Federal Court of Australia

Naidenov, in the matter of Quoterite Pty Ltd (administrators appointed) [2023] FCA 1169

ORDERS

THE COURT ORDERS THAT:

1.    The originating process filed on 28 September 2023 be made returnable instanter.

2.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that it is necessary to prevent prejudice to the proper administration of justice, and until further order, the publication or other disclosure of Confidential Exhibit SN-2 to the affidavit of Steven Naidenov affirmed on 28 September 2023 and its contents be prohibited other than to the Court, the plaintiffs, and their legal representatives.

3.    Pursuant to s 447A of the Corporations Act 2001 (Cth) (the Corporations Act), Pt 5.3A of the Corporations Act is to operate in relation to Quoterite Pty Ltd ACN 618 611 420 (administrators appointed) (the Company) as if for the purposes of s 440D(1) a “proceeding in a court” includes an arbitration proceeding, to the intent that s 440D(1) applies to the arbitration proceeding before the Judicial Arbitration and Mediation Service in the State of Colorado, United States of America titled DesignWarePro LLC v Retail Pro Software Pty Ltd., JAMS No. 32655.

4.    The plaintiffs serve a copy of the originating process, the affidavit of Steven Naidenov affirmed on 28 September 2023, the document referred to as Exhibit SN-1 in that affidavit, and a copy of these orders on DesignWarePro LLC (DesignWarePro) by email to DesignWarePro's legal representatives at mike.richardson@milgromlaw.com and amanda.milgrom@milgromlaw.com and louis.tompros@wilmerhale.com by 7 pm on 28 September 2023 AEST.

5.    DesignWarePro and any other person affected by these orders who demonstrates sufficient interest has liberty to apply on 48 hours’ notice to the Commercial and Corporations Duty Judge in New South Wales to vary or discharge these orders.

6.    The costs of this proceeding be costs in the administration of the Company.

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

REASONS FOR JUDGMENT

Ex tempore (revised from transcript)

YATES J:

1    This matter comes before me as the presiding Commercial and Corporations Duty Judge in New South Wales. It is an application that needs to be determined urgently given a pending arbitration before the Judicial Arbitration and Mediation Service in the State of Colorado in the United States of America, the hearing of which is due to commence on Monday, 2 October 2023 Mountain Daylight Time (the local time zone in Denver, Colorado), which is Tuesday, 3 October 2023 Australian Eastern Daylight Time.

2    The plaintiffs are the joint and several administrators of Quoterite Pty Ltd (administrators appointed) (the company), formerly called Retail Pro Software Pty Ltd. They were appointed today, 28 September 2023, pursuant to a resolution of the company’s sole director, Aaron LeCornu, passed under s 436A(1) of the Corporations Act 2001 (Cth) (the Act), which provides:

(1)     A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:

(a)     in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

(b)     an administrator of the company should be appointed.

3    The company’s business involves licensing a computer program called “Quoterite”, which is described in the evidence as “cloud-based computer software designed for the window covering industry (being retailers and manufacturers) that provides a variety of services, including real-time price-quote generations, workflow scheduling tools, accounting integration, and various other business management services”.

4    At the present time, a Report on Company Activities and Property has not been provided to the plaintiffs. However, it is their understanding that the company generates revenue by licensing the “Quoterite” software to customers in Australia and overseas in exchange for a subscription fee. The company employs 14 people to support the product development, and customer support and trading operations, of the business.

5    The plaintiffs’ present intention is to continue to trade the company’s business while assessing the options that are available to them as administrators.

6    The company’s annual report for the 12 months ending 30 June 2022 records that the company made a loss of $938,640. Its balance sheet as at 30 June 2022 records a deficiency in assets of $1,056,071.

7    The company’s profit and loss statement for the 12 months ending 30 June 2023 records a loss of $1,786,955.83. In the current year, the company has also recorded a loss of $359,143.43. The company’s balance sheet as at 27 September 2023 records that the deficiency in its assets has increased to $2,030,770.58.

8    The arbitration to which I have referred concerns claims made against the company by DesignWarePro LLC (DesignWarePro) which seeks an award of US$6,000,000 for alleged copyright infringement, misappropriation of trade secrets, breaches of the duty of good faith and fair dealing, and breaches of contract by the company. These claims are said to arise out of a Licence Agreement into which the company and DesignWarePro entered in 2017. The company denies the allegations that have been made against it and has raised a number of “affirmative defences”.

