FEDERAL COURT OF AUSTRALIA

Billingsley (Administrator), in the matter of B K Chemists Pty Ltd (Administrators Appointed) [2020] FCA 418

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 439A(6) of the Corporations Act 2001 (Cth) (Act), the period within which the plaintiff must convene the second meeting of creditors of B K Chemists Pty Ltd (Administrators Appointed) ACN 156 536 373 and B K Chemists No. 2 Pty Ltd (Administrators Appointed) ACN 163 847 765 (the Companies) under section 439A of the Act (Second Meeting) be extended to 9 July 2020.

2.    Pursuant to section 447A(1) of the Act, that Part 5.3A of the Act is to operate so that the Second Meeting may be held at any time during, or within 5 days after the end of, the convening period as extended by paragraph 1 above, notwithstanding the provisions of section 439A(2) of the Act.

3.    Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, the following paragraphs of the confidential affidavit of Michael James Billingsley sworn 4 March 2020, and page numbers of exhibit MJB-1 to that affidavit, not be further disclosed by publication or otherwise:

(a)    paragraph 31 and pages 55 to 57;

(b)    paragraphs 38 to 40;

(c)    paragraph 42 and page 81; and

(d)    parts of pages 56, 100 to 102 and 103 to 105, as redacted, in the redacted version of the affidavit of Michael James Billingsley sworn 4 March 2020, which is to be filed by the plaintiff on or before Tuesday, 10 March 2020.

4.    Order 3 is to operate until the conclusion of the administration of the Companies.

5.    The plaintiff must give notice of these orders to any officer, contributory or creditor of the Companies (including persons claiming to be creditors) by means of a circular to be sent by email or by post to all known parties by Tuesday, 10 March 2020.

6.    There be liberty to any officer, contributory or creditor of the Companies, who can demonstrate sufficient interest, to apply on one day’s notice.

7.    The plaintiff’s costs of and incidental to this application be costs in the administration of the Companies, and be paid out of the property of the Companies.

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

REASONS FOR JUDGMENT

GLEESON J:

1     On 5 March 2020, I heard an ex parte application made by the joint and several voluntary administrators (administrators) of B K Chemists Pty Ltd (Administrators Appointed) (ACN 156 536 373) (BK No 1) and B K Chemists No. 2 Pty Ltd (Administrators Appointed) (ACN 163 847 765) (BK No 2) (together companies) under s 439A and s 447A of the Corporations Act 2001 (Cth) (Act) to extend the convening periods for the second meetings of the companies’ creditors (convening periods) to 9 July 2020 (that is, a period of four months), and for ancillary orders.

2    The application was supported by an affidavit of Michael Billingsley, one of the administrators sworn on 4 March 2020, and an accompanying exhibit marked “MJB-1”, and by oral submissions made by Hugh Somerville, counsel for the administrators.

3    The convening periods were due to expire on 9 March 2020. I was satisfied that the convening periods should be extended. Accordingly, I made orders to the effect of those sought by the administrators, with minor modifications. My reasons for making those orders are as follows.

Background

4    The administrators were appointed to the companies on 10 February 2020, pursuant to s 436A of the Act.

5    In summary, the administrators sought the extension of the convening periods to allow time:

(1)    to endeavour to sell the companies’ businesses as going concerns;

(2)    to make reliable estimates of liabilities and potential realisations for inclusion in the report to creditors required under r 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPR), where there is some complexity in the corporate structure and transactions of the companies and the director has not provided timely access to financial records.

6    The first meetings of creditors of each company were held concurrently on 20 February 2020. The meetings were informed that, given the likely timeframe involved in achieving successful sales, the administrators would probably need to apply to the Court for an extension of the convening period. The minutes of the meetings record that the Chairperson, Mr Billingsley, asked the meetings if there were any objections, and there were none.

7    In late February 2020, Mr Billingsley also wrote separately to the two secured creditors who have submitted proofs of debt to date (National Australia Bank (NAB) and Australian Pharmaceutical Industries Ltd (API)), informing them of the administrators’ intention to apply for a four month extension of the convening periods. API informed the administrators that it did not object to an extension of the convening period, while NAB did not object to the application.

Facts

8    As at the date of the administrators’ appointment:

(1)    BK No 1 operated two pharmacies called “Pharmacy 4 Less” at Chatswood and Burwood, in Sydney, New South Wales;

(2)    BK No 2 operated one “Priceline” pharmacy” located at Chatswood.

