Federal Court of Australia

McCabe, in the matter of Andrew McCabe and Joseph Hayes in their capacity as joint and several deed administrators of the companies listed in Schedule 1 [2023] FCA 1042

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) being Sch 2 of the Corporations Act 2001 (Cth), the plaintiffs are justified and are otherwise acting reasonably in not distributing to creditors of the companies listed in Sch 1 to these orders (Companies), the deed fund identified in the deed of company arrangement dated 9 February 2023 (DOCA), until the determination of Federal Court of Australia proceeding QUD 99 of 2023, or, alternatively, further order of the Court.

2.    The costs of these proceedings be paid in priority as part of the Deed Administrators’ Costs (as defined in the DOCA) in accordance with cl 12.2 of the DOCA.

3.    Within 5 days of these orders, the plaintiffs are to notify the creditors of the Companies of these orders by sending a copy of these orders to each creditor by way of email and by posting these orders on the plaintiffs’ website.

4.    Any creditor of the Companies that seeks to amend or vary these orders may apply to the Court on 48 hours’ notice.

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

SCHEDULE 1

REASONS FOR JUDGMENT

HALLEY J:

A.    Introduction

1    The plaintiffs, Andrew McCabe and Joseph Hayes in their capacity as joint and several deed administrators (Administrators) of each of the companies listed in Sch 1 of the originating process filed on 8 August 2023 (Companies), seeks orders pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) being Sch 2 of the Corporations Act 2001 (Cth) (Act) that they are justified and are otherwise acting reasonably in not distributing money to creditors of the Companies in accordance with a deed of company arrangement (DOCA) until the determination of proceedings brought by the Queensland Commissioner of State Revenue (Commissioner) in this Court (QUD 99 of 2023) seeking to set aside the DOCA (FCA Proceedings).

2    The Administrators rely on an affidavit of Mr McCabe sworn on 2 August 2023 and written and oral submissions of their counsel, Mr L. Kelly KC and Mr J. Raftery.

3    The application by the Administrators is supported by the Commissioner, a creditor of the Companies, who appeared by leave, pursuant to r 2.13(1) and r 2.13(4)(a) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), at the hearing of the proceeding on 21 August 2023, by her counsel, Mr A.G. Psaltis.

4    Following the conclusion of the hearing of the proceeding before me, the Administrators notified the Australian Securities and Investments Commission (ASIC) of their application for orders pursuant to s 90-15 of the IPS. The notification was made by the Administrators pursuant to their obligation under r 2.8 of the Rules to notify an application under s 90-20 of the IPS for relief under s 90-15 of the IPS.

5    On 30 August 2023, ASIC advised the Administrators that it did not propose to intervene in the proceedings and neither opposed or supported the relief sought by the Administrators.

B.    Background

6    The factual background to the appointment of the Administrators, the entry into the DOCA and the commencement of the FCA Proceedings are set out by Mr McCabe in his affidavit. For present purposes, it is sufficient to note the following matters.

7    The Companies provided engineering, contracting and manufacturing services to a wide range of industries locally in Queensland, nationally and internationally.

8    In September 2022, the Commissioner of State Revenue in Queensland (Commissioner) issued Default Assessment Notices to the Companies in an aggregate amount of approximately $10 million. The notices were issued for allegedly outstanding payroll tax liabilities across the Companies from 2010 to 2022 in an amount of approximately $3 million for payroll tax, together with penalties and interest since 2010.

9    On 5 December 2022, the Administrators were appointed joint and several administrators of each of the Companies following a resolution of the directors of each of the Companies in accordance with s 436A of the Act.

10    On 11 January 2023, the Administrators issued their second report to creditors of the Companies, setting out, amongst other things, the terms of the DOCA that had been proposed by the directors of each of the Companies.

11    On 19 January 2023, a second meeting of the Companies was convened pursuant to s 439A of the Act, at which the creditors of the Companies resolved to enter into the DOCA and that the Administrators be appointed as deed administrators. The DOCA provides that:

(a)    all employees would be retained and all employee entitlements preserved;

(b)    all current projects would be progressed and completed, minimising any liquidated damages claim and impact on debtor collections;

(c)    a pooled DOCA with a combined deed cash contribution of $2.3 million would be provided within 45 days of execution of the DOCA;

(d)    residual cash at the end of the administration period formed part of the deed fund after payment of voluntary administrators’ trading expenses, remuneration and disbursements, and Administrators’ legal fees, potentially providing an additional deed contribution;

(e)    surplus funds after payment of the administration costs (Administrators’ trading expenses, remuneration and disbursements) and priority creditors (being admitted employee creditors) to be distributed as follows:

(i)    60% to the Commissioner; and

(ii)    40% to all admitted participating creditors (other than the Commissioner) on a pro rata basis;

(f)    on effectuation of the DOCA, control of the respective Companies would be returned to the directors.

12    A consequence of the distributions proposed in the DOCA, is that the Commissioner would be paid approximately between 7.8 cents and 17.4 cents in the $1 of her alleged debt of over $10 million, whereas other creditors would be paid approximately between 16.9 cents and 37.8 cents in the $1 in relation to their proofs of debt.

