FEDERAL COURT OF AUSTRALIA

Park (Administrator), in the matter of Surfstitch Group Limited [2017] FCA 1221

ORDERS

THE COURT ORDERS THAT:

Interim Orders

1.    An order that the Originating Process be made returnable instanter.

Extension of Convening Period

2.    An order pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (“Act”) that the convening period within which the plaintiffs must convene the second meetings of creditors of Surfstitch Group Limited (Administrators Appointed) ACN 602 288 004 and Surfstitch Holdings Pty Limited (Administrators Appointed) ACN 601 114 603 (together, “the Companies”) under section 439 of the Act (“Second Meetings”) be extended from 22 September 2017 to 21 December 2017.

3.    An order pursuant to section 447A(1) of the Act that Part 5.3A of the Act is to operate such that the Second Meetings may be held, together or separately, at any time during, or within five business days after the end of, the convening period as extended by paragraph 2 above, notwithstanding the provisions of section 439A(2) of the Act.

Service and Notices

4.    An order that the plaintiffs, within two business days of making these orders, are to take all reasonable steps to give notice of the orders to the Companies’ creditors (including the persons claiming to be creditors), by means of a circular:

(a)    to be sent by email transmission to creditors for whom the plaintiffs have a current email address; or

(b)    to be sent by ordinary post to creditors for whom the plaintiffs have only a postal address.

5.    An order pursuant to section 447A(1) of the Act that Part 5.3A of the Act is to operate such that the requirement on the plaintiffs to issue notices under ss 75-225(1) and 75-15 of the Insolvency Practice Rules (Corporations) 2016 (Cth) be modified such that notice of the Second Meetings will be validly given to any creditors by, not less than five business days prior to the date of the proposed meeting:

(a)    giving such notice electronically by email sent to the email address of any creditor (including persons claiming to be creditors) of the Companies for whom or which the plaintiffs hold an email address;

(b)    sending such notice to the postal address or facsimile number, or otherwise as provided for by the Act or the Insolvency Practice Rules (Corporations) 2016 (Cth), to any creditors not being a creditor referred to in sub-paragraph (a); and

(c)    causing such notice to be published in The Insolvency Notices website located at: https://insolvencynotices.asic.gov.au/.

6.    An order that the following parties have liberty to apply on giving the plaintiffs not less than 2 business days’ notice:

(a)    any person who can demonstrate sufficient interest (including any creditor of the Companies) for the purpose of modifying or discharging any orders made pursuant to paragraphs 2 and 3 above; and

(b)    the plaintiffs, for the purpose of seeking any further extension of the convening period.

Confidentiality

7.    An order pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary for the proper administration of justice, that the Confidential Affidavit of Joseph Ronald Hansell sworn on 15 September 2017 be marked “Confidential”, be filed electronically and not be published, disclosed or accessed except pursuant to an order of the Court.

Costs and other orders

8.    The plaintiffs’ costs of and incidental to this application be costs and expenses in the administration of each of the Companies, and be paid out of the assets of the Companies.

9.    A direction 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

GLEESON J:

1    On 15 September 2017, I heard an ex parte application made by the joint and several voluntary administrators (“administrators”) of Surfstitch Group Limited (“SGL”) and Surfstitch Holdings Pty Ltd (“SHPL”) (together “companies”) under ss 439A and 447A of the Corporations Act 2001 (Cth) (“the Act”) to extend the convening periods for the second meeting of the companies’ creditors to 21 December 2017 (that is, a period of three months), and for consequential orders.

2    The convening periods were due to expire on 22 September 2017. I was satisfied that the convening periods should be extended. Accordingly, I made orders in the terms sought by the administrators, with minor modifications. My reasons for making those orders are as follows.

3    The application was supported by two affidavits of Joseph Hansell, one of the administrators, both sworn 15 September 2017 and by written and oral submissions made by Mr Rose, counsel for the administrators. One of the affidavits contained commercially sensitive confidential material (“confidential affidavit”). In summary, the administrators sought the extension of the convening periods to allow time:

(1)    for a potential deed of company arrangement (“DOCA”) to be propounded;

(2)    for investigations to be conducted concerning complex litigation brought against the companies;

(3)    for sales processes to be undertaken in respect of various of the companies’ assets; and

(4)    for other investigations of the affairs of the companies so that the administrators may form the opinion required under rule 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth).

4    Mr Hansell expressed the belief that no creditor would suffer any prejudice if the convening periods were extended to 21 December 2017, and that it was in the interests of creditors to extend the convening period for reasons set out below.

Background facts

5    The administrators were appointed to the companies on 24 August 2017, in each case pursuant to a resolution of the board in accordance with s 436A of the Act.

