Federal Court of Australia

Diakos v Pacific Steel Constructions Pty Ltd, in the matter of Pacific Steel Constructions Pty Ltd (No 2) [2022] FCA 759

File number(s):

NSD 406 of 2022

Judgment of:

GOODMAN J

Date of judgment:

30 June 2022

Catchwords:

CORPORATIONS – application for leave to proceed against first to seventh defendants under s 444E(3) of the Corporations Act 2001 (Cth) application under s 447A of the Act for further variation of deeds of company arrangement to allow time to complete refinancing – absence of prejudice to creditors – extension in the interests of creditors – application granted

Legislation:

Corporations Act 2001 (Cth)

Cases cited:

Diakos v Pacific Steel Constructions; In the matter of Pacific Steel Constructions Pty Ltd [2022] FCA 645

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Number of paragraphs:

17

Date of hearing:

30 June 2022

Counsel for the Plaintiffs:

Mr J R Anderson

Solicitor for the Plaintiffs:

Watson Mangioni Lawyers

Counsel for the Eighth Defendant:

Mr H Somerville

Solicitor for the Defendants:

William James Lawyers

ORDERS

NSD 406 of 2022

IN THE MATTER OF PACIFIC STEEL CONSTRUCTIONS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) & OTHER COMPANIES LISTED IN THE SCHEDULE

BETWEEN:

CON DIAKOS

First Plaintiff

NICHOLAS CHRISTOU

Second Plaintiff

PAUL BONADIO (and others named in the Schedule)

Third Plaintiff

AND:

PACIFIC STEEL CONSTRUCTIONS PTY LTD (ACN 100 940 145) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

First Defendant

BOOM LIFT PTY LTD (ACN 163 723 439) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Second Defendant

EQUIPMENT PLUS PTY LTD (ACN 111 202 441) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (and others named in the Schedule)

Third Defendant

order made by:

GOODMAN J

DATE OF ORDER:

30 june 2022

THE COURT ORDERS THAT:

1.    Pursuant to s 444E of the Corporations Act 2001 (Cth) (Act), to the extent necessary, leave is granted nunc pro tunc, to the plaintiffs to begin and proceed with this application as against the first to seventh defendants (Companies).

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 the Companies as if:

(a)    clause 11.1(a)(i) of the deeds of company arrangement executed by the Companies on 1 April 2022 (DOCAs), as varied by orders made on 31 May 2022, were further varied by:

(i)    deleting the number 3; and

(ii)    inserting in lieu thereof the number 4;

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

(i)    deleting the number 9; and

(ii)    inserting in lieu thereof the number 8’’;

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

(i)    deleting the number 9; and

(ii)    inserting in lieu thereof the number 8;

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

(i)    deleting the number 11; and

(ii)    inserting in lieu thereof the number 10.

3.    The deed administrators of the Companies are to provide a copy of these Orders to creditors 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.

REASONS FOR JUDGMENT

(Delivered extempore and revised)

GOODMAN J

INTRODUCTION

1    The plaintiffs are directors of the first to seventh defendants (Companies). The Companies entered into deeds of company arrangement (DOCAs) on 1 April 2022. The DOCAs included a clause which provided that the DOCAs would terminate upon the expiration of two months from 1 April 2022.

2    On 31 May 2022, Halley J made orders under s 447A(1) of the Corporations Act 2001 (Cth) the effect of which was to extend that date by a month: Diakos v Pacific Steel Constructions; In the matter of Pacific Steel Constructions Pty Ltd [2022] FCA 645 (Diakos No 1).

3    By Interlocutory Process filed 29 June 2022, the plaintiffs seek orders for the further variation of the DOCAs, to extend that date by a further month.

4    The application is supported by affidavits of the first plaintiff, Mr Diakos, affirmed on 30 May 2022 and Mr Steven Mattiussi, the plaintiffs’ solicitor, sworn 31 May 2022 and 28 June 2022.

