    As at 10 February 2017, no deed of company arrangement (DOCA) had been proposed. However, Mr Hines has indicated his intention to submit such a proposal and has sought information (including Trust records) to assist him in that regard. Mr Weston has correctly noted that, if a proposed DOCA is received, and competes with any offers to purchase the business and/or assets of the Trust, it will be necessary for him to put these competing proposals to the creditors at the second meeting.

The extension of time

10    Mr Weston seeks an extension of the convening period in order to:

    conduct and conclude the sales process referred to above;

    allow any DOCA proposal to be formulated and considered;

    allow sufficient time to carry out further investigations in relation to the matters I have briefly noted at [7] above; and

    issue a report to creditors on these matters, in accordance with s 439A(4) of the Act.

11    Apart from the time required for the proposed sale process, Mr Weston has expressed the view that he will require up to three months to properly carry out the investigations which he considers to be necessary. At the present time, he has not been able to reach a view as to the quantum of any likely insolvent trading claim or the sums that might be recovered as voidable transactions. He also needs to complete his review of the Trust’s financial records to identify any unlawful payments that might have been made to Mr Hines.

12    Mr Weston has informed Bank SA of the present application. Bank SA consents to the extension that is sought. Mr Weston has also contacted the Trust’s major Australian creditors. Only one of these creditors has signified its consent to the extension that is sought. That said, the creditors who have been notified have not signified any opposition to the extension. Currently the company has 28 employees, 20 of whom have confirmed that they have no objection to the convening period being extended. The remaining eight employees have not expressed any objection to the extension. The Australian Securities and Investments Commission (ASIC) has been informed of the application. Counsel for the plaintiff read a communication from ASIC in which it stated that it regarded the present application as a matter left for the Court’s determination and that it did not intend to appear or seek leave to intervene.

13    For good reason, Mr Weston has expressed his concern that if the company is wound up prior to completion of the contemplated sale, various supply contracts may be terminated and the employment of the present employees lost. Mr Weston has said that both events would likely materially jeopardise a proposed sale and, at the very least, significantly reduce the price that a purchaser might be willing to pay for the Trust’s assets.

Consideration

14    In considering an application of this nature, the Court is involved in a balancing exercise. A balance needs to be struck between the expectation that an administration under Pt 5.3A of the Act will be conducted with relative speed, to which the relevant provisions of the Act give due regard, and the requirement that “speed not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders”: Collective Olive Groves Limited, in the matter of Collective Olive Groves Limited; application by Reidy [2009] FCA 177 at [18]; Diamond Press Australia Pty Limited [2001] NSWSC 313 at [10].

15    In Re Riviera Group Pty Ltd (administrators appointed) (receivers and managers appointed) (ACN 102 298 279) & Ors (2009) 72 ACSR 352, Austin J surveyed the case law that informs the exercise of the discretion that arises in cases such as the present one. It is not necessary for me to set out or summarise all that his Honour said on that matter. It is sufficient for present purposes for me to note that his Honour observed (at [16]) that in balancing the expectation of an expeditious administration against the risk of prejudice, there cannot be any predisposition in favour of a speedy administration because that would skew the balancing process.

16    In Lombe Re Australian Discount Retail Pty Ltd [2009] NSWSC 110, Barrett J said (at [20]-[21]):

20    In the circumstances as they now exist, it would, in a real sense, be counterproductive for the administrators to be compelled to bring on the second meeting of creditors quickly. The purpose of that meeting is to decide the company's future - whether the administration should end, whether the company should pass into liquidation or whether any deed of company arrangement proposal should be accepted (there is, I might say, no deed of company arrangement proposal in this case, at least at this stage).

21    The second meeting of creditors is best held at a time when it is possible to give creditors fairly definitive financial information that will assist them in this decision making. In the present case, information about the financial consequences of a sale of the business is crucial, assuming such a sale eventuates. In addition, creditors' decision-making will be much more difficult and more complicated if they are compelled to make a decision about the company's future based on speculation about the possibility of a going-concern sale. Further time for the formulation and digestion of recommendations based on established realities will avoid the possibility of what might be a premature decision in favour of winding up as the only practically available option.

17    Those observations are entirely apposite to the present case, particularly given that there may well be competing proposals in relation to either a sale or entry into a DOCA. Those observations are also apposite, however, when there may be substantial claims, with the prospect of substantial recoveries, to a future liquidator. The creditors should have before them the best financial information that reasonably can be made available to enable them to make an informed, and not a premature, decision concerning the fate of the company.

18    Based on the evidence before me, I am satisfied that it is appropriate to extend the convening period by 90 days, as Mr Weston seeks.

Disposition

19    Orders, substantially as sought, should be made. I will also order that notice of the Court’s orders be posted on Mr Weston’s firm’s website. As is now usual, the orders will grant liberty to apply to any interested party to vary or discharge the orders on proper grounds being shown.

Associate:

Dated:    28 February 2017