6    SGL is an e-commerce retailer of action sports and youth apparel, operating across multiple jurisdictions including Australia, the United Kingdom, the United States of America and France. SGL conducts, through its subsidiary companies, retailing and media operations.

7    SGL is listed on the Australian Securities Exchange. In accordance with s 437F(1) of the Act, its shares are currently suspended from trading.

8    The only assets of SGL appear to be the shares in SHPL. SHPL’s assets appear to be certain intellectual property and shares in certain operating subsidiaries. SHPL also employs a number of the group’s senior management.

9    SHPL’s subsidiaries (“operating subsidiaries”) conduct the following businesses:

(1)    Surfstitch Australia, operated by Surfstitch Pty Limited, which is a retailer of brands including Billabong and SWELL (the group’s own brand);

(2)    Surfdome, operated by Surfdome Shop Limited (a company incorporated in the United Kingdom), which services the European market from its base in the United Kingdom. Its product mix is estimated at 60% surf, 20% skate and 20% snow;

(3)    SWELL, operated through Surfstitch USA, Inc (a company incorporated in the United States of America), which services the American market;

(4)    STAB, operated through Rollingyouth Pty Ltd and its wholly owned subsidiary Rollingyouth US, Inc (a company incorporated in the United States of America), which produces Stab Magazine, a quarterly surfing magazine and is an online surf publishing network; and

(5)    MSW, operated by MetCentral Ltd, which is a wholly owned subsidiary of Magic Seaweed Limited (both companies are incorporated in the United Kingdom), which consists of user generated surf reports for surf locations worldwide.

10    The operating subsidiaries continue to trade in the ordinary course, under the control of their respective boards, although the administrators oversee the operations in a similar manner to the oversight that the directors and management of SGL had over the operating subsidiaries prior to the administrators’ appointment.

Administration to date

11    The first creditors’ meetings for the companies were held concurrently on 5 September 2017. On that occasion, creditors were informed that:

(1)    the administrators were appointed only over the companies and that the primary reasons for the appointment were two shareholder class action lawsuits (described below) and “other issues attached to the two entities”;

(2)    a draft DOCA proposal had been received from one of the non-executive directors of SGL, the terms of which were confidential at that stage and that over the coming weeks, the administrators would be seeking proposals from other interested parties; and

(3)    the administrators proposed to make an application to extend the convening period for the second meeting of creditors for a further 30 or 60 days.

12    Since their appointment, the administrators have undertaken the following tasks in relation to each of the companies:

(1)    preparing for and conducting the first creditors’ meetings;

(2)    investigating each company’s business, property, affairs and financial circumstances, pursuant to s 438A of the Act, including identifying potential voidable transactions;

(3)    liaising with the directors and representatives of the companies, including in relation to access to books and records of the companies, and also the financier to each company, Westpac Banking Corporation (“Westpac”);

(4)    progressing or formulating sale processes for the operating subsidiaries and a process for seeking recapitalisation proposals for the companies; and

(5)    addressing queries from creditors, including employees and trade creditors, including to discuss the nature and implications of the appointment of voluntary administrators.

13    At the time of Mr Hansell’s affidavit, the administrators had not finalised processing all proofs of debt. Mr Hansell’s preliminary investigations indicate that the companies have only one secured creditor, being Westpac. The administrators’ preliminary investigations indicate that Westpac has cash cover in excess of the companies’ current liability to it.

14    The administrators have determined that the companies are not party to any leases. The Surfstitch Australia business is operated from the group’s headquarters in Burleigh Heads and its distribution centre in Coomera, Queensland. The lessee in each case is Surfstitch Pty Ltd, one of the operating subsidiaries.

15    SHPL currently employs eight people. Since the administrators’ appointment, one employee has ceased employment (having resigned before the appointment), and no employee has had their employment terminated. SGL has no employees. Post-appointment wages and entitlements are being paid in full. Preliminary investigations indicate that:

(1)    the employee priority creditors’ claims may be in the range of $118,894; and

(2)    the sole director of SHPL, who is also employed by SHPL, may have a claim in the range of $31,358; and

(3)    a former employee, who is also a former director of SHPL, may have a claim in the range of $227,856.

16    Concerning non-employee unsecured creditors, preliminary investigations indicate that:

(1)    SGL’s unsecured creditors’ claims may be in the range of $789,777 (including claims of directors of SGL);

(2)    SHPL’s unsecured creditors’ claims may be in the range of $345,221 (excluding employee creditors’ claims); and

(3)    SGL’s and SHPL’s unsecured creditors (excluding employee creditors’ claims and the claims made in the litigation described below) comprise of trade creditors, the Deputy Commissioner of Taxation and in respect of SGL, claims of directors of SGL.