13    On 3 March 2023, the Administrators issued a notice of intention to declare a first and final priority dividend to creditors of the Companies on 5 April 2023.

14    On 27 March 2023, the Administrators received the sum of $2,300,000 representing the contribution sum pursuant to the terms of the DOCA.

15    On the same day, the Administrators arranged a payment of $22,019.71 to priority employee creditors of the Companies. The Administrators have not made any other distributions to creditors of the Companies since the execution of the DOCA.

16    On 17 March 2023, the Commissioner commenced the FCA Proceedings. The Administrators are named as the first defendant to the FCA Proceedings.

17    The Commissioner relevantly seeks the following orders in the FCA Proceedings:

(a)    an order pursuant to s 445D, or alternatively, s 447A of the Act that the DOCA be terminated; and

(b)    alternatively, an order pursuant to s 75-42 of the IPS that the resolution that the Companies execute the DOCA, passed on the exercise of the casting vote by Mr McCabe, on 19 January 2023, be set aside.

18    On 5 April 2023, the Administrators sent a circular to creditors of the Companies, in which it was stated with respect to the FCA Proceedings that:

...while these proceedings are on foot we are unable to pay a distribution to unsecured creditors in accordance with our notice of intention to declare a dividend.

19    On 28 June 2023, Sarah C Derrington J made orders in the FCA Proceedings, including orders to set the FCA Proceedings down for a five day hearing commencing on 25 September 2023, with 3 October 2023 being reserved for contingency.

20    On 17 July 2023, the Administrators sent a further circular to creditors of the Companies, in which it was stated with respect to the FCA Proceedings that:

Notwithstanding the resolution passed at the creditors meeting on 17 January 2023 to accept the DOCA Proposal, the distribution of Priority Claims, the receipt of the $2.3M Deed Contribution Funds and the notice of intention to declare a dividend, we are unable to pay a distribution to unsecured creditors in accordance with the notice of intention to declare a dividend dated 5 April 2023 given the application filed by the [Commissioner].

21    As at 2 August 2023, the sum of $2,556,824.41 was held in the Administrators’ Trust Account (as defined in the DOCA) which comprised the deed fund (Deed Fund).

22    Pursuant to cl 12.2 of the DOCA, the Administrators are obliged to distribute funds to creditors of the Companies when they see fit to do so.

C.    Legal principles

23    Section 90-15(1) of the IPS provides that the Court may make any orders it thinks fit in relation to the external administration of a Company. Section 90-15(1) confers a “very broad” power on the Court by virtue of the words “such orders as it (the Court) thinks fit”: Kelly, in the matter of Halifax Investment Services Pty Ltd (in liquidation) (No 8) [2020] FCA 533 at [51] (Gleeson J, as her Honour then was). It includes a power to make orders determining any question arising in the external administration of the company: s 90-15(3)(a) of the IPS.

24    The principles governing the Court’s power to give directions under s 90-15(1) of the IPS, and its predecessor provisions, s 479(3) and s 511 of the Act, are well-established: In the matter of Broens Pty Limited (in liq) [2018] NSWSC 1747 at [40] (Gleeson J).

25    The “prevailing principle” to be applied in circumstances where liquidators and administrators request a judicial direction in respect of a business or commercial decision, is that the decision must give rise to an issue requiring the exercise of legal judgment. An issue of this kind includes one of substance or procedure or of power, propriety or reasonableness of the decision: Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409; [2002] FCA 90 at [65] (Goldberg J); see also Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [7]-[9] (Black J).

D.    Consideration

26    The DOCA does not specify any particular period by which distributions are to be made to creditors. The Administrators, however, advised creditors of the Companies on 3 March 2023 that they intended to declare a first and final dividend on 5 April 2023.

27    I am satisfied that an order should be made pursuant to s 90-15 of the IPS that the Administrators are justified and are otherwise acting reasonably in not distributing money to creditors of the Companies in accordance with the DOCA until the determination of the FCA Proceedings.

28    The decision not to pay any dividend to creditors prior to the resolution of the FCA Proceedings will inevitably lead to a delay in creditors of the Companies receiving any payments under the DOCA. The prejudice of that delay to creditors, however, needs to weighed against the prejudice to the persons who contributed the Deed Fund if the Commissioner is ultimately successful in overturning the DOCA. If the Commissioner is successful, the persons contributing the Deed Fund would likely only be able to recover the amounts that they had advanced as unsecured creditors and the benefits that they had otherwise believed they had secured for their payment of the Deed Fund would be lost. In these circumstances, in my view, this would plainly be an unjust result.

29    Further, and in any event, I am satisfied that it is in the interests of all creditors that expenses not be incurred in proceeding to declare dividends and make payments to creditors under the DOCA that then might have to be subsequently unwound in the event that the Commissioner succeeds in having the DOCA set aside. The inconvenience and costs thrown away if that were ultimately the result of the FCA Proceedings would likely be substantial, both for the Administrators and the creditors of the Companies.

E.    Disposition

30    Orders will be made substantially in the form sought by the Administrators in the originating process.

Associate:

Dated:    4 September 2023