FEDERAL COURT OF AUSTRALIA

Hill, in the matter of Autocare Services Pty Ltd (administrators appointed) [2021] FCA 167

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) and on the ground that the order is necessary to prevent prejudice to the proper administration of justice the following documents are to be marked “confidential” on the electronic court file and are not to be published or accessed, except pursuant to an order of the Court or the written agreement of the plaintiffs until 5 pm on Tuesday, 1 June 2021 or further order:

(a)    paragraph 27 and Tab 4 of exhibit CCH-1 to the affidavit of Christopher Clarke Hill sworn on 24 February 2021;

(b)    exhibit CCH-2 to the affidavit of Christopher Clarke Hill sworn on 24 February 2021; and

(c)    exhibit CCH-3 to the affidavit of Christopher Clarke Hill sworn 25 February 2021.

2.    The first plaintiffs (administrators) must file versions of the affidavit and exhibit referred to in Order 1(a) redacted to omit paragraph 27 and Tab 4 by 4 pm on Tuesday, 2 March 2021.

3.    Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (Act), the convening period, as defined by s 439A(5) of the Act, with respect to Autocare Services Pty Ltd ACN 004 497 607 (Administrators Appointed) (the Company) be extended up to and including 24 May 2021.

4.    Pursuant to s 447A(1) of the Act, Part 5.3A of the Act is to operate in relation to the Company such that the meeting of creditors required by s 439A(1) of that Act, be held at any time during the period as extended under Order 3 above, and the period of five (5) business days thereafter, notwithstanding the provisions of s 439A(2) of the Act.

5.    Pursuant to s 447A(1) of the Act, and s 90-15 of the Insolvency Practice Schedule (Corporations) being Sch 2 to the Act (IPSC), Part 5.3A of the Act is to operate in relation to the plaintiffs as if s 443A(1) of the Act provides that:

(a)    the liabilities of the administrators (in their capacity as administrators of the Company) incurred with respect to any obligations arising out of, or in connection with any funding agreement substantially in accordance with confidential exhibit CCH-3 to the affidavit of Christopher Clarke Hill sworn 25 February 2021 (Funding Agreement), between the Company, LINX Cargo Care Group Pty Ltd ACN 123 683 885 (LINX) and the administrators are in the nature of debts incurred by the administrators in the performance and exercise of their functions as joint and several administrators of the Company; and

(b)    notwithstanding that the liabilities referred to in Order 5(a) are debts incurred by the administrators in the performance and exercise of their functions as joint and several administrators of the Company, the administrators will not be personally liable to repay such debts or satisfy such liabilities to the extent that the property of the Company is insufficient to satisfy the debts and liabilities incurred by the administrators arising out of, or in connection with, the Funding Agreement.

6.    Pursuant to s 90-15 of the IPSC, the administrators (in their capacities as administrators of the Company) are justified in causing the Company to borrow monies not exceeding the sum of $6 million pursuant to the Funding Agreement.

7.    Pursuant to s 447A(1) of the Act, Part 5.3A of the Act is to operate in relation to the Company such that notice of the second meeting of the creditors of the Company will be validly given to creditors of the Company by:

(a)    causing notice to be published on the published notices website of the Australian Securities and Investments Commission (ASIC) at https://insolvencynotices.asic.gov.au;

(b)    sending a hyperlink to the notices published on the ASIC published notices website by email to the email address of each creditor at such email address as is recorded in the books and records of the Company;

(c)    where an email address is not recorded in the books and records of the Company but a postal address is recorded, sending the notice by posting it to the postal address of each creditor as is recorded in the books and records of the Company; and

(d)    where the administrators do not have an email or postal address by publishing the notice on the website maintained by FTI Consulting Australia Pty Ltd (FTI) at https://www.fticonsulting-asia.com/creditors/autocare-services-pty-ltd.

8.    The administrators take all reasonable steps to cause notice of these orders to be given, within two (2) business days of making these orders to:

(a)    the creditors (including persons claiming to be creditors) of the Company in the following manner:

(i)    where the administrators have an email address for a creditor, by notifying each such creditor, via email, of the making of the orders;

(ii)    where the administrators do not have an email address for a creditor, but have a postal address for that creditor, by notifying each such creditor, by post, of the making of the orders; and

(iii)    where the administrators do not have an email or postal address, by publishing the notice on the website maintained by FTI.

(b)    ASIC, by its street address or email address.

9.    Liberty to apply be granted to any person, including any creditor of the Company or ASIC, who can demonstrate sufficient interest to vary Orders 3, 4, 7 and/or 8 on the giving of two (2) business days’ notice to the plaintiffs, and to the Court.

10.    The administrators’ costs and expenses of and incidental to the originating process are to be treated as costs in the administrations of the Company.

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

REASONS FOR JUDGMENT

FARRELL J:

INTRODUCTION

1    These reasons relate to orders made on 26 February 2021 under s 37AF of the Federal Court of Australia Act 1976 (Cth), ss 439A(6) and 447A of the Corporations Act 2001 (Cth) and s 90-15 of the Insolvency Practice Schedule (Corporations), being Sch 2 of the Corporations Act (IPSC) in relation to the conduct of the administration of Autocare Services Pty Ltd ACN 004 497 607 (administrators appointed) (Company).

2    The material set out below relies on submissions filed on 25 February 2021 (marked MFI-1) and the following evidence:

(a)    Two affidavits sworn by Christopher Clarke Hill on 24 February 2021 and exhibits CCH-1 and CCH-2. The first Hill affidavit was filed on 24 February 2021 at 11.47.17 am and the second Hill affidavit was filed on the same day at 11.47.19 am;

(b)    The third Hill affidavit sworn and filed on 25 February 2021 and exhibit CCH-3 (proposed funding agreement); and

(c)    The affidavit of Emily Grace Pendlebury sworn, affirmed and filed on 26 February 2021.