Sales processes and process for seeking recapitalisation proposals

17    Mr Hansell’s confidential affidavit sets out details of the processes being undertaken by the administrators, including matters taken into account by the administrators in adopting various courses of action. The affidavit provides further explanation of the reasons for seeking the extension of the convening periods, including reasons why Mr Hansell considered it necessary to seek the extension.

Litigation against SGL and SHPL

18    The two shareholder class actions are a proceeding commenced in the Supreme Court of Queensland by Warwick and Leonee Cook and a proceeding commenced in the Supreme Court of New South Wales by TW McConnell Pty Ltd. Among other things, the class actions allege that SGL engaged in misleading and deceptive conduct and breached its continuous disclosure obligations under the Act. Mr Hansell’s evidence was that any persons that may be group members in these class actions could be subordinate creditors of SGL within the meaning of s 563A of the Act.

19    Concerning the shareholder class actions, Mr Hansell stated:

[46]    As at our appointment, the board of SGL had had preliminary correspondence with the funders of the two class actions to explore the prospects of settling the class action proceedings. Those discussions did not progress to any form of binding documentation.

[47]    We have had preliminary discussions with the funders of the class actions since our appointment. Those discussions are continuing. At this stage it remains unclear whether a settlement of the class action claims can be reached. It is also unclear whether it will be necessary for us to formally adjudicate on the class action claims.

[48]    We are seeking legal advice from King & Wood Mallesons as to the liability (if any) of SGL and if relevant, the appropriate processes to quantify any liability and to resolve the class actions (including under the relevant class action legislation). I note that:

(a)    I am informed by King & Wood Mallesons that they are not aware of any case which has considered the interaction between a consensual resolution of the Class Action Proceedings and Part 5.3A of the Act, including whether there is a need to resolve the class actions in accordance with the procedure set out in the relevant class actions practice notes and directions; and

(b)    the class action claims raise complex issues of fact and law. Given the relatively early stage of the Class Action Proceedings, a detailed review of those issues will be required to determine liability (if any) and to quantify on the class action claims, explore settlement prospects with the class action funders, and if necessary to seek orders under section 600H of the Corporations Act to enable the underlying claimants to vote and for the administrators to adjudicate on their claims.

[49]    Our review in respect of the class action claims is ongoing and the grant of the Orders will enable us sufficient time to finalise that review and assess the impact of the class action claims on the administration of SGL.

20    There are also three legal proceedings brought by parties referred to as the “Coastalwatch parties”. The proceedings have been commenced in the Supreme Court of Queensland and are currently running in parallel. In respect of those proceedings:

(1)    Three Crowns Investments Pty Ltd lodged a proof of debt in respect of SGL in the amount of $11,580.100.60 for monies allegedly owed under a contract and damages; and

(2)    3 Crown Technologies Pty Ltd lodged a proof of debt in respect of SHPL in the amount of $9,255,781.22 for damages for repudiation of a contract

(“Coastalwatch proofs of debt”).

21    Mr Hansell’s opinion is that the claims made by the Coastalwatch parties involve complex issues of fact and law and the administrators will be required to take further legal advice on the proceedings. A detailed review of the issues will be required to adjudicate on the Coastalwatch proofs of debt. Mr Hansell deposed that the extension of the convening periods would give the administrators sufficient time to adjudicate on the Coastalwatch proofs of debt.

22    Mr Hansell’s opinion is that, having regard to the complexities concerning the shareholder class actions and the Coastalwatch proceedings, he is not presently able to provide an opinion to the creditors of each company for the purpose of r 75-225(3)(b) of the Insolvency Practice Rules (Corporations) 2016 (Cth). In Mr Hansell’s view, these matters are required to be resolved prior to any vote by the creditors of each company as to whether the relevant company executes a DOCA, that the administrations end or that the relevant company be wound up.

Interests of stakeholders

23    Mr Hansell’s view is that the claims of unsecured creditors of at least SHPL (excluding the claims the subject of litigation) are likely to be satisfied in full, subject to the sale and/or recapitalisation of some or all of the operating subsidiaries and the trading performance during the convening period. On this basis, Mr Hansell also expects that the employees’ wages and entitlements will be paid in full.

24    Mr Hansell expressed the following beliefs:

(1)    An extension of the convening period is in the interests of employees because it will provide additional time for us to conduct a sale and/or recapitalisation process in respect of each company which may result in better prospects of a proposal which sees continuing employment for employees. If the orders are not made, this would likely result in the immediate winding up of each company and the termination of each employee’s employment.

