Federal Court of Australia

Diakos v Pacific Steel Constructions Pty Ltd, in the matter of Pacific Steel Constructions Pty Ltd [2022] FCA 645

ORDERS

THE COURT ORDERS THAT:

1.    To the extent necessary, an order pursuant to s 444E of the Corporations Act 2001 (Cth) (Act) granting leave, nunc pro tunc, to the plaintiffs to begin and proceed with this application as against the first to seventh defendants.

2.    Pursuant to s 447A(1) of the Act, an order that Part 5.3A of the Act is to operate in relation to each of:

(a)    Pacific Steel Constructions Pty Ltd (ACN 100 940 145) (Subject to Deed of Company Arrangement);

(b)    Equipment Plus Pty Ltd (ACN 111 202 441) (Subject to Deed of Company Arrangement);

(c)    Boom Lift Pty Ltd (ACN 163 723 439) (Subject to Deed of Company Arrangement);

(d)    Maxim Steel Pty Ltd (ACN 618 755 534) (Subject to Deed of Company Arrangement);

(e)    PRB Fabrication Pty Ltd (ACN 149 985 357) (Subject to Deed of Company Arrangement);

(f)    PSC Property Management Pty Ltd (ACN 100 935 037) (Subject to Deed of Company Arrangement); and

(g)    Sydney Management Pty Ltd (ACN 149 985 348) (Subject to Deed of Company Arrangement); (together, the Companies)

as if:

(h)    clause 11.l(a)(i) of the deeds of company arrangement executed by the Companies on 1 April 2022 (DOCAs) were varied by:

(i)    deleting the number “2”; and

(ii)    inserting in lieu thereof the number “3”;

(i)    clause 3.4(a) of the Trust Deeds contained at Schedule 1 of each of the DOCAs were varied by:

(i)    deleting the number “10”; and

(ii)    inserting in lieu thereof the number “9”;

(j)    clause 3.4(b) of the Trust Deeds contained at Schedule 1 of each of the DOCAs were varied by:

(i)    deleting the number “10”; and

(ii)    inserting in lieu thereof the number “9”;

(k)    clause 4.2(d) of the Trust Deeds contained at Schedule 1 of each of the DOCAs were varied by:

(i)    deleting the number “12”; and

(ii)    inserting in lieu thereof the number “11”.

3.    The Deed Administrators of the Companies are to provide a copy of these Orders to creditors of each of the Companies within 5 business days.

4.    The Deed Administrators of each of the Companies, creditors of the Companies, and any other person on demonstrating sufficient interest, have liberty to apply on 5 business days’ notice in relation to these orders, specifying the relief sought.

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

EX TEMPORE REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

HALLEY J:

Introduction

1    By Originating Process dated 30 May 2022, the plaintiffs, Mr Diakos and others, seek, among other orders, orders for the variation of seven interlocking deeds of company arrangement (DOCAs) made in relation to each of Pacific Steel Constructions Pty Limited (Pacific Steel), Equipment Plus Pty Ltd, Boom Lift Pty Ltd, Maxim Steel Pty Ltd, PRB Fabrication Pty Ltd, PSC Property Management Pty Limited and Sydney Management Pty Ltd (all subject to Deeds of Company Arrangement) (together, the Companies or the Group).

2    The variation sought by the plaintiffs provides for an extension of time for certain refinancing to take place, as contemplated by the DOCAs, and a corresponding compression of the time for final distributions under related creditors’ trust deeds, to achieve the result that creditors will not be prejudiced by the variation.

3    The Originating Process is supported by an affidavit of the first plaintiff, Mr Diakos, affirmed on 30 May 2022, and Exhibit CD-1 to that affidavit and an affidavit of Steven Antonio Mattiussi affirmed on 31 May 2022.

4    I have drawn, in this judgment, on the helpful written and oral submissions of Mr Anderson of Counsel who appears for the plaintiffs.

Background

5    Mr Diakos is the Chief Financial Officer of the Group. The Group carries on the business of steel fabrication. Pacific Steel is the primary training entity in the Group.

6    The Companies were placed into voluntary administration on 20 December 2021 following significant COVID-induced disruptions to the Group’s business. On 21 January 2022, the convening period for the second meeting of creditors of each of the Companies was extended by 90 days.

