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Federal Court of Australia |
Last Updated: 13 August 2003
Humphris, in the matter of ACN 004 987 866 Pty Ltd [2003] FCA 849
CORPORATIONS - application by voluntary administrators for directions and orders - group of companies in administration - proposed deed of company arrangement - corporate group operated financially as a single entity but was divided for operational purposes - group effectively traded under name of one of the group companies - majority of trade creditor's claims against that one entity because of trading arrangement - no accounting procedures in place for intra-group transactions - proposal by administrators to pool group's assets and liabilities - resolution for pooling passed by shareholders of each company - no objection to pooling by creditors - whether direction approving administrators executing and giving effect to deed containing pooling arrangement should be given.
Corporations Act 2001 (Cth): Pt 5.3A, s 447D
Mentha v GE Capital Ltd (1997) 154 ALR 565, applied
Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209, applied
Re Switch Telecommunications Pty Ltd (In Liq); Ex parte Sherman [2000] NSWSC 794; (2000) 35 ACSR 172, considered
Re Charter Travel Co Limited (1997) 25 ACSR 337, considered
Companies & Securities Advisory Committee, Corporate Groups: Final Report, May 2000.
ACN 004 987 866 PTY LTD (formerly HILTON'S STORES PTY LTD) & ORS (in accordance with the schedule attached) (All Administrators Appointed) v MICHAEL JAMES HUMPHRIS and LAURENCE ANDREW FITZGERALD (as Administrators of each of the Companies)
V 3163 of 2003
GOLDBERG J
13 AUGUST 2003
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA |
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VICTORIA DISTRICT REGISTRY |
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IN THE MATTER OF:
THE COURT ORDERS AND DIRECTS THAT:
1. Pursuant to s 447D of the Corporations Act 2001 (Cth), it is proper for the plaintiffs to execute and give effect to a deed of assignment and novation in the form which is schedule 2 to the draft deed of company arrangement which is exhibit "LAF-9" to the affidavit of Laurence Andrew Fitzgerald sworn 16 July 2003 and filed in this proceeding.
2. The costs of this application be costs in the administration of each of ACN 004 987 866 Pty Ltd, ACN 005 824 457 Pty Ltd, ACN 086 202 619 Pty Ltd, ACN 008 076 524 Pty Ltd and ACN 086 202 593 Pty Ltd.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA |
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VICTORIA DISTRICT REGISTRY |
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JUDGE: |
GOLDBERG J |
DATE: |
13 AUGUST 2003 |
PLACE: |
MELBOURNE |
1 The plaintiffs seek a direction from the Court that it is proper for them, as the voluntary administrators of five companies, to execute and give effect to a deed of assignment and novation which is proposed to be executed by the administrators and the companies under administration at the same time as they execute and enter into deeds of company arrangement pursuant to the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) ("the Act").
2 On 12 March 2003 the plaintiffs were appointed voluntary administrators of the five companies in the "Hilton's group", namely Hilton's Stores Pty Ltd, Hilton's Stores (N.S.W.) Pty Ltd, Hilton's Stores (S.A.) Pty Ltd, Hilton's Stores (W.A.) Pty Ltd and Hilton's Stores (Vic) Pty Ltd.
3 The first Hilton's store opened in 1956 in Melbourne and thereafter the group underwent significant expansion both in Victoria and interstate. Hilton's was a retailer in women's fashion evening wear targeting the 16-35 age group.
4 By 2003 the business operations of the Hilton's group were carried on by the five companies to which I have referred. The business comprised 14 retail stores in Victoria, New South Wales, South Australia, Western Australia and the Australian Capital Territory and employed approximately 84 full-time and part-time employees throughout the head office and stores.
5 On 12 March 2003 the plaintiffs were appointed voluntary administrators of each company in the Hilton's group pursuant to a resolution of the director of each of the companies.
6 The first meeting of the creditors of each of the companies in the Hilton's group was held concurrently on 19 March 2003. The creditors appointed a committee of creditors in respect of each company comprising the sole director of each of the companies, a representative of the main supplier to the Hilton's group and a representative of the lessor of the five stores of the Hilton's group. The committees of creditors were given similar information to the creditors in relation to the pooling proposal propounded by the plaintiffs. None of the committee members has raised any objection to the pooling proposal.
7 On 23 April 2003 the plaintiffs convened a second meeting of creditors of each of the Hilton's companies. The plaintiffs, in accordance with s 439A(4) of the Act, submitted a report and their opinions to the creditors of the companies. The report noted that the plaintiffs had sold the business and assets of the companies and they were proposing that each of the companies execute a deed of company arrangement once all outstanding matters in connection with the sale of business and assets had been dealt with.
8 The report noted that as part of the expansion of the business of the Hilton's group, an individual company had been incorporated for each State in which Hilton's stores were established. Each company employed staff, entered into lease agreements and operated the affairs of the company generally in its State jurisdiction. However, all stock was acquired by Hilton's Stores Pty Ltd which then transferred the stock to the various retail outlets throughout Australia.