(2)    The extensions are necessary to afford the administrators sufficient time to address the complex and novel issues raised in the SGL and SHPL administrations. The prospects of achieving the objects of s 435A of the Act in respect of either or both of the companies will depend on work that the administrators will need to do in the period in which the extension is sought.

(3)    If the orders sought were not made, convening the meetings of creditors of SGL and SHPL on 22 September 2107 (when the convening period would have expired), or within 5 business days of that time, was expected to result in a winding up of both companies. In Mr Hansell’s view, that would result in a prospective return to creditors which was likely to be less than the return that may be possible if the orders were granted and there was additional time to resolve the issues raised in his evidence. The objective of the orders was aligned to the objective of the administrators to maximise the chance of each company, or as much as possible of its business, continuing in existence or otherwise to create a result involving a better return for each company’s creditors and members than would result from an immediate winding up of the companies.

25    On the basis of Mr Hansell’s affidavit evidence, I was satisfied that sales processes and the process for seeking recapitalisation proposals are reasonably likely to result in a better return for the companies’ creditors and members than would result from an immediate winding up of either company.

Statutory framework

26    Section 439A of the Act provides relevantly:

(1)    The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6).

(2)    The meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period.

(5)    The convening period is:

(a)    if the day after the administration begins is in December, or is less than 25 business days before Good Friday—the period of 25 business days beginning on:

(i)    that day; or

(ii)    if that day is not a business day—the next business day; or

(b)    otherwise—the period of 20 business days beginning on:

(i)    the day after the administration begins; or

(ii)    if that day is not a business day—the next business day.

(6)    The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires.

27    Requirements for giving notice of a meeting pursuant to s 439A are set out in rr 75-15 and 75-255 of the Insolvency Practice Rules (Corporations) 2016 (Cth).

28    By s 447A(1), the Court may make such order as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company.

Relevant principles

29    In Strawbridge, re Custom Coaches (Sales) Pty Ltd (Admin Apptd) [2014] FCA 683, Jacobson J said (at [22]):

The statutory and legal framework is well-known. The principles have been stated in a number of authorities. The essential principle is that the Court attempts to strike a balance between the expectation that the administration be conducted relatively quickly and the need to ensure that the speed with which it is dealt does not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders. That principle was stated by Barrett J in Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] and has been cited on numerous occasions in decisions of this Court and in the Supreme Court of New South Wales.

30    In Re BCD Resources NL (recs & mgrs. apptd) (admins apptd) [2015] NSWSC 777 at [12], Black J considered that relevant factors included the time needed for an assessment of a proposal for a DOCA (which, in that case depended on the proposal being sufficiently developed), and the fact that an extension might allow the value of the business to be maximised by the proposals for a DOCA. His Honour was satisfied that, on balance, the grant of an extension of time was preferable to declining such an extension, where creditors would otherwise be left with no real option other than a winding up. His Honour noted that the court can, and should, also give weight to the considered judgment of the administrator in matters of this kind: cf. Owen, re RiverCity Motorway Pty Ltd (Admins Apptd) (Recs & Mgrs Apptd) v Madden (No 4) [2012] FCA 1491; (2012) 92 ACSR 255 at [26].

Consideration and conclusion

31    I was satisfied that the Court had power to make the orders sought and that those orders were appropriate. In particular, I was satisfied that the proposed three month extension was reasonable having regard to:

(1)    the complexity of the potential asset sale processes set out in Mr Hansell’s confidential affidavit;

(2)    Mr Hansell’s estimate of time required to allow any sale to be proposed and completed;

(3)    the potential for a DOCA to be proposed, where a draft DOCA proposal had already been received and where the administrators intended to seek proposals from other interested parties (noting that if a DOCA is proposed, further time will be required for it to be considered and, perhaps developed and negotiated before being put to creditors);

(4)    the complexity of the companies’ affairs generally and the need for the administrators to carry out further investigations in order to make a properly informed recommendation to the companies’ creditors at the second creditors’ meetings;

(5)    the uncertainty as to contingent and postponed creditors’ claims arising out of litigation to which SGL is a defendant, and the need for the administrators to conduct further investigations in relation to those claims;

(6)    the fact that creditors (including employees) will not be materially prejudiced by the extension – the companies’ post-appointment obligations in respect of employees are being met and the extension will also provide a further period of employment to the companies’ employees;

(7)    the orders proposed make provision for any person who can demonstrate sufficient interest to apply to the Court for modification of those orders; and

(8)    there are no winding-up applications on foot in respect of any of the companies.

32    On the evidence before me, there is no reason to think that the administrators have delayed in the exercise of their functions. An extension of time will increase the likelihood that the administrators can convey useful information to the creditors and a properly informed opinion as to the options available to the creditors at the second meeting.

Associate:

Dated:    17 October 2017