Judicial Registrar considered an application to wind up a company when administrators had been appointed shortly before the hearing In the matter of Polar Agencies Pty Ltd [2019] VSC 43.

FACTS

The plaintiff  a statutory demand served on the defendant by the plaintiff by post sent on 18 October 2018 [4].  The demand is in respect of debts totalling $558,508.56 for goods supplied by the plaintiff to the defendant and invoiced in the period March to August 2018. The defendant failed to comply with it [4] and made no application to set aside the statutory demand [5] thereby failing to comply with the demand in about midNovember 2018 which gave rise to a statutory presumption of insolvency under s 459C(2)(a) of the Corporations Act (the Act).

By an originating process filed on 16 November 2018 [3] the plaintiff applied for the defendant be wound up in insolvency pursuant to s 459P and s 459Q of the Act [1].

The proceeding first came on for hearing on 19 December 2018 where:

• the plaintiff appeared and the defendant did not.
• the Court was informed that negotiations were underway. Directions were made that any request for a further adjournment was to be supported by an affidavit to be filed and served by 4 February 2019,
• the hearing was adjourned to 6 February 2019 [6].

The defendant did not file any affidavits nor did it file a notice of opposition to the application [7].

On the morning of the hearing, 6 February 2019:

• a notice of appearance was filed by Tisher Liner FC Law (‘Tisher Liner’), as solicitors for the administrators, Mr Rathner and Mr Sweeny which had been appointed as administrators of the defendant on 5 February 2019 by the directors of the defendant [8]
• an affidavit sworn by Sining Wang, a solicitor of Tisher Liner, was filed  (‘Wang Affidavit’).

During the hearing Wang:

•  informed the court that Gideon Isaac Rathner and Matthew Brian Sweeny had been appointed as administrators of the defendant on 5 February 2019 [1]
• sought an adjournment of the winding up application until 20 March 2019, by when the administrators would have prepared their report to creditors for the second meeting of creditors of the defendant required to be conducted under s 439A of the Act [9].

The Wang Affidavit:

• referred to a meeting held between the administrators, Mr Wang, Simon Abraham (another solicitor from Tisher Liner), and the two directors of the defendant on 5 February 2019 [10] and stated that  the defendant was:

   

  • in the business of supplying linen, primarily to the healthcare and hospitality sectors,
  • had been trading for over 10 years [11].
  • earned income primarily through the commissions it earns on linen stock sold to its customers [11],
  • had two large customers who are long-term customers of the defendant [11].
• had assets of approximately $114,000, which includes cash on hand of $10,000 and commissions owed and other debtors of $55,000 [12];
• stated that the estimates given by the directors at a Meeting with administrators on 5 February 2019 included that the defendant:
  • • owed approximately $1.65m to a secured creditor, National Australia Bank [12];
    • had no outstanding tax liabilities
    • earned about $570,000 per annum 
    • its expenses are approximately $300,000 per annum; and
    • it owed
      • $75,000 to trade creditors;
      • $550,000 to the plaintiff;
      • approximately $1.875m to unsecured creditors, comprising:
  • • • • $750,000 in shareholder loans; and
        • $150,000 in rent;
    • there was a contingently of $350,000 in respect of a disputed claim;
•  stated that the difference between the defendant’s assets and liabilities was approximately $3.411m [12];
• deposed that the directors’ proposed a Deed of Company Arrangement (“DOCA”) on the following terms:
  • The defendant would continue to trade during the administration and contribute $22,500 per month (equal to $270,000 per annum) from its surplus funds from trading, commencing in May 2019 for a period of 3 years [13];
  • both directors would agree not to draw a wage from the defendant for the duration of the DOCA (totalling $100,000 x 2 per annum, or $600,000 over 3 years).
  • the profits of the defendant would  be for the benefit of creditors participating in the DOCA
  • the directors would procure the consent of the shareholder creditors (totalling $750,000) not to claim in the DOCA;
  • the directors would procure the support of NAB on the basis that it receives 50% of the total DOCA fund dividends, with the remaining 50% to be distributed to unsecured creditors; and
  • the directors would procure funds of $100,000;
    • $50,000 of which will be paid to the administrators’ trust account by 20 February 2019; and
    • the balance by 8 April 2019

to be held by the administrators pending creditor approval of the DOCA [13]

• stated that the initial payment of $100,000 would be utilised as an initial dividend to unsecured creditors, subject to the administrators’ costs; anddividends will be paid to unsecured creditors by:

   

  • further dividends to unsecured creditors, arising from the surplus funds from trading, to be paid every 6 months for a period of 3 years.