7    On 24 March 2022, the voluntary administrators published reports to creditors of the Companies. In those reports, the administrators noted that the Group’s businesses continued to trade and expressed the view that, for various reasons, it was in the creditors’ interests for deeds of company arrangement to be executed rather than to have the Companies proceed into liquidation. These reasons were principally the more timely and certain return to creditors, the continuation of employees’ employment and a maximisation of the chances of the Companies’ continuing in existence.

8    On 1 April 2022, at the second meeting of creditors of each of the Companies, the creditors resolved to execute deeds of company arrangement and deeds were executed on that date.

9    The operative terms of each of the DOCAs were in materially identical terms. As Mr Anderson submits, the DOCAs provide relevantly for:

(a)    the Group’s secured creditors to be refinanced and/or compromised within two months: cll 10.2(d)-(h) and 11.1(a)(i);

(b)    cash contributions from the directors totalling $500,000 across the Group could be contributed to the deed fund within two months: cll 1.1 (“Director’s Contribution”), 8.1(a)(i) and 10.2; together with trading receipts;

(c)    in relation to Pacific Steel, the collection of pre and post-appointment debtors and work in progress of at least $1.5 million to be contributed to a deed fund: cll 1.1 (“Additional Debtor Sum”, “Debtor Contributions”), 8.1(a)(ii), 8.2 and 8.3;

(d)    the deed funds established under the DOCAs to be transferred to creditors’ trusts and made whole by 1 April 2023, to in turn be distributed to unsecured creditors by 1 June 2023, with certain related parties excluded from participating the ultimate distribution; cll 7, 10 and the creditors’ trust deeds;

(e)    continued employment of the Group’s 32 employees: recital G, cll 1.1 (“Continuing Employees”) and 6.5; and

(f)    return of control of the Group’s operations to its directors: cl 12.

10    Mr Diakos gives evidence as to the state of progress with the satisfaction of the conditions precedent in the DOCAs and the progress towards obtaining finance from the Group’s incoming financier. It is apparent that substantial progress has been made towards satisfaction of each of those conditions precedent, with the impediment to completion of the transactions contemplated by the DOCAs being a delay in the provision of the incoming financier’s loan documents. The most recent information concerning the state of the preparation of the finance documents is that the financier was meeting with its solicitors earlier today, with a view to finalising that draft loan documentation.

11    Importantly, if obtained, that refinance will permit the repayment of the secured debt, due to the National Australia Bank Ltd and ING Bank Ltd, and facilitate completion of the balance of the contemplated transactions.

Consideration

Leave to proceed

12    As Mr Anderson submits, the plaintiffs are persons bound by the DOCAs and therefore require leave under s 444E of the Corporations Act 2001 (Cth) (Act) to bring and proceed with the present application.

13    The principles applicable to a grant of leave are well settled and more recently summarised by Middleton J in Hastie Group Limited (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) (No 2) [2021] FCA 1344 (Hastie) at [7]-[10].

14    After identifying a number of non-exclusive discretionary factors at [8] and [9], Middleton J stated at [10]:

However, it is important to recall that the only limitations on the discretion of the Court in considering whether to grant leave under s 444E(3) of the Act are derived from the context, scope and purpose of Pt 5.3A of the Act. There should be no strict formula to constrain the exercise of that discretionary decision. For instance, whether there is a claim which has a “solid foundation” may be a factor to take into account, but is not a determinative factor.

15    Mr Anderson submits, and I accept, that the circumstances of the present case, and the nature of the present application, do not easily fit with any of the factors referred to in Hastie at [8]-[9]. Rather, he submits and I accept that, as recognised by Middleton J in Hastie at [10], the question of whether leave should be granted is informed by the context, scope and purpose of Part 5.3A of the Act: namely, to provide for the business, property and affairs of the Companies to be administered in such a way that maximises the chances of the Companies, or as much as possible of their business, continuing in existence; or, if that is not possible, administered in such a way that results in a better return for creditors than an immediate winding up: s 435A of the Act.

16    I am satisfied that a grant of leave would serve the purpose of Part 5.3A in that it would enable the orders under s 447A to be sought, which themselves, for the reasons that I explain below, serve the purpose of that Part.

The application under s 447 of the Act

17    Section 447A(1) of the Act 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.

18    I am satisfied that as directors of the Companies, and as proponents of the DOCAs, the plaintiffs have standing to seek relief as “interested person[s]”: s 447A(4).