BACKGROUND

The Company’s business

3    The Company provides finished vehicle logistics in the Australian automotive market. Its functions include receipt and delivery of vehicles at the wharf in Australia; processing those vehicles for Australian compliance; storing the vehicles and delivering them to vehicle dealers; as well as providing services to original equipment manufacturers and customs brokerage and freight forwarding. It has capacity to deliver in excess of 600,000 vehicles per annum and 53,000 at any one time on the east coast of Australia.

4    The Company operates in every state and territory in Australia except the ACT. It leases 23 sites from 15 landlords including on-wharf and off-wharf premises covering over two million square meters. The Company has approximately 544 full time or part time employees, 424 of which are subject to enterprise agreements for each State or Territory. A significant number of the employees are represented by trade unions. There are approximately 113 subcontractors.

LINX

5    The Company is a wholly owned subsidiary of LINX Cargo Care Group Pty Ltd ACN 123 683 885 (LINX), an Australian and New Zealand based diversified logistics infrastructure and solutions provider. LINX also claims to be a secured creditor of the Company. LINX provides a range of corporate services to the Company, including finance, treasury and payroll; legal and insurance services; health, safety and environment; information technology; and human resources. It also provides the Company with some senior management on a shared services basis, with the Company being charged for the provision of those services.

Appointment of administrators and committee of inspection

6    On 4 February 2021, Christopher Hill, Joseph Hansell and Ross Blakeley were appointed as joint and several voluntary administrators of the Company pursuant to a resolution of its sole director under s 436A of the Corporations Act.

7    The first creditors’ meeting was held on 16 February 2021; a committee of inspection was appointed and the creditors did not choose to appoint another administrator. The committee of inspection comprises:

(a)    Robert Mills on behalf of Australian Amalgamated Terminals Pty Ltd (a landlord);

(b)    Christine Allsopp on behalf of CG & C Enterprises Pty Ltd (a trade supplier);

(c)    Andrew Bruce on behalf of Sea Road Shipping Pty Ltd (a trade supplier);

(d)    Tim Hickey on behalf of Alliance Promotions Pty Ltd (a trade supplier);

(e)    Jenny Draper on behalf of Port of Brisbane Pty Ltd (a landlord);

(f)    Eliza Anning on behalf of LINX (a secured creditor);

(g)    Amanda Swan on behalf of Perth Airport Pty Ltd (a landlord);

(h)    David Smith of the Australian Manufacturing Workers Union members on behalf of Jason Budd (an employee of the Company);

(i)    Claud Chaaya on behalf of AIMS Funds Management (a landlord); and

(j)    Graham Harrison on behalf of YMTR Pty Ltd trading as Transport 2000 (a trade supplier).

Company’s financial position

8    Based on information available to Mr Hill, the Company has experienced successive years of volatile market conditions, declining vehicle volumes, and increasing operating costs on a proportional basis which have had a significant impact on the Company’s ongoing financial viability as a going concern.

9    As at 18 February 2021, the Company had approximately $15,993,014.66 in cash at bank (in pre and post administration accounts) but its income is not sufficient to cover liabilities.

10    The Company’s books and records show:

(a)    $91,764.91 owing to secured creditors (other than LINX) as at 4 February 2021. That figure was derived by cross-referencing the Company’s master creditor list against creditors who have lodged Personal Property Securities Register (PPSR) registrations against the Company;

(b)    $734,904 owing to trade creditors as at 4 February 2021;

(c)    $3,536,446.14 owing to landlords in relation to lease liabilities;

(d)    $2,434,945 owing to subcontractors up to and including 11 February 2021; and

(e)    $6,349,525 owed in accrued employee entitlements as at 11 February 2021.

11    However the lodged proofs of debt, invoices and other searches demonstrate a different position:

(a)    LINX, which is possibly the senior secured creditor, has lodged a proof of debt for $116,125,649 comprising (1) shareholder loans assigned to LINX in 2016 and 2019 for an aggregate value of $75,130,256 (including interest); and (2) a working capital loan agreement with no limit and a project capital loan facility, with a current liability of $40,995,393 to which Mr Hill understands there are attached 203 PPSR registrations. The Company has also entered into an agreement for a line of credit of $14 million from a subsidiary of LINX but at the date of swearing the first Hill affidavit, Mr Hill was unable to locate a copy of that document;

(b)    Secured creditors (other than LINX) have lodged proofs of debt for a total of $555,585.69. There are approximately 80 PPSR registrations in favour non-LINX entities. It is Mr Hill’s preliminary view that many of these registrations relate to a range of assets used in the day-to-day operations of the Company, including assets owned by original equipment manufacturers that are being transported and processed by the Company. However, at this stage the administrators have been unable to verify this independently on a case-by-case basis and therefore to audit and value the assets in the possession of the Company.

(c)    The Australian Taxation Office has lodged a proof of debt for one dollar but the books and records do not include any amounts owing to the ATO;

(d)    The Chief Commissioner of State Revenue has lodged a proof of debt for $72,412.27;

(e)    The City of Melbourne is owed $74,365.58 but it has not lodged a proof of debt;

(f)    10 landlords have lodged proofs of debt for $208,891,922.15 (including $188 million claimed by the Port of Brisbane Pty Ltd). As at 24 February 2021, the administrators identified 23 invoices from nine landlords totalling $786,162.02 (including GST) for the period up to and including 3 February 2021 and 33 invoices from 11 landlords totalling $7,380,948.03 (including GST) for the post-appointment period, covering rent, outgoings and other property related charges. The Port of Melbourne has been paid up to 31 March 2021. Before the administrators’ appointment, the Company paid 10 landlords up to 31 January 2021 and the next payment of rent was due on or about 1 March 2021. Mr Hill’s initial enquiries have established bank guarantees of approximately $17,977,506 in favour of 10 landlords and he is not aware that any bank guarantee has been called upon.