• • stated that the administrators informed him that unsecured creditors would receive no return in a liquidation any may receive a total dividend of around 36 cents in the dollar if the DOCA is accepted [14].

• • deposed that as the administrators were only appointed on 5 February, they had not had time to thoroughly investigate the defendant’s affairs or prepare a s 439A report they seek a ‘short adjournment’ to allow them ‘sufficient time to investigate the matters … and to consider the DOCA proposal’.

• deposed that the administrators informed him that they are not aware of any prejudice to creditors, other than the administrators’ costs, if the adjournment is granted [15].

DECISION

Wang made the application for an adjournment under s 440A(2) of the Act, which provides:

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 [16].

Dr Bigos, counsel for the plaintiff, relied on Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd which stated at [10] – [12]:

• The onus is on the defendant to show by “persuasive evidence” that it is in the interests of the company’s creditors that the administration continue rather than liquidation ensue.
• the question of whether an administration should continue is related to the further question of whether the creditors could hope to get more by way of payment of their debts from administration than from liquidation.
• there must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors [17]

Following from that the plaintiff opposed the adjournment application and sought to proceed with the winding up application submitting that:

(a) although the administrators have not yet verified the information contained in the Wang Affidavit, that information shows that the defendant was hopelessly insolvent;

(b) the proposed DOCA was nothing more than optimistic speculation;

(c) the return to creditors of 36 cents in the dollar under the proposed DOCA depends on profitable trading by the defendant for 3 years, which does not appear to be supported by its historical performance;

(d) there is nothing to say that suppliers and customers will continue to allow the defendant to continue trading;

(e) the Wang Affidavit says nothing about potential claims by a liquidator against the directors;

(f) the plaintiff with about 50% of the unrelated unsecured debt, is unlikely to support the DOCA, and wishes to proceed with the winding up application; and

(g) creditors may be prejudiced by an adjournment if it affects the relation-back date [18].

Wang :

• submitted thatGorst does not apply as in Gorst there were assets which could be realised in a liquidation, whereas here:
• submitted there were no realisable assets as its business is selling products for commission.
• submitted that the directors had put the details of the DOCA proposal although Mr Wang said that it was possible that this may not be the final proposal [19].
• relied on In the matter of Bobos Engineering Australia Pty Ltd, which provided:
  • on an application under s 440A(2), the Court must be satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up [20], and
  • that mere speculation that such a course may be in their interests is insufficient [20];
  • the extent of proof that can result in the requisite level of persuasion differs with the circumstances; and,
• submitted that in the context of a short adjournment made very soon after the appointment, less may be required than in the context of a longer adjournment, the practical effect of which would be to defeat the winding up application.
• acknowledged that the matters in his affidavit had not been verified by the administrators because they had only been appointed the day before [22].
• submitted that after the winding up application had been filed, the defendant made a payment of $25,000 to the plaintiff, of which there was no evidence [23].
• submitted that the administrators expected suppliers and customers to continue to trade with the defendant in the DOCA period which the court noted that there was no evidence to support this [24].
• referred to Minister for Environment v Eclipse Resources Pty Ltd (Administrator Appointed), where the Supreme Court of Western Australia balanced the possibility of a liquidator taking proceedings regarding uncommercial transactions in an unfunded liquidation against with a proposed DOCA, as being a reason not to adjourn the winding up application [25].

The Court was not persuaded by the Wang affidavit stating:

• that it did not contain persuasive evidence that it is in the interests of the defendant’s creditors that the defendant continue under administration rather than be wound up.
• at most it would characterise the assertions as being ‘optimistic speculation’ that at some time in the future such evidence may possibly be obtained [26].
• the affidavit relied on by the administrators has been sworn by a solicitor, not by the administrators or by the directors with no explanation as to why the administrators or the directors have not gone on affidavit. 
• that either of those parties could have given more substance to some of the matters deposed to – in particular, the directors presumably could have given direct, first-hand evidence of the financial position of the defendant
• while the Wang Affidavit properly conformed to the requirements for an affidavit for an adjournment the failure to have the directors or administrators file affidavit(s) affected the weight the court was  prepared to give to it and that it does not constitute ‘persuasive evidence’,  which is required [27].
• in relation to  the proposed DOCA the court noted:
  • it involves a modest, when compared to the defendant’s debts, injection of cash , around half of which will be for the administrators’ fees.