19    As Mr Anderson submits, the powers of the Court under s 447A of the Act are wide, but not entirely without limits: Australasian Memory Pty Limited and Another v Brien and Another (2000) 200 CLR 270; [2000] HCA 30 (Australasian Memory) at [20]; see also In the matters of MROC Car Wholesalers Pty Ltd and ors [2017] NSWSC 287 at [30]. The relevant limitations were identified in Australasian Memory at [20] in this way:

Some particular limitations, suggested in the course of argument, must be examined: first, that s 447A does not permit a court to make an order altering the times fixed by those provisions of Pt 5.3A which contain express provision for variation of the time so fixed; second, that it permits only orders having prospective effect; third, that it does not permit the making of orders affecting vested rights; and, fourth, that it does not apply unless there is a continuing administration (or, presumably, an extant deed of company arrangement).

20    Further, as Black J observed in In the matter of Maria’s Farm Veggies Pty Ltd (admins appt) [2016] NSWSC 1899 at [21]:

The overriding requirement for an order under that section is that any order made and any directions given must be designed to achieve the objective of Part 5.3A as expressed in s 435A of the Corporations Act, and as Mr Cook pointed out, must have a nexus with how Part 5.3A is to operate in relation to the particular company: Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2004] FCA 130; (2004) 49 ACSR 1 at 15; Correa v Whittingham [2013] NSWCA 263; (2013) 278 FLR 310 at [4].

21    More specifically for present purposes, the Court has power under s 447A to vary a deed of company arrangement. As Barrett J (as his Honour then was) observed in In the matter of Derwent Howard Media Pty Limited [2011] NSWSC 1164:

11    Ordinarily, any variation of a deed of company arrangement should be by resolution of creditors under s 445A. But it is, I think, sufficiently established that the court’s power under s 447A enables it, in an appropriate case, to vary a deed of company arrangement or, more accurately, to cause Part 5.3A to operate in relation to the subject company as if some provision of the deed were varied: see, for example, Mulvaney v Rob Wintulich Pty Ltd (1995) 18 ACSR 384; Re Pasminco Ltd [2003] FCA 265; (2003) 45 ACSR 1; Brandrill Pty Ltd v Newmont Yandal Operations Pty Ltd [2006] NSWSC 974; (2006) 24 ACLC 1179.

12    Generally speaking, however, the court should be reluctant to exercise this power (and thereby to deprive creditors of their role under s 445A) except in circumstances that are uncontentious, in the sense that no prejudice to creditors is involved: Re Paradox Digital Pty Ltd; Ex parte Smith [2001] WASC 182. That is the position here. Deferral of the 30 September 2011 deadline will avoid the possibility of untoward termination of the arrangement and preserve the basis of participation by creditors envisaged by the deed, as well as allowing time within which any proposal for substantive variation can be placed before creditors for consideration.

(See also Kipoi Holdings Mauritius Limited v Kirman and Bauer as joint and several administrators of Tiger Resources Limited (Subject to Deed of Company Arrangement) [2021] WASCA 194 at [50] and the cases there cited.)

22    I am satisfied that the observations of Barrett J apply with equal force to the present circumstances. No prejudice to creditors is involved in the variations sought by the plaintiffs. The variation, while having the effect of providing for an up to one month deferral of the time for entry into the loan documents with the incoming financier, Solid Asset Solutions, will also bring about a corresponding compression of time for payment of the “Final Dividend” under the creditor’s trust deeds. Creditors will be left in the same ultimate position as they would otherwise have been under the transactions originally contemplated by the DOCAs: that is, payment of the “Final Dividend” will occur by the time that was originally intended. That position is to be preferred to an immediate winding up of the Companies.

23    Further, I note that the Deed Administrators by their counsel, Mr Somerville, have confirmed that they do not take issue with the application, that they consider that the proposed extension of time under the DOCAs (and corresponding reduction under the creditor’s trust deeds) to be in the best interests of creditors of the Group; and that they maintain their opinion that the DOCAs provide for a greater estimated return for each class of creditor than a liquidation.

24    I am therefore satisfied that the orders sought by the plaintiffs under s 447A of the Act would serve the purpose of achieving the objective of part 5.3A of the Act in relation to the Companies.

Disposition

25    The plaintiffs will be granted leave, nunc pro tunc, to begin and proceed with this application as against the Companies, and orders will be made pursuant to s 447A(1) and related orders in the terms sought by the plaintiffs in the originating process.

Associate:

Dated:    1 June 2022

SCHEDULE OF PARTIES