Supreme Court New South Wales

• Medium Neutral Citation: In the Matter of Reed Constructions Australia Pty Ltd [2012] NSWSC 1045
• Hearing dates: 9 July 2012
• Decision date: 09 July 2012
• Jurisdiction: Equity Division - Corporations List
• Before: Brereton J

Decision

Adjournment refused; Defendant wound up; liquidator appointed

• Catchwords: CORPORATIONS - external administration - where voluntary administrators appointed after winding-up proceedings instituted - circumstances in which a court should not order a winding up because an administrator has been appointed - whether in interest of company's creditors that administration continue - adjournment - Corporations Act 2001, s 440A(2) - grounds for adjournment - proposal for Deed of Company Arrangement
• Legislation Cited: (Cth) Corporations Act 2001, s 436A, s 440A(2), s 467(1), s 439A
• Cases Cited: Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456; DCT v Bradley Keeling Management Pty Ltd [2003] NSWSC 47
• Category: Principal judgment
• Parties: SCE Resources Pty Ltd ACN 003 833 270 (Substituted Plaintiff); Reed Constructions Australia Pty Limited ACN 003 340 878 (Defendant)
• Representation: Counsel: D M Crompton (Solicitor) (Plaintiff); P Dowdy (Defendant); Solicitors: Church & Grace (Plaintiff); HWL Ebsworth (Defendant)
• File Number(s): 2012/ 146820

Judgment (ex tempore)

1 HIS HONOUR: By originating process filed on 8 May 2012 the original plaintiff BCI Nominees Pty Ltd (BCI) claimed orders that the defendant Reed Constructions Pty Ltd be wound up in insolvency and that a liquidator be appointed. On 29 June 2012, by consent, SCE Resources Pty Ltd (SCE) was substituted as plaintiff. In the meantime, on 15 June 2012, Ryan Reginald Eagle and John Melluish, who are official liquidators, were appointed voluntary administrators of the defendant pursuant to (Cth) Corporations Act 2001 (Corporations Act), s 436A. There is no question before me as to the validity of that appointment. The administrators convened a first meeting of creditors, which was held on 27 June 2012.

Adjournment application

2 The winding up application was, on 29 June 2012, adjourned to the Corporations List today. The second meeting of creditors has been convened to be held on 20 July 2012, and the company seeks a further adjournment until after that date, primarily pursuant to (Cth) Corporations Act 2001, s 440A(2). The company also relies on the general discretion to adjourn a winding-up application under Corporations Act s 467(1), and the court's inherent control of its own process. Nonetheless, s 440A provides specifically for this specific type of situation.

3 Section 440A(2) provides as follows:

The court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.

4 Accordingly, the court is required to adjourn a winding-up application under s 440A(2) if satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. In Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 McPherson JA, speaking for the Queensland Court of Appeal, said that the question of whether an administration should continue rather than that there be a winding-up was closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of administration than the other. His Honour said (at 457):

In order to satisfy the court of the matter referred to in section 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.

5 In DCT v Bradley Keeling Management Pty Ltd [2003] NSWSC 47, Campbell J, as his Honour then was, said (at [18]):

Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase.

6 The report to creditors pursuant to Corporations Act, s 439A, is in the course of preparation, and, it is anticipated, will be finalised and distributed to creditors in two days' time, on 11 July 2012. A meeting of the committee of creditors that was appointed at the first creditors meeting is apparently to take place at 2pm today, to discuss a number of topics, listed in the administrators' solicitor's affidavit as follows:

(a) Status of the claims of the defendant against third parties;

(b) Position of retention of moneys held by the defendant;

(c) Status of claims against the defendant brought under the Building & Construction Security of Payment Act 1997 (NSW) and equivalent legislation in other states;

(d) Investigations regarding the possibility of preference payment claims;

(e) Investigations regarding the possibility of an insolvent trading claim;