• • that NAB would receive $50,000 of the $100,000 payment which in effect means there is no benefit other than covering the costs of administration in this cash payment for unsecured creditors;

• • there was no evidence that the directors had the financial capacity to make the $100,000 payment;

• • that apart from the $100,000 payment any other value from the DOCA in terms of further cash contributions is completely reliant on the defendant continuing to trade, and trade profitably, for 3 years even though there was no persuasive evidence to support the contention that the defendant has been trading profitably or will be able to continue to do so;
  • it was “somewhat concerning” to see a substantial debt owed for  rent as the ongoing availability of premises to be a requirement for the defendant’s business;
  • there was no explanation as to how the defendant came to have substantial debts to unsecured creditors which it was unable to pay;
• the plaintiff was a large supplier to the defendant when contrasted with the other trade creditor debts;
• there was no evidence as to whether the defendants could make good on the commitment to procure the consent of the shareholder creditors not to claim in the DOCA;
• there was no evidence that the directors could procure NAB’s support if it received 50% of the DOCA fund the support of which given the secured debt is $1.65m the court regarded as optimistic speculation. Further, there is no evidence or submission as to how that is in the interests of unsecured creditors;
• The directors foregoing wages over the 3 year period of the DOCA, which is said to have a value of $600,000, was not a contribution of $600,000. It may have little or no value to creditors if the trading is not profitable in that period; and
• much of the information in Wang’s affidavit had not been verified by the administrators because, it was submitted, the administrators had only  been appointed the day before. The court did not regard an explanation based on the timing of the appointment of the administrators to be at all persuasive as timing was completely within the hands of the directors of the defendant [29].

The court concluded:

• that there was a ‘mere speculative possibility’ that it is in the interests of creditors for the administration to continue rather than the defendant be wound up;
• it was not appropriate to adjourn the winding up application so that this mere speculative possibility can be turned into persuasive evidence that there is a real prospect of it being in the interests of creditors for the administration to continue.
• the only reason needed for the extra time is due to the last minute appointment of the administrators which, as I have already noted, was within the directors’ control [31].
• the timing of the appointment of the administrators was a relevant factor in this determination with:
  • the originating process was filed on 16 November 2018.
  • a hearing on 19 December 2018, where the winding up application was adjourned to 6 February 2019.
  • the administrators being appointed at the death knell, just before that adjourned hearing.
  • the defendant being on notice since mid-October 2018 that the plaintiff was pursuing its debt [32].

The court found the comments apt by:

•   Gardiner AsJ in Gorst as being apt when his Honour said:

While the interests of creditors are of course the paramount consideration in determining whether the administration should continue, I also take the view that, in addition to the absence of persuasive evidence that the administration should continue because it would be in the interests of creditors, the appointment of the administrator yesterday amounts to an abuse of the processes of Part 5.3A of the Corporations Act 2001 [34].

• Brereton J stated, in In the Matter of Offshore & Ocean Engineering Pty Ltd, that:

Finally, it cannot go without observation that when a manifestly insolvent company appoints voluntary administrators following resistance to a creditor’s statutory demand and the initiating of winding-up proceedings, the Court approaches with a degree of scepticism whether the appointment is not an attempt as a last resort to avoid the consequences of liquidation [35].

The court made orders:

• refusing the application for an adjournment [37].
• terminating the administration of the defendant which commenced on 5 February 2019 pursuant to s 447A of the Act on the basis that  provisions of Part 5.3A are being abused and I am so satisfied in that regard [37].
• winding up the defendant in insolvency [38]

ISSUE

This decision highlights the importance of having the correct party file affidavits in support of important applications.  There are many times when it is entirely appropriate for a solicitor to file an affidavit in support of an application; evidencing critical conversations, exhibiting relevant correspondence and exhibiting various searches to name just three common situations.  It is often self defeating when a solicitor swears/affirms an affidavit which sets out substantive evidence which should more properly be provided by the client.