9    Previously, BK No 2 has also operated a second “Priceline” pharmacy at Chatswood. Trading ceased at this pharmacy in December 2019, when the business was locked out by the landlord. Following this, BK No 2 negotiated a sale of the business.

Administration to date

10    Since their appointment, the administrators have undertaken the following tasks in relation to the administrations:

(1)    completed statutory lodgements and notifications including informing creditors and potential creditors of their appointment;

(2)    collected and commenced a review of the available books and records of the companies;

(3)    discussed the current and historical affairs of the companies with insurance brokers;

(4)    liaised with employees and provided them with the required notices;

(5)    undertaken a preliminary calculation of employee entitlements;

(6)    with respect to creditors:

(a)    liaised with creditors generally about their claims and more specifically those claiming to hold security interests, about the validity of their security and position on enforcement; and

(b)    convened the first meetings of creditors, and prepared and lodged the Form 5011 minutes of that meeting;

(7)    traded the companies’ businesses in order to conserve value for sale. In particular, Mr Billingsley has:

(a)    reviewed the accounting systems, processes and controls;

(b)    analysed the historical trading results and attended to the preparation of forecasts;

(c)    liaised with landlords and key suppliers regarding the administration process; and

(d)    attended on site at the premises and discussed the current and historical affairs of the Companies with senior management;

(8)    commenced a sales process to ascertain what interest there is in a purchase of the businesses and the structure and mechanics of any such sale including but not limited to:

(a)    liaising with interested parties; and

(b)    attending to preparation of confidentiality agreements to be entered into with prospective purchasers; and

(9)    conducted other ancillary investigations as required.

11    The administrators have also engaged Australian Pharmacy Group (APG) to facilitate the sale of the remaining stores. At the date of his affidavit, the administrators had received eight inquiries in relation to purchasing the businesses. The administrators have received advice from APG about risks involved in sales of pharmacy businesses and options to achieve the best sales outcomes, including that a four month extension of the convening period was important to achieving the best outcome in the interests of the companies’ creditors.

Financial position

12    Mr Billingsley estimated total creditors for each company (based on limited company records and proofs of debt) as follows:

(1)    in respect of the BK, $10,412,051, which consists of:

(a)    API, with an all present and after-acquired (with exceptions) (AllPAAP) security interest which, at this stage, Mr Billingsley believes to be owed approximately $9.5m; and

(b)    62 unsecured creditors, with claims totalling approximately $921,051; and

(2)    in respect of BK No. 2 $14,199,632, which consists of:

(a)    the NAB, with an AllPAAP security interest which, at this stage, Mr Billingsley believes to be owed approximately $680,000; and

(b)    29 unsecured creditors with claims totalling approximately $13,339,632.

13    There are also 58 current and former employees who are yet to provide proofs of debt.

14    Although other creditors are registered on the Personal Property Securities Register, of these, only API and NAB have submitted a proof of debt to date.

15    The administrators are still in the process of ascertaining whether there are any other secured creditor claims against the companies.

16    Mr Billingsley also expected total proofs of debt may include contingent or future claims that crystallise or that are able to be claimed in a notional liquidation of the companies, including landlords and utility suppliers.

17    Mr Billingsley has conducted his analysis of the companies’ affairs on the basis that the total estimated creditor position for the companies is in the order of at least $24.6 million, including $10.18 million owed to API and NAB as secured creditors.

18    Mr Billingsley also noted his understanding that the director has provided personal guarantees to NAB and API and the landlords for each of the businesses. By s 440J(1) of the Act, during the companies’ administration, such a guarantee cannot be enforced and a proceeding in relation to such a guarantee cannot be begun against the director except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

Further investigations and steps to sell businesses

19    Mr Billingsley’s view was that he needed additional time to prepare an effective and meaningful second report to creditors, particularly in relation to the estimated quantum of liabilities and estimated realisations (whether via a sale or sales of the businesses, a deed of company arrangement proposal or recoveries in the course of a liquidation). In particular, Mr Billingsley’s evidence was that additional time was required considering:

a.    the complexity of the corporate structure and transactions entered into by the Companies. There are a number of intercompany transactions between the Companies which require additional time … to properly determine the position of each Company, and whether any potential voidable transactions are potentially recoverable;

  b.    the lack of timely access to financial records or cooperation by the director:

i.    a ROCAP for each Company has been requested from the director on numerous occasions and is yet to be provided….

ii.    the Companies outsourced their finance function to BAMM Group Administration Pty Ltd (BAMM Group). I note that BAMM Group is controlled by Feras Kareem a brother of the Director. The staff and CFO of BAMM Group have failed to provide management accounts for the Companies or access to the MYOB accounting file...