(f) Investigations conducted regarding the novation of the contracts to which the defendant was a party;

(g) Ongoing discussions with St George Bank - a division of Westpac Banking Corporation, the secured creditor of the defendant;

(h) Status of other related entities of the defendant;

(i) The financial position of the defendant's sole director;

(j) Current views of the Administrators of the potential recovery in a liquidation; and

(k) A proposal for a Deed of Company Arrangement (DOCA);

7 As is pointed out on behalf of the plaintiff, the affidavit does not really indicate what it is contemplated will be discussed under any of those topics, nor what outcome from such discussions might benefit creditors. The evidence establishes that a proposal for a DOCA is being considered by the administrators, with a view to its being put to the second meeting of creditors.

8 In the present context, ways in which it could be shown that continuation of the administration might be preferable in the interests of creditors to a winding-up would include demonstrating a realistic prospect that there would be a substantial injection of funds from a third party that would increase the fund available to creditors. Such a course is often an aspect of a DOCA. However, I rejected speculative evidence, on information and belief from an un-stated source, as to what that DOCA might include. Had I admitted it, nonetheless it would have indicated no more than a speculative possibility, of un-stated likelihood, that there might be some injection of funds of an unspecified quantum from an unspecified external entity. The evidence does not establish that there is a realistic possibility that there will be a substantial injection, and the rejected evidence would not have done so.

9 Another consideration which is usually relevant is that, typically, liquidation will have an advantage for creditors in triggering the availability of the provisions that enable recovery of the proceeds of uncommercial transactions, and remedies for insolvent trading. In this case, the evidence does not disclose whether or not there have been uncommercial transactions, but the possibility that there have been such transactions, which might be recovered as a result of the liquidation, has not been excluded, and the reference to "novation of the contracts to which the defendant was a party" suggests that there may be some matters warranting investigation in this respect.

10 Moreover, the size of the apparent deficiency of funds - which is prima facie unlikely to have arisen overnight - indicates a possibility warranting investigation that there has been insolvent trading. The solicitor's affidavit sets out some preliminary conclusions made by the administrators from their investigations in respect of claims that the company has against third parties, and potential liabilities of the company. As best I can tell, it appears to assert that there are potential claims of up to $13.4 million [see paragraph 9(b)] plus a further claim, albeit subject to a cross-claim, of $15.5 million [see paragraph 9(c)], against liabilities which seem to total about $130 million plus contingent liabilities of a further $50 million [see paragraph 9(d)]. A document entitled RATA Work Papers, tendered by the Plaintiff, indicates assets of about $3 million and liabilities of $30 million. On any view, albeit preliminary, there appears to be a very large deficiency, which is unlikely to have arisen immediately. There is therefore apparent potential scope for insolvent trading claims.

11 As it seems to me, the situation with which the court is confronted is that there is not really any evidence that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. The highest that the case for the company can be put is that further material, not yet before the court, might emerge in the report to creditors, and that the creditors ought to be allowed to make their own decision at the second creditors' meeting; but that simply is not the test under s 440A. The cases to which I have referred indicate that the court needs to be persuaded that it is in the interests of the creditors for the company to continue under administration. The evidence that has been adduced on this application simply does not enable me to be so persuaded.

12 Accordingly, I refuse the application under section 440A. As that section provides specifically for the situation, I can see no basis for reaching a different conclusion under s 467 or in the inherent jurisdiction of the court.

[Counsel addressed]

13 The company, having failed to secure an adjournment under s 440A or otherwise, now renews its application for a shorter adjournment until Thursday of this week, by when the report to creditors will be available, presumably with a view to renewing its s 440A application then.