9 The report noted that a sale of business agreement was executed on 16 April 2003 with effect from the close of business on 9 April 2003. A cash consideration of $1,150,000 was paid for all the assets and undertakings of the companies in the group and offers of employment to transferring employees and assumption of accrued entitlements for transferring employees were made and taken over by the purchaser.
10 In the report the plaintiffs proposed that the five companies enter into separate deeds of company arrangement incorporating similar provisions on the basis that the assets and liabilities of the companies would be pooled into a single fund against which all creditors of the companies would be entitled to claim. The plaintiffs saw this proposal as "the most equitable and practical means to deal with the claims of creditors". The plaintiffs explained why the pooling proposal was appropriate in the following terms:
"As noted above, the group operated from the central bank account held with the NAB and it is into this account that all monies from all stores were eventually banked. In addition payments were made for various current assets, inventories, employee's wages etc from the central bank account. No loan accounts between the group entities were set up to reflect these payments. Financially, the companies operated as a single entity whilst it was divided for operational purposes.If intercompany loans were reconstructed, the claims of each group entity against other group entities would rank as unsecured. The costs involved in administering this process would also be significantly higher than if the assets and liabilities were pooled. I have formed the view that there is no benefit to be gained by creditors in reconstructing these loan accounts.
The group essentially traded as `Hilton's Stores Pty Ltd' resulting in the majority of trade creditors' claims being against this company. In the absence of any tracing rights, it is likely that trade creditors would only be entitled to claim against Hilton's Stores Pty Ltd. However the majority of assets were applied to and for the benefit of other group entities, leaving Hilton's Stores Pty Ltd with significantly fewer assets and significantly higher liabilities when compared to other group entities. In my view this is inequitable insofar as the creditors of Hilton's Stores Pty Ltd are concerned.
Furthermore, lessees and employees would be entitled only to claim against the company entering into the lease contract or the company with which they hold the employment agreement. Accordingly, the result would be differing treatment [of] creditors of the same class of creditors across the group. That said assuming that the purchaser is successful is obtaining assignments of the individual leases I expect that any claims of lessors will be mitigated in full.
In summary, the benefits from pooling assets through a DCA [deed of company arrangement] are as follows:
* No requirement to recreate intercompany loan accounts resulting in lower administration costs;
* No requirement to allocate assets to individual companies resulting in lower administration costs; and a
* More equitable treatment of creditors."
11 The second meeting of creditors of each of the companies was held concurrently on 2 May 2003. The plaintiffs' recommendation concerning pooling was discussed at length with creditors but no resolution was required and the meeting was adjourned to enable the completion of outstanding matters relating to the sale of the business and assets of the Hilton's group.
12 The adjourned meeting was reconvened on 23 June 2003 to be held on 1 July 2003. The creditors were sent an addendum to the first report of the plaintiffs which explained in some detail why the plaintiffs were proposing a pooling process under the terms of the proposed deeds of company arrangement. Relevantly, the addendum was in the following terms:
"In order to clarify any queries I set out below further details in relation to the pooling process under the terms of the proposed DCA.As previously advised it is proposed that all five entities enter into separate DCA's incorporating similar provisions. This approach will result in the assets and liabilities of the companies pooled into a single fund against which all creditors of the companies would be entitled to claim. This proposal I believe is the most equitable and practical means to deal with the claims of creditors.
To provide the creditors with sufficient information in relation to the pooling of the assets and liabilities of the companies I advise that:
Ø ACN 004 987 866 Pty Ltd (Administrators Appointed) formerly trading as `Hilton's Stores Pty Ltd' (`HS') operated 6 separate bank accounts. A National Australia Bank (`National') account was used as the main trading account for the group with all sales directly and indirectly deposited into same.
Another bank account was used to collect money in relation to the GST portion of sales to be remitted to the Australian Taxation Office.
Four other non National accounts were established to allow for the deposit of cash sales from stores that did not have a National branch nearby. These funds were swept to the main National trading account each week.
Therefore, the group effectively operated one trading account for the operation of the business. I also advise that no loan accounts were maintained between HS and the other companies in relation to the flow of sale deposits or in relation to payments made.
Ø HS would order stock from suppliers and pay same through the National trading account. The stock would be directed to each store location as instructed. There were no loan accounts set up to reflect these transactions between HS and the other companies. Accordingly, the vast majority of third party unrelated creditors are creditors of HS.
Ø Each company employed staff, however, wage and employee entitlement payments were made by HS. No loan accounts were established to reflect these transactions.
Ø Each individual company was the lessee for the properties in each applicable state jurisdiction. All payments made in relation to rental and outgoings were made from HS. Again no loan entries were made.
In the event that pooling of assets and liabilities was not completed, I would be required to rebuild the loan accounts from the date of registration for each company. I do not believe that this is in the best interests of creditors for the following reasons:
Ø Time involved to rebuild the accounts would delay any distribution to creditors considerably as compared to pooling of the assets and liabilities in a DCA.
Ø Costs involved to rebuild the accounts would result in a considerable reduction in the balance available for distribution with the possibility of no distribution to creditors.
Issues involved in the separation of the companies would include the following:
Ø Recalculation of inter-entity loan accounts.
Ø Determine a method for the distribution of funds between the companies.
In summary the