BACKGROUND

5    In Diakos (No 1), Halley J at [5]-[11] described the background to the application before his Honour as follows:

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.

6    The evidence on the present application establishes that since 31 May 2022 efforts to advance the refinancing have continued, but there has been delay in the preparation of the transaction documents. The transaction documents are well advanced, but are yet to be finalised and will not be finalised prior to the present termination date. There is also a need for the outgoing secured creditors to have time to attend to various matters and this will not occur by the present termination date.

Consideration

Leave to proceed

7    As the plaintiffs are persons bound by the DOCAs they require leave under s 444E of the Act to bring and proceed with the present application. The considerations applicable to the exercise of the discretion to grant leave to proceed with this application are relevantly identical to those before Halley J in Diakos (No 1).

8    At [13]-[15] of Diakos (No 1), his Honour identified the breadth of the Court’s discretion, and that an important consideration in the exercise of that discretion is the object of Part 5.3A of the Act, within which s 447A resides. Section 435A of the Act provides that the object is to provide for the business, property and affairs of insolvent companies to be administered in a way that maximises the chances of such 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 and members than would result from an immediate winding up of such companies.

9    I am satisfied that a grant of leave would further the object of Part 5.3A, in that it would enable the orders under s 447A to be sought, which orders would further that object, for the reasons set out below at [14]-[16].

The application under s 447A of the Act

10    Section 447A of the Act provides in so far as is presently relevant:

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.

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

(f)      any other interested person.

11    The plaintiffs are directors of the Companies and parties to the DOCAs. I am satisfied that they have standing as interested persons (s 447A(4)(f)) to make the application.

12    I respectfully agree with, and adopt, the following summary of principles relevant to the exercise of the discretion under s 447A, set out by Halley J in Diakos (No 1) at [19]-[21]:

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 courts 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.)

13    A month has passed since the making of the orders in Diakos (No 1). Nevertheless, I am satisfied that the orders sought on this application should be made, for the following reasons.

14    First, there is no apparent prejudice to creditors. The variation, while having the effect of a deferral of up to one month of the time for finalisation and entry into the loan documents with the incoming financier, will also bring about a corresponding compression of time for payment of the “final dividend” under the creditors’ trust deeds. As a result, creditors will be left in the same ultimate position as they would otherwise be under the transactions originally contemplated by the DOCAs. That is, payment of the final dividend will occur by the date originally intended.

15    Secondly, the deed administrators have indicated that they remain of the view that the DOCAs and the associated creditors trust arrangement are in the interests of creditors. The deed administrators have also indicated to the Court that they support the present application.

16    Thirdly, if the DOCAs are carried out to completion this would be a better result for creditors than an immediate winding up.

CONCLUSION

17    For the reasons set out above, I will make orders granting leave under s 444E of the Act and for the variation of the DOCAs under s 447A of the Act.

I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman.

Associate:    

Dated:    30 June 2022

SCHEDULE OF PARTIES

NSD 406 of 2022

Plaintiffs

Fourth Plaintiff:

NIKOLA SABO

Fifth Plaintiff:

FIONA DIAKOS

Sixth Plaintiff:

VANESSA BONADIO

Seventh Plaintiff:

WENDY CHRISTOU

Eighth Plaintiff:

KATHY SABO

Defendants

Fourth Defendant:

MAXIM STEEL PTY LTD (ACN 618 755 534) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Fifth Defendant:

PRB FABRICATION PTY LTD (ACN 149 985 357 (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Sixth Defendant:

PSC PROPERTY MANAGEMENT PTY LTD (ACN 100 935 037) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Seventh Defendant:

SYDNEY MANAGEMENT PTY LTD (ACN 149 985 348) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Eighth Defendant:

ANDREW LAKOMY & NEIL ROBERT CUSSEN IN THEIR CAPACITIES AS JOINT & SEVERAL DEED ADMINISTRATORS OF THE DEEDS OF COMPANY ARRANGEMENT MADE IN RELATION TO THE FIRST TO SEVENTH DEFENDANTS