14 It is said that, knowing the processes that are on foot in the administration, it would be unfortunate if that effort were wasted at this point by the company being "snuffed out". However, it needs to be borne in mind that there are in fact two proceedings on foot, and the winding-up process was commenced first, before the voluntary administration process. In the absence of other evidence, courts would often be inclined to infer in such situations that the administration process was embarked upon only as a last resort in response to the winding-up proceedings, to endeavour to avoid the consequences of liquidation. Whether or not that is the case does not really matter. The point is that, in the ordinary course, the plaintiff is entitled to have its winding-up application heard and determined, unless the court is satisfied of the matters referred to in s 440A(2).

15 Secondly, the 440A application was put on the basis of an application for an adjournment until after the second creditors' meeting. It was not put on the basis, then, of a short adjournment to enable further evidence to be put before the court, say by Thursday this week. It rather savours of first endeavouring to have one's cake of the full adjournment and then, when that fails, eating it too, by seeking a short adjournment to strap up the evidence.

16 While I acknowledge that at first sight there seems to be an attraction in a short adjournment, to enable the evidence to be supplemented, the company made its application today on evidence that did not satisfy the relevant test and failed, and, in accordance with the ordinary procedures of the court and sound principles of case management, it ought not be then afforded a further opportunity to renew the application, especially in the face of the plaintiff's entitlement to proceed in the ordinary course to have its application heard and determined, absent satisfaction of the criteria referred to in s 440A.

Standing of substituted plaintiff to apply for winding up

17 The defendant objects to the assertion, contained in the affidavits of debt of Mr Newman, that as at particular dates, namely 8 May and 20 June 2012, the defendant was indebted to the substituted plaintiff in a sum of $265,314.28.

18 The deponent says that he is familiar with the financial books of accounts detailing the arrangements of the substituted plaintiff, and has searched them. That of itself does not cure the problem, because that simply means that there is an assertion based on secondary evidence - or, in other words, hearsay.

19 Nonetheless, in proceedings of this type, as in bankruptcy proceedings - at least where indebtedness is not put distinctly in issue - it has been conventional for creditors to prove their standing by a sworn assertion that the defendant is justly and truly indebted to the plaintiff in a certain amount. The same form of affidavit is commonly required in support of an application for default judgment. Where there is a contest as to the existence or amount of a debt, testimony in that form will be inadmissible and insufficient to prove it; however, where it is not in contest, a sworn affidavit of debt to that effect suffices to raise a prime facie case of standing as a creditor. A contrary view would reverse decades, if not centuries, of practice in this field.

20 In this case, the notice of appearance filed by the company identified, as the only ground of opposition, the appointment of the administrators. It did not put into issue the existence or amount of the plaintiff's debt, nor its standing as a creditor. Indeed, the defendant consented to the substitution of the substituted plaintiff, inherent in which is its standing as a creditor. Moreover, the amount of the substituted plaintiff's debt is of no practical significance, as the plaintiff relies on a creditor's statutory demand served by the original plaintiff, not by the substituted plaintiff.

21 In the context of these proceedings, with the grounds of opposition defined as they are, the form of the evidence is such that it may be accepted as proof of the substituted plaintiff's standing as a creditor.

Winding up application

22 BCI had served a creditor's statutory demand on the defendant at its registered office by post on 14 March 2012. The defendant did not comply with the statutory demand, nor secure or compound to it to BCI's satisfaction within 21 days thereafter, nor did the defendant apply to set aside the creditor's statutory demand. As a result of the defendant's non-compliance with the statutory demand, it is presumed to be insolvent. On 29 June 2012, SCE was, by consent, substituted as plaintiff. SCE is a creditor of the defendant in an amount of $265,314.28. The defendant filed a notice of appearance in which it stated that the winding-up application was opposed on the basis that administrators had been appointed, but it did not state any other ground of opposition.

23 I am therefore satisfied that the company is presumed to be insolvent and ought to be wound up.

Orders

24 My orders are:

(1) Order that Reed Constructions Australia Pty Limited ACN 003 340 878 be wound up in insolvency.

(2) Order that Mark Robinson be appointed liquidator of the defendant.

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Decision last updated: 11 October 2012