LINX indemnity

12    The administrators have confirmed that LINX and the Company entered into a deed of obligation and indemnity on 23 December 2020 (LINX indemnity) pursuant to which the Company agreed to indemnify LINX for demands made for payment under letters of credit and bank guarantees which have been issued in favour of lessors in relation to property occupied by the Company.

Reasons for the Company’s failure

13    The administrators have identified, on a preliminary basis, the following reasons for the Company’s failure:

(a)    A three year automotive industry market downturn;

(b)    Decline in new vehicle sales resulting in less demand for the Company’s services;

(c)    Structural change in original equipment manufacturer supply chains resulting in disproportionate risk allocation borne by the Company;

(d)    Reduced storage commitment from original equipment manufacturers (resulting from reduced demand) resulting in malalignment with the scale of the Company’s operational costs, including the number of sites;

(e)    Fixed costs have increased above price increases, resulting in a net loss; and

(f)    The COVID-19 pandemic and associated economic uncertainty which has exacerbated the previously identified issues as well as causing supply chain disruption for original equipment manufacturers which has had a flow on effect on the Company.

Work done since the administrators were appointed

14    Since their appointment, the administrators have:

(a)    Continued to trade the Company with a view to maximising the value available to creditors through a sale of the Company’s businesses or recapitalisation;

(b)    Investigated the financial position of the Company including obtaining records from the Company’s accountant for FY19 and earlier, and management accounts for FY20, analysed historical trading results of the Company and commenced analysis of the Company’s solvency and estimated insolvency date as well as preparing forecasts for the administrators to consider the near term prospects of a sale or recapitalisation;

(c)    Identified as many of the creditors of the Company as possible and identified and contacted the approximately 80 holders of PPSR registrations against the Company. As at 24 February 2021, the administrators were not able to confirm the total amount of debt owing to unsecured creditors;

(d)    Obtained the support of LINX as the major secured creditor for the administration process, including LINX’s agreement to continue to provide a variety of critical services to the Company, as well as a potential line of funding for $6 million pursuant to the proposed funding agreement between the Company, LINX and the administrators;

(e)    Paid one landlord, the Port of Melbourne, up to 31 March 2021 and commenced negotiations with certain landlords with a view to renegotiating lease terms and, wherever possible, avoiding landlords calling on bank guarantees and letters of credit which would trigger the LINX indemnity;

(f)    Engaged in discussions with trade union representatives and subcontractors;

(g)    Sought the production of a report on company activities and property (ROCAP) from the directors and officers of the Company, which was to be provided on or before 26 February 2021;

(h)    Corresponded with the Company’s suppliers to maintain the Company’s current trade to preserve the value of the business with key stakeholders;

(i)    Corresponded with the Company’s customers regarding renegotiation of the terms and conditions of ongoing supply;

(j)    Prepared for and held the first creditors’ meeting;

(k)    Made all necessary filings with the Australian Securities and Investments Commission and notified the Australian Tax Office (ATO) and other government bodies of their appointment;

(l)    Engaged insurance brokers to correspond with the Company’s insurers in relation to pre-appointment insurance and to advise the administrators with respect to coverage requirements;

(m)    Prepared for and launched a process for the sale or recapitalisation of the business (Sale Process), including advertisements placed in the Australian Financial Review and The Australian on 10 and 17 February 2021.

Further work required

15    Further work is required to investigate properly the Company’s business, property, affairs and financial circumstances including establishing the quantum of the Company’s debts, finalising calculations with respect to employee entitlements as stipulated by a number of enterprise agreements, continuing to investigate various enterprise agreements and engage with trade unions in a productive manner and pursuing debtors for amounts outstanding. There also remain a large number of records and information yet to be received (including the ROCAP).

16    Further, the administrators’ timeline for the Sale Process would see interested parties submit indicative offers by the beginning of March, with a short list to be developed and detailed due diligence leading to final bids taking approximately eight weeks. As confirmed by counsel for LINX who appeared at the hearing on 26 February 2021, there is a reasonable prospect of a deed of company arrangement being proposed by LINX. That will also take time to be developed, negotiated, considered and then presented to creditors.

17    Having regard to the stage of the administration and the timeline required to run a Sale Process which tests the market and for the administrators to undertake restructuring initiatives, the administrators are presently unable to provide any meaningful recommendation or proposal to creditors at the second creditors’ meeting. Given the complexity of the Company’s affairs, Mr Hill considers that a period of up to 90 days to 24 May 2021 is required to carry out the required activities. Without extension, the convening period for the second creditors’ meeting under s 439A(5)(a) of the Corporations Act would end on 5 March 2021. Immediate liquidation would not be in the best interests of creditors but there would be no alternative at that time.

Notification of creditors concerning application for extension of the convening period

18    The creditors of the Company were notified of the administrators’ intention to seek an extension of the convening period by a newsletter sent to creditors via email on 12 February 2021, at the first creditors’ meeting and by an email sent to the known creditors on 22 February 2021. Both Mr Hill and Ms Pendlebury give evidence that no creditor has indicated that they oppose extension of the convening period to 24 May 2021 and LINX supports the application.

