Federal Court of Australia

Brooks, in the matter of Mezethes Salamanca Pty Ltd (Subject to Deed of Company Arrangement) v Mezethes Salamanca Pty Ltd [2021] FCA 378

ORDERS

THE COURT ORDERS THAT:

1.    The applicant convene a meeting of creditors of the respondent for the purpose of creditors voting on a resolution to vary the Deed of Company Arrangement dated 21 May 2020 having regard to the respondent’s proposal set out in the letter appearing at Annexure A to the affidavit of Craig David Higginbotham sworn 7 April 2021 and filed herein.

2.    The hearing of the proceeding be vacated, and adjourned to a date to be fixed, if necessary.

3.    There be liberty to apply on the giving of 24 hours’ notice.

4.    The costs of this application be reserved.

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

REASONS FOR JUDGMENT

(Revised from transcript)

O’CALLAGHAN J:

1    These reasons for judgment were delivered ex tempore at the hearing on 12 April 2021 and accompany the orders set out above.

2    This is an interlocutory application dated 7 April 2021 made pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (Corporations Act) by which the respondent, Mezethes Salamanca Pty Ltd (subject to a deed of company arrangement), seeks, among other orders, an order that the applicant, Ms Shelley-Maree Brooks in her capacity as deed administrator of the respondent, convene a meeting of creditors of the respondent for the purpose of creditors voting on a resolution to vary the Deed of Company Arrangement dated 21 May 2020 (the DOCA), having regard to the respondent’s proposal set out in a letter appearing at Annexure A to the affidavit of Craig David Higginbotham sworn 7 April 2021. The respondent also seeks an order vacating the hearing of the proceeding fixed to commence today.

3    The respondent read two affidavits in support of the application: the affidavit of Mr Craig Higginbotham to which I have just referred, and an affidavit of Mr Anastasios Spandonis sworn 23 March 2021.

4    The respondent says that the court should make the orders convening a creditors’ meeting because the creditors, who generally speaking are taken to be the best judges of what is in their commercial interests, should be given an opportunity to vote on whether it is, or is not, in their commercial interests to accept a proposal whereby Mrs Spandonis (the mother of Mr Spandonis) would make a further contribution of $150,000 to a fund provided for by cl 6.1 of the DOCA, rather than to see the respondent immediately placed into liquidation, which is the relief the applicant seeks in this proceeding.

5    The respondent accepts that if the creditors do not accept the proposal, it would not oppose the termination of the DOCA and it being placed into liquidation without further delay.

6    The respondent contends that the court should have regard to the object of Pt 5.3A of the Corporations Act, as set out in s 435A, which relevantly provides as follows:

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)    …

(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.

7    Section 447A(1) of the Corporations Act is contained in Pt 5.3A and provides that the court “may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company”.

8    It is common ground that it is not possible for the respondent’s business, a restaurant in Salamanca Place, Hobart, called Mezethes Greek Tavern, to continue in existence.

9    The applicant says that I should dismiss the interlocutory application, proceed now to hear and determine the proceeding, and make an order that the respondent be placed into liquidation. The applicant relies on her affidavit sworn today.

10    The respondent says that creditors should be given the opportunity to vote on its proposal, which, it says, if accepted will result in a return of 86.96 cents in the dollar to priority creditors. Mr Higginbotham, who is the solicitor for the respondent, gave the following breakdown of figures in the annexure to his affidavit referred to earlier:

11    At the hearing this morning, where counsel for both parties, if I may say so with respect, made commendably brief and persuasive submissions for their respective cases, Mr Hynes, counsel for the respondent, informed the court that Mrs Spandonis had paid the sum of $150,000 into the trust account of his instructing solicitors’ firm. Mr Hynes also undertook that the total sum of $10,700 would be paid forthwith into the trust account to cover the applicant’s estimate of the costs of calling the meeting of creditors (on the basis that if the meeting is ordered and any sum incurred is less than $10,700 the balance is to be refunded).

12    The applicant says that Mr Higginbotham’s estimate does not factor in costs recently incurred by her which, when taken into account, mean that, using Mr Higginbotham’s own assumptions, the respondent’s proposal would result in a return of 50 cents in the dollar to priority creditors, not 86.96 cents. The applicant’s figures, which appear under the heading “Option 1” in Annexure 2 to her affidavit sworn today, are as follows:

13    The applicant contends that creditors are likely to be better off under a liquidation scenario because of the equity that exists in a house situate in Sandy Bay, Hobart, which is registered in the name of the respondent. The applicant points to Mr Spandonis’s own sworn evidence that, conservatively, after payment of the amounts owed under a mortgage to the ANZ Bank, the sum of something in the order of $260,000 would be available to pay secured creditors. The applicant’s calculations in that regard appear under “Option 2” in Annexure 2 to her affidavit and assume an equity of $250,000, as follows:

14    Although that option refers to a likely return from an insolvent trading claim of $200,000, Ms Sutherland, who appeared for the applicant, did not seek to attribute any value to any potential insolvent trading claims against either Mr or Mrs Spandonis for the purpose of the submissions made on this application (and, obviously enough, only for that purpose).

15    Accordingly, on that hypothesis, the amount available to creditors in Option 2, deleting from it any consideration of a potential insolvent trading claim or claims, would be $186,000.

16    In any event, whichever figures are used, the picture is not so simple, because the respondent says that a company controlled by Mr Spandonis’s mother, 28 Siede Court Pty Ltd, has been paying the loan repayments outstanding in respect of the Sandy Bay home (registered in the name of the respondent) since the respondent’s restaurant business closed, and that Mr Spandonis’s mother has acquired by making those payments a 64.06% interest in the property, which interest is worth, on Mr Spandonis’s sworn estimate, in the vicinity of $171,000, leaving the respondent’s interest in it, after paying out the bank and the amount thus available to creditors, in the vicinity of $96,000.

17    Mr Hynes submitted that, on any view of it, the dollars involved in this matter either way are, relatively speaking, not substantial, and that creditors may well take the view that any attempt by a liquidator to dispute the validity of Mrs Spandonis’s claimed equitable interest would or could result in costly litigation that could very well eat up whatever equity in the property remained.

18    Mr Hynes also submitted that, in light of the undertaking made this morning to fund the costs of the creditors’ meeting up to $10,700, which was the applicant’s own estimate of the costs involved, the applicant is unable to point to any prejudice that would result if the orders sought in the interlocutory application are to be made.

19    Ms Sutherland also submitted that I should find that Mrs Spandonis does not have standing to call a meeting of creditors, but, to the extent that it is necessary to decide the point, I do not accept that proposition on the basis of uncontradicted evidence before me.

20    Ultimately, the question for resolution involves the appropriate exercise of the court’s discretion to make such order as it thinks appropriate about how Pt 5.3A of the Corporations Act is to operate in relation to the respondent. In my view, and in particular given that the applicant deed administrator is unable to point to any prejudice, it is appropriate that I make the orders sought in the interlocutory application, including vacating the hearing of the application to place the respondent into liquidation.

21    It seems to me that the question of where the creditors’ best commercial interests lie is a question that they should be afforded an opportunity to determine. It is most certainly not the court’s role to embark upon, or even further to comment about, that exercise. As I said at the outset, if the proposal is rejected, the respondent does not oppose the relief sought in the proceeding. In light of that concession, and the lack of prejudice to the deed administrator or to the administration, I will grant the relief sought in the interlocutory application.

Associate:    

Dated:    16 April 2021