9    The plaintiffs have not had an opportunity to consider, in detail, the claims that have been made against the company, the merits of those claims, or the company’s prospects of success in the arbitration. They have been informed, however, that legal costs of between US$85,000 and US$105,000 are likely to be incurred should the company appear at the arbitration to defend its position. As the company has only approximately $36,064.70 in available cash, it is not in a position to incur those costs; nor does it have the assets to cover those costs. Moreover, if a substantial award were to be made against it, it would not have the assets to meet the award.

10    Section 440D of the Act provides:

440D    Stay of proceedings

(1)     During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:

(a)     with the administrator’s written consent; or

(b)     with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

(2)     Subsection (1) does not apply to:

(a)     a criminal proceeding; or

(b)     a prescribed proceeding.

11    Section 447A(1) of the Act provides:

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

12    The reference to “this Part” in s 447A(1) is a reference to Pt 5.3A of the Act.

13    The plaintiffs apply under s 447A(1) to modify the operation of s 440D (which is within Pt 5.3A) so that the reference therein to “a proceeding in a court” includes an arbitration proceeding, with the intent that the stay provided by s 440D will operate in respect of the pending arbitration in Colorado.

14    The power to make such an order was accepted in In the matter of THO Services Ltd [2016] NSWSC 509 (THO Services). In that case, Brereton J observed (at [37] – [39]:

37     As it seems to me, the policy that informs s 440D – and, for that matter, s 440B and s 440F – is one that is founded on avoiding disruption to and distraction of administrators from performing their functions and duties as administrators during the relatively short period available to them, and providing a breathing space for the company, until the creditors make a decision under s 439C about its future. Thus, under s 440B, even secured creditors and lessors are prevented from enforcing their security interests, distraining for rent or taking possession of leasehold property. Under s 440F, enforcement process is suspended. Together, these provisions create the so-called “moratorium” associated with voluntary administration.

38     The continuation during that period of commercial arbitration proceedings appears, at least at first sight, inconsistent with the scheme of a moratorium. The policy that informs the existence of the moratorium suggests that it would be appropriate to apply it also to a private commercial arbitration, particularly one of the scale and scope in question here.

39     Another element of that underlying policy is the avoiding of expenditure of an insolvent company’s limited resources in the defence of claims which, in the likely outcomes of an administration, will sooner or later be stayed. Thus, if the administration proceeds to a DOCA, the arbitration will be stayed under s 444E. If it proceeds to a deemed creditors’ voluntary winding up, it will be stayed under s 500(2). In either case, of course, the Commonwealth can apply for leave to continue with the proceedings, but application of s 440D in these circumstances would simply accelerate, by the period of the administration, a stay which is likely to arise or be imposed in any event upon the outcome of the administration, it appears unlikely in the extreme that the outcome of this administration would be the return of the company to the control of the directors.

15    His Honour’s last-mentioned observation would appear to apply equally to the present case: it appears extremely unlikely that the outcome of the present administration will be the return of the company to its director.

16    Unlike the position in THO Services, the hearing of the arbitration in the present case is imminent. Barring some unusual development of which I am not aware, it is a practical certainty that the company will not be represented at the arbitration given its obvious lack of financial resources. This may well result in a substantial award being made against it on an undefended basis in circumstances where the company not only denies the claims that have been made but alleges that those claims have been made “maliciously” or “in extreme bad faith”. This may have the effect (I say no more than that) of giving one possible creditor a preferred position over other creditors, which would be contrary to the policy of Pt 5.3A of the Act.

17    I accept that granting the relief that the plaintiffs seek will disrupt the commencement of the hearing of the arbitration. It may lead to costs being thrown away. While this is undesirable, it would be the inevitable effect of s 440D if the relevant proceeding were “a proceeding in a court”. Therefore, I do not see this as a compelling reason for not granting the relief.

18    In any event, I balance against that possible prejudice the following additional considerations:

(a)    the period of the administration is likely to be relatively short, meaning that the period of the stay is also likely to be relatively short;

(b)    the modification of s 440D that the plaintiffs seek would nevertheless allow the claimant in the arbitration to move the Court for leave to continue the arbitration; and

(c)    the grant of the relief that the plaintiffs seek would be subject to the usual condition which is imposed in an ex parte application of this kind that any person affected by the relief that is granted, and who can demonstrate a sufficient interest, will have liberty to apply to the Court, on relatively short notice, to vary or discharge the orders that are made granting that relief.

19    In all the circumstances, I propose to grant the relief that is sought in the originating process, subject to some relatively minor amendments.

Associate:

Dated:    29 September 2023