Administrators’ opinion concerning prejudice to creditors if the convening period is extended

19    It is the administrators’ opinion that the creditors will not be materially prejudiced by the extension of the convening period because:

(a)    The administrators will be personally liable for rent accrued and services engaged in on behalf of the Company from 11 February 2021 pursuant to s 443B of the Corporations Act until the end of the administration, be it through a recapitalisation, deed of company arrangement or the Company entering into liquidation. Rent accrued during the administration is an expense of the administration and may be afforded a priority on a liquidation of the Company should that occur;

(b)    All employee entitlements will be met by the administrators during the administration; wages will be paid in the ordinary course and superannuation contributions will be funded and paid up to date including pre-appointment amounts; and

(c)    The administrators will continue to meet all approved supplier expenses incurred after their appointment during which the Company trades,

albeit that the administrators have identified no recoveries which would enable them to further investigate or pursue whether the extension would have an adverse impact on creditors.

Administrators’ opinion

20    It is Mr Hill’s view that enabling the Company to continue to trade in New South Wales, the Northern Territory, Queensland, South Australia, Victoria and Western Australia while they conclude the further work required in relation to the Sale Process will provide the most value to creditors of the Company and it is therefore in the best interests of the creditors as a whole because:

(a)    The Company relies on the ongoing support of its customers and the Company is a critical component in the supply chain of its customers. The ability to maintain business as usual is paramount in maintaining the support of customers, which will greatly preserve the value of the Company and maximise the outcome of the Sale Process;

(b)    While the Company has significant assets on its balance sheet, the likely recoveries from the sale of the assets in the event its business was not trading would be significantly less than via the sale of its business as a going concern;

(c)    If the Company ceases to trade and it is unable to service its customers, the customers may seek damages against the Company, increasing the quantum of the Company’s unsecured debt and further reducing the likelihood of any favourable return to unsecured creditors as a whole. It would also reduce the likelihood of the Company being able to recover any amounts owing from its customers and/or protract the collections of these debts as they are resolved;

(d)    If the orders for extension of the convening period were not to be made and the Company were to cease trading, the administrators would be forced to recommend to creditors that they vote at the second creditors’ meeting in favour either of an adjournment of the meeting or liquidation as there is unlikely to be any alternative to put forward at that time. A liquidation is likely to create significant challenges in achieving any kind of sale as a going concern, while an adjournment would create both additional costs in terms of multiple reports to creditors and provide a significantly shorter period to achieve a sale or recapitalisation of the Company.

Possible cash deficiency during an extended convening period and proposed funding agreement

21    In the second Hill affidavit, Mr Hill deposes to the fact that exhibit CCH-2 (which was prepared by the administrators with input from finance staff from the Company and LINX) demonstrates a steady decline in the Company’s cash balance over the forecast period. While it does not indicate a current funding need, the administrators remain concerned that if they continue to trade the Company’s business for the extended convening period, there is a significant risk that they will have temporary cash deficiencies resulting in an inability to meet all liabilities as and when they fall due, particularly during April and May 2021, which might result in the administrators being unable to continue to trade the Company.

22    The causes of concern are the possibility of customers delaying payments beyond contracted terms which could create temporary cash flow deficits towards the end of the month; any additional payments associated with the restructuring of the businesses’ cost base (for instance, employee redundancies or property transition costs) which the administrators are currently unable to forecast since they depend on ongoing negotiations; and, potential loss of customers and associated revenue as a consequence of negotiations. Committed funding would provide flexibility to enable the administrators to negotiate rationalisation of sites with landlords.

23    The proposed funding agreement would provide the administrators with up to $6 million, enough funds to continue to trade the Company on an interim basis during the extended convening period. The funding may be provided for working capital and approved capital projects or otherwise as authorised by LINX; or to pay employee wages and entitlements and subcontractor payments, with up to $5 million quarantined to the latter purpose.

24    Mr Hill deposes that that the Company’s creditors would not be prejudiced and they would stand to benefit from the Company entering into the proposed funding agreement because:

(a)    Ongoing trade creditors will have certainty of payment during the extended convening period, allowing the Company to maintain its relationship with them, and employees and subcontractors will be retained, all of which is beneficial to the prospect of maintaining the Company as a going concern and achieving the best outcome in the Sale Process.

(b)    Subject to confirmation of the validity of LINX’s asserted security, in a liquidation scenario it is unlikely ordinary unsecured creditors will receive a return because the asserted secured debt exceeds $100 million and it is unlikely that that would be met in full.

(c)    LINX’s consent is required to the Company entering into any third party funding (in the unlikely event that it would be available) because of LINX’s priority position and the administrators have not identified any alternate funding. The proposed interest and borrowing costs are not excessive or uncommercial in those circumstances.

(d)    Amounts which may be advanced under the proposed funding agreement will be secured under the LINX indemnity. Amounts may only be advanced under the proposed funding agreement where the administrators can demonstrate a cash deficiency. The second Hill affidavit sets out at [21] the circumstances in which the proposed funding agreement may be terminated.

EXTENSION OF THE CONVENING PERIOD

25    Under s 439A(6) of the Corporations Act, the Court has power to extend the convening period specified in ss 439A(5)(a) or (b) upon an application made during or after that period. Further matters must be addressed where the application is made after the end of the convening period: see s 439A(7) and (8), but those provisions do not apply in this case because the application for extension was made before the end of the convening period.

26    In determining whether and for what period to extend time for convening a second meeting of creditors under s 439A or s 447A of the Corporations Act, the Court must have regard to the objects of Part 5.3A set out in s 435A and reach an appropriate balance between the expectation that an administration will be relatively speedy and summary and the countervailing factor that undue speed should not be allowed to prejudice sensible and constructive actions directed to maximising a return for creditors: In the matter of Diamond Press Australia Pty Limited [2001] NSWSC 313 (Barrett J).