20    In connection with the steps required to sell the companies’ businesses as a going concern, Mr Billingsley stated, relevantly:

…. if a sale of the Businesses is to be effected, then in my opinion, it is likely that consents from lessors and suppliers to any assignment or novation of critical contracts needed by the Businesses will be necessary prior to the completion of any sale. This will take more time than is available under the current strictures of the convening period. In my experience, this process is likely to take several weeks to complete. I believe the moratorium should continue to apply while this process is undertaken.

Prejudice to creditors

21    Mr Billingsley did not consider that undue prejudice would be caused to creditors or other interested persons if the convening periods were extended because:

a.    all trade creditors whose services are continuing during the administration and continuing lessors have and are being paid, or have entered into a consignment arrangement (and in respect of amounts to be paid to them during any extension Ms Palaghia and I, are aware that we may be personally liable for these liabilities under sections 443A and 443B of the Act);

b.    an extension would likely allow a greater opportunity for the Administrators to secure a buyer for the Businesses for continued operation (that would benefit employees, creditors and suppliers).

22    Mr Billingsley noted that, if the application was not granted, he would recommend that the companies enter into liquidation which would likely result in the termination of all current employees.

Legal framework

23    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.

24    Requirements for the giving of notice of a meeting pursuant to s 439A are set out in r 75-15 and r 75-225 of the IPR.

25    By s 447A(1) of the Act, the Court may make such order as it thinks appropriate regarding how Pt 5.3A will operate in relation to a particular company.

26    In deciding whether to extend the convening period, 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: Strawbridge, in the matter of Custom Coaches (Sales) Pty Ltd (Administrators Appointed) [2014] FCA 683 at [22], citing Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10].

27    In Silvia, in the matter of Austcorp Group Limited (Administrators Appointed) [2009] FCA 636 at [18], Lindgren J summarised the considerations affecting the exercise of the discretion whether to extend the convening period as follows:

(a)    the Court should recognise the objective of speed of administration that was associated with the introduction of Part 5.3A by the Corporate Law Reform Act 1992 (Cth) as from 23 June 1993. The Court should also recognise the objectives stated in para 507 of the explanatory memorandum associated with the Bill for that Act, that it was expected that the power to extend the period would be exercised infrequently since it is an important objective of Part 5.3A that creditors be fully informed about the company’s position as early as possible and have an opportunity to vote on its future as soon as possible;

(b)    the function of the Court is to strike an appropriate balance between the legislature’s expectation that the administration will be a relatively swift and summary procedure, and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders;

(c)    the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration;

(d)    a particular consideration against the too ready grant of an extension is the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others;

(e)    the application is to be assessed by reference to whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and, in particular, to arrive at the opinion referred to in s 439A(4), in order to inform creditors adequately so that they will be in a position to decide whether to terminate the administration, execute a deed of company arrangement or place the company in liquidation;

(f)    it is often desirable that any extension be accompanied by an order under s 447A, permitting the meeting to be held at any time during the convening period as extended.

(Citations omitted)

28    The Court should generally give weight to the considered value judgments of administrators as to what is in the interests of the creditors as a whole: Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 4) [2012] FCA 1491; 92 ACSR 255 at [26]; In the matter of Pinnacle Drilling Pty Ltd (Administrators Appointed) & Ors [2015] NSWSC 1051 at [8].

Consideration and conclusion

29    I was satisfied that the Court had power to make orders of the kind sought and that those orders were appropriate. In particular, I was satisfied that the proposed four month extension was reasonable having regard to the following matters:

(1)    the prospect of achieving a sale of the companies’ businesses as a going concern, which is likely to achieve a better outcome for creditors generally than a liquidation;

(2)    conversely, if the orders were not made, this would almost certainly have resulted in the immediate winding up of each company with significant job losses and likely significant loss in value of the businesses;

(3)    it is desirable for the administrators to carry out further investigations and, in particular, obtain complete financial records from the director in order to make a properly informed recommendation to the companies’ creditors at the second creditors meetings

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

Other matters

30    I made an order to protect the confidentiality of information that may, if known, affect the success of the sales process for the companies’ businesses.

31    I also made an order requiring the administrators to give prompt notice of the orders made to the companies’ creditors.

Associate:

Dated:    1 April 2020