27    The administrator’s view on an application of this kind is significant and, particularly where the administration is complex, it should carry weight: see In the matter of Renex Holdings (Dandenong) 1 Pty Ltd (administrators appointed) [2015] NSWSC 2002 (Black J) at [9].

28    Another relevant factor is the need for the administrators to provide a report and recommendation to creditors in a way that would allow them to make an informed decision at the second meeting as to whether the company should be returned to its directors, a deed of company arrangement should be executed (if proposed), or the company should be allowed to pass into voluntary liquidation: In the matter of Harrisons Pharmacy Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458 (Farrell J) at [13] and the cases there cited.

29    As noted by Austin J in In the matter of Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) [2009] NSWSC 585; (2009) 72 ACSR 352 at [14]-[18] and approved by Nettle and Gordon JJ in Mighty River International Limited v Hughes [2018] HCA 38; (2018) 265 CLR 480 at [73], where a substantial issue in any of the accepted categories of reasons justifying an extension is established the Court tends to grant an extension and the extension tends to be for the time sought by an administrator provided that the evidentiary case has been properly prepared, there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and the Court is satisfied that the administrator’s estimate of time has a reasonable basis.

30    In this case, the Court accepts that the convening period should be extended for the period proposed by the administrators because:

(a)    The administration is complex due to the size and scope of the Company’s business. It operates from 23 sites across the country with 15 landlords, some of whom hold guarantees which may trigger the LINX indemnity;

(b)    Employee entitlements are attended by complexity as there are 424 of 544 employees who are subject to eight different enterprise agreements, some of which will expire over the next two months. A significant number of employees are represented by trade unions with whom the administrators are negotiating. There are 113 subcontractors;

(c)    LINX currently conducts a number of functions which support the Company’s business;

(d)    The administrators have identified 80 PPSR registrations where it is unclear whether the registrations relate to assets owned by original equipment manufacturers;

(e)    LINX claims that it and its subsidiary have made significant intercompany loans in respect of which it claims 203 PPSR registrations. The administrators are still assessing the extent of the security claimed by LINX in relation to these loans and under the LINX indemnity;

(f)    The administrators need more time to complete investigations into the business, property and affairs of the Company and to progress the Sale Process, including the possible negotiation of a deed of company arrangement with LINX.

(g)    Further work needs to be done so as to put the administrators in a position to make a recommendation to creditors in relation to the course they should adopt at the second creditors’ meeting in choosing between returning the Company to its director, entering into a deed of company arrangement or liquidation. In the administrators’ opinion, if it were necessary to hold the second creditors’ meeting imminently, the administrators would likely need to recommend that the Company be placed in liquidation or the meeting adjourned for a period unlikely to be long enough to conduct an appropriate Sale Process, but they do not consider that either of those outcomes would be in the best interests of the Company’s creditors and shareholder. It is their view that the best interests of the Company’s creditors are served by them continuing to trade its business and to progress the Sale Process;

(h)    For reasons given above, the extension of the convening period is unlikely to prejudice materially the interests of creditors, including landlords and employees. The creditors have been notified of the application for extension of time and they do not oppose it, while LINX (the sole shareholder and a secured creditor) supports it; and

(i)    The proposed orders include liberty for any person who can demonstrate sufficient interest to approach the Court to modify or discharge the orders extending the convening period.

LIMITATION OF ADMINISTRATORS’ LIABILITY UNDER THE PROPOSED FUNDING AGREEMENT

31    The administrators also seek orders under s 447A of the Corporations Act and s 90-15 of the IPSC modifying the operation of s 443A so as to limit their personal liability with respect to debts and liabilities they incur under the proposed funding agreement to the value of their indemnity against the Company’s property under s 443D.

32    Section 443A provides:

443A General debts

(1)    The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for:

   (a)    services rendered; or

   (b)    goods bought; or

(c)    property hired, leased, used or occupied, including property consisting of goods that is subject to a lease that gives rise to a PPSA security interest in the goods; or

   (d)    the repayment of money borrowed; or

   (e)    interest in respect of money borrowed; or

   (f)     borrowing costs.

(2)    Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator’s rights against the company or anyone else.

33    Section 443D provides:

443D Right of indemnity

The administrator of a company under administration is entitled to be indemnified out of the company’s property (other than any PPSA retention of title property subject to a PPSA security interest that is perfected within the meaning of the Personal Property Securities Act 2009) for:

(a)    debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(2); and

(aa)    any other debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator; and

(b)    the remuneration to which he or she is entitled under Division 60 of Schedule 2 (external administrator’s remuneration).

34    Section 447A provides:

447A General power to make orders

(1)    The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2)    For example, if the Court is satisfied that the administration of a company should end:

(a)    because the company is solvent; or

(b)    because provisions of this Part are being abused; or

(c)    for some other reason;

the Court may order under subsection (1) that the administration is to end.

(3)    An order may be made subject to conditions.

(4)    An order may be made on the application of:

…

(c)    in the case of a company under administration—the administrator of the company; or

…

35    Section 90-15 of the IPSC relevantly provides:

90-15 Court may make orders in relation to external administration

Court may make orders

(1)    The Court may make such orders as it thinks fit in relation to the external administration of a company.

Orders on own initiative or on application

 (2)    The Court may exercise the power under subsection (1):

(a)    on its own initiative, during proceedings before the Court; or

(b)    on application under section 90-20.

Examples of orders that may be made

(3)    Without limiting subsection (1), those orders may include any one or more of the following:

   (a)    an order determining any question arising in the external administration of the company;

…

Section does not limit Court’s powers

(7)    This section does not limit the Court’s powers under any other provision of this Act, or under any other law.

36    Section 5-20(a) of the IPSC includes an administrator in the definition of “external administrator”. An external administrator has a “financial interest” in the external administration of a company under s 5-30(a)(iii). Section 90-20(1)(a) authorises a person with a financial interest in the external administration of a company to make an application for orders under s 90-15.

37    While it is now settled that the Court has wide powers to modify the operation of Part 5.3A in relation to a particular company under s 447A of the Corporations Act and s 90-15 of the IPSC, such orders must be made in pursuit of the objects of Part 5.3A as set out in s 435A as follows:

435A Object of Part

The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a)    maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)    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.

Note: Schedule 2 contains additional rules about companies under external administration.

and where there is recourse to the IPSC, regard should also be had to its objects set out in s 1-1 of the IPSC which relevantly provide as follows:

1-1 Object of this Schedule

…

(2)    The object of this Schedule is also:

(a)    to regulate the external administration of companies consistently, unless there is a clear reason to treat a matter that arises in relation to a particular kind of external administration differently; and

(b)    to regulate the external administration of companies to give greater control to creditors.

38    The considerations and case law relevant to an application under s 447A for modification of the application of s 443A were summarised by Sloss J in Re Unlockd Limited (administrators appointed) [2018] VSC 345 (Unlockd Limited) at [60]-[64]:

[60]    In the leading case of Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (admins apptd) [2011] FCA 1493 (Secatore), Gordon J stated (at [23]):

Section 447A(1) of the Act empowers the Court, in an appropriate case, to modify the operation of s 443A to exclude personal liability on the part of a voluntary administrator, and to provide that a loan taken by the company via the voluntary administrator is repayable on a limited recourse basis. Orders in similar terms have frequently been made in circumstances where the Court is satisfied that an administrator has entered into a loan agreement or other arrangement to enable the company’s business to continue to trade for the benefit of the company’s creditors: see, for example, Re Ansett Australia Ltd (No 1) at [49]; Re Spyglass Management Group Pty Ltd (admin apptd) (2004) 51 ACSR 432 at [6]; Sims; Re Huon Corporation Pty Ltd (admins apptd) (2006) 58 ACSR 620 at [12]; Re Malanos [2007] NSWSC 865 at [13].

[61]    In such circumstances, courts have held that it is not to be expected that the voluntary administrators should expose themselves to substantial personal liabilities: see e.g. Re Renex Holdings (Dandenong) 1 Pty Ltd [2015] NSWSC 2003, [13] (Black J); Preston, in the matter of Hughes Drilling Limited [2016] FCA 1175 (Hughes Drilling), [18] (Yates J). See also Korda, in the matter of Ten Network Holdings Ltd [2017] FCA 1144, [43]-[44] (Markovic J).

[62]    In Secatore, Gordon J also observed (at [29]) that if orders are made relieving administrators from personal liability in respect of borrowings, it will permit them to make commercial decisions about the ongoing operations by focussing on what is in the best interests of the creditors ‘uninfluenced by concerns of personal liability.’

[63]    In Re Great Southern Infrastructure Pty Ltd [2009] WASC 161 (Great Southern) at [13], Sanderson M observed that:

The material consideration on such an application is whether the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Pt 5.3A of the Act. To put that proposition positively — the question is whether the court is satisfied the proposed arrangements are for the benefit of the company’s creditors. To put it negatively — the question is whether the court is satisfied the company’s creditors are not disadvantaged or prejudiced by the proposed arrangement. These principles have been confirmed in a large number of cases.

[64]    In Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd (admins apptd) (2010) 82 ACSR 142; [2010] FCA 1469, Gilmour J summarized the principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A as follows (at [30]):

(a)    the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Part 5.3A of the Corporations Act: Re Great Southern at [13].

(b)    typically the arrangements proposed are to enable the company’s business to continue to trade for the benefit of the company’s creditors: Re Malanos at [9] and Re View at [17].

(c)    the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement: Re View at [18], and also Re Application of Fincorp Group Holdings Pty Ltd [2007] NSWSC 628 at [17].

(d)    notice has been given to those who may be affected by the order: Re Great Southern at [12].

39    In Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717; (2020) 144 ACSR 347 at [89], Middleton J adopted those passages from Unlockd Limited as the principles to be applied in an application of this kind and went on to say at [90]-[91]:

90    Orders are commonly sought limiting an administrator’s personal liability where a company borrows funds from an external financier to fund the ongoing trading of the business during the administration: Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 1144 at [42] (‘Ten Network’) (Markovic J).

91    There can be no doubt that in the appropriate circumstances, personal liability can be excluded with respect to any arrangement where that enables the company’s business to continue to trade for the benefit of the company’s creditors. Further, s 447A can also be used to avoid liability before it is imposed: Silvia v FEA Carbon Pty Ltd (2010) 185 FCR 301 at [14] (Finkelstein J).

40    Applying those principles:

(a)    I am satisfied that the proposed funding agreement is in the interests of the Company’s creditors as a whole and making the proposed orders is consistent with the objectives of Part 5.3A of the Corporations Act because:

(i)    I accept the administrators’ opinion that it is the best interests of the Company’s creditors to enter into the proposed funding agreement so that the administrators may continue to trade the Company’s business during the extended convening period.

(ii)    The administrators have demonstrated a basis for their view that the Company may not have sufficient cash to meet its liabilities, particularly during April and May 2021 without access to funding. Ceasing trading would significantly jeopardise the prospect of the administrators being able to sell or recapitalise the Company as a going concern. It is their view that the outcome for creditors would be materially worse if the Company’s business or assets were to be sold in the course of an immediate liquidation of the Company without the Sale Process being completed.

(iii)    Having regard to the terms of s 443A, should the assets of the Company be insufficient to discharge the liabilities of the administrators incurred during the administration, including amounts owing under the proposed funding agreement, there is a risk they would be personally liable to repay amounts advanced under the agreement. They are not prepared to take that risk. Accordingly, they will not enter into the proposed funding agreement unless the Court makes orders modifying the effect of s 443A in relation to the agreement.

(iv)    Funding will provide the Company with working capital and funding for capital requirements and other agreed purposes. Approximately eighty per cent of the funding will be reserved to enable the Company to meet employee wages and entitlements and subcontractor payments. It is likely that redundancies consequent on restructuring the Company’s business will be paid from these funds.

(b)    I am satisfied that creditors will not be materially prejudiced by the administrators entering into the proposed funding agreement because:

(i)    LINX will be obliged to advance funds under the proposed funding agreement where the administrators can demonstrate that there will be a deficiency in the cash required to meet forecast expenses of the Company and may refuse to advance funds if that cannot be demonstrated. It is therefore likely not to be utilised unless there is a projected cash deficiency.

(ii)    The proposed funding agreement is with LINX. It is the administrators’ opinion that, if the Company were to be immediately wound up, the amount realised in the liquidation is unlikely to meet the secured debt that LINX currently claims. Unless funding is available, the Company may need to cease to trade with the likelihood of immediate winding up.

(iii)    It is the administrators’ view that obtaining funding from any other source is not viable as it would need LINX’s consent.

(iv)    In their view, the terms of the proposed funding agreement are not excessive or uncommercial.

(c)    I am satisfied that notice of the administrators’ intention to apply for the relief relating to the proposed funding agreement was sufficiently provided to creditors by way of the notification to creditors dated 22 February 2021, albeit without reference ss 443A or 447A specifically.

ADVICE TO THE ADMINISTRATORS

41    The administrators seek a direction under s 90-15 of the IPSC to the effect that the administrators (in their capacities as administrators of the Company) are justified in causing the Company to borrow monies not exceeding the sum of $6 million pursuant to the proposed funding agreement.

42    Section 90-15(3)(a) confers a broad power on the Court to make “an order determining any question arising in the external administration of the company”. Where judicial advice is sought in the context of an administration, the only statutory constraint on the exercise of that power is the need to consider whether or not the provision of that advice advances the objects of Part 5.3A set out in s 435A of the Corporations Act and is not inconsistent with the objects of the IPSC set out in s 1-1(2) with respect to administrations.

43    Courts commonly take some guidance from principles applied to the provision of judicial advice under previous regimes. It is uncontroversial that powers of this kind are intended to facilitate the performance of an external administrator’s functions and should be interpreted widely to give effect to that intention where it is advantageous to the administration, but Courts will generally be reluctant to give directions concerning the making or implementation of a business or commercial decision: see In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 (Black J) at [9]. Further, the protection afforded by such an order must be predicated on the external administrator having made full and fair disclosure of all relevant facts and circumstances to the Court: see Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [44] (Goldberg J).

44    Some care should be taken with the application of principles derived from the statutory predecessors of ss 90-15(1) and (3)(a) to ensure that the power conferred by those provisions is not constrained by limitations imposed by no longer enacted requirements. As noted by Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481; (2018) 125 ACSR 355 at [8], unlike the now repealed ss 479(3) and 511 of the Corporations Act, s 90-15(3)(a) accommodates the determination of substantive rights, provided appropriate notice has been afforded to potentially affected parties. Having said that, as I remarked in GDK Projects Pty Ltd, in the matter of Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541 at [33]: “despite the breadth of s 90-15(1), it is difficult to envisage circumstances where the power would be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration”.

45    The administrators concede that the decision to enter into the proposed funding agreement is “not uncommercial”, but they submit that it is attended by complexity and it is foreseeable, though not foreshadowed, that they would be open to a claim that they had acted unreasonably or inappropriately by causing the Company to enter into and perform obligations under it.

46    While the administration is complex, it is not clear that the decision to enter into the proposed funding agreement is. There may be some complexity arising from the time at which the LINX indemnity was entered into (23 December 2020), at a time when discussions had already commenced about the possibility of the Company entering into voluntary administration. That would confer a priority on LINX for future advances. However, the administrators have indicated that they are not willing to accept risk arising from entering into the proposed funding agreement and they have demonstrated that there is a real benefit to the administration in ensuring that there is sufficient cash available during the convening period to avoid having to make the decision to cease trading, which would likely have an impact on the Sale Process and the value that might be obtained from it. Further, the proposed advice relates to borrowings of $6 million, not a great amount in the scheme of the administration, albeit that its availability may confer significant benefit in allowing the administrators to undertake necessary reconstruction of the Company’s business confidently and avoid the need to cease trading during the Sale Process.

47    In all of the circumstances, I am satisfied that the Court has power to give the advice sought under ss 90-15(1) and(3)(a), that it involves no injustice and confers a benefit on the administration which will assist in pursuing the legislated objectives of Part 5.3A such that the Court should make the order sought.

CONFIDENTIALITY ORDERS

48    Mr Hill sought confidentiality orders under s 37AF of the Federal Court of Australia Act in respect of paragraph 27 of the first Hill affidavit and Tab 4 of exhibit CCH-1, exhibit CCH-2 to the second Hill affidavit and the proposed funding agreement which is exhibit CCH-3.

49    Sections 37AE, 37AF, 37AG, 37AH and 37AJ of the Federal Court of Australia Act relevantly provide:

37AE Safeguarding public interest in open justice

In deciding whether to make a suppression order or non-publication order, the Court must take into account that a primary objective of the administration of justice is to safeguard the public interest in open justice.

37AF Power to make orders

(1)    The Court may, by making a suppression order or non-publication order on grounds permitted by this Part, prohibit or restrict the publication or other disclosure of:

(a)    … ; or

(b)    information that relates to a proceeding before the Court and is:

(i)    information that comprises evidence or information about evidence; or

(ii)    information obtained by the process of discovery; or

   (iii)    information produced under a subpoena; or

   (iv)    information lodged with or filed in the Court.

(2)    The Court may make such orders as it thinks appropriate to give effect to an order under subsection (1).

37AG Grounds for making an order

(1)    The Court may make a suppression order or non-publication order on one or more of the following grounds:

(a)    the order is necessary to prevent prejudice to the proper administration of justice;

...

(2)    A suppression order or non-publication order must specify the ground or grounds on which the order is made.

37AH Procedure for making an order

(1)    The Court may make a suppression order or non-publication order on its own initiative or on the application of:

   (a)    a party to the proceeding concerned; or

(b)    any other person considered by the Court to have a sufficient interest in the making of the order.

(2)    Each of the following persons is entitled to appear and be heard by the Court on an application for a suppression order or non-publication order:

   (a)    the applicant for the order;

   (b)    a party to the proceeding concerned;

(c)    the Government (or an agency of the Government) of the Commonwealth or a State or Territory;

   (d)    a news publisher;

(e)    any other person who, in the Court’s opinion, has a sufficient interest in the question of whether a suppression order or non-publication order should be made.

(3)    A suppression order or non-publication order may be made at any time during a proceeding or after a proceeding has concluded.

(4)    A suppression order or non-publication order may be made subject to such exceptions and conditions as the Court thinks fit and specifies in the order.

(5)    A suppression order or non-publication order must specify the information to which the order applies with sufficient particularity to ensure that the court order is limited to achieving the purpose for which the order is made.

37AJ Duration of orders

(1)    A suppression order or non-publication order operates for the period decided by the Court and specified in the order.

(2)    In deciding the period for which an order is to operate, the Court is to ensure that the order operates for no longer than is reasonably necessary to achieve the purpose for which it is made.

(3)    The period for which an order operates may be specified by reference to a fixed or ascertainable period or by reference to the occurrence of a specified future event.

50    The first Hill affidavit at [27] and Tab 4 of CCH-1 relate to underlying trends in the Company’s performance since January 2018. Exhibit CCH-2 relates to cash flow forecasts containing information about the Company’s operating costs, supplier costs, its customers and debts those customers owe to the Company. Mr Hill has deposed that reliance on the cash flow forecast as at 24 February 2021 in exhibit CCH-2 would be of limited value but may be misleading to creditors or potential Sale Process participants. The forecast contained in exhibit CCH-2 will be updated on a weekly basis and has been prepared on prudent but conservative views on forecast cash, incorporating significant contingency skewed towards the low range of anticipated receipts and a high range of anticipated payments, and does not include any benefit from restructuring or cost savings. While some of this information may be made available to a participant in the Sale Process at the due diligence stage, that will only occur after the participant has executed a confidentiality deed.

51    The funding deed in exhibit CCH-3 includes a copy of exhibit CCH-2 and other information which has been kept confidential, including details of the Company’s key customers, the Sale Process and the administrators’ preferred next steps in relation to the Sale Process. The proposed funding agreement contains confidentiality provisions.

52    Mr Hill says that it would prejudice an orderly Sale Process and therefore the interests of the Company and its creditors and shareholder if this information became publicly available during the Sale Process. Among other things, Mr Hill says that there may be a difference in the access allowed to this information depending upon whether or not an interested party is a competitor of the Company and that early release of the information may affect the administrators’ negotiations with landlords and customers and therefore their ability to undertake necessary restructure of the Company’s business and to conclude the Sale Process.

53    The information which the administrators seek to protect is plainly commercially sensitive. The Court accepts Mr Hill’s evidence that its premature release may prejudice the interests of the Company and its creditors and shareholder. The Court is satisfied that its premature release would adversely affect the beneficial conduct of the administrations. Further, the failure to protect such information by appropriate confidentiality orders would inhibit the willingness of parties to provide information of that kind to the Court and thus adversely affect the proper administration of justice. I explained this in Vickers, in the matter of J M Kelly Builders Pty Ltd (in liquidation) (No 2) [2019] FCA 1789 at [7] in relation to a funding agreement entered into by liquidators. The below comments are equally applicable here:

There is a clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors and to that end commercially confidential information should be protected. While it may be that not every part of the material the subject of the confidentiality order is of a commercially confidential and sensitive nature, it would not serve the interests of justice to require the liquidators to spend time and money to identify particular portions of the material that should be the subject of the order. This is the approach adopted by this Court in Deputy Commission of Taxation v Italian Prestige Jewellery Pty Ltd [2018] FCA 983 at [57]-[63] (Markovic J) relying on Deputy Commissioner of Taxation v ACN 154 520 199 Pty Ltd (No 2) [2017] FCA 755 at [37]-[42] (Gleeson J).

54    The orders I made will protect the confidentiality of the information until 1 June 2021 or further order. The Court is satisfied that such a limited period is justified, calculated as it is by reference to the likely timeframe of the Sale Process and the second creditors’ meeting. The provision for “further order” facilitates extension of the confidentiality period if the Sale Process is not concluded by 24 May 2021 and it becomes necessary to further extend the convening period.

Associate:

Dated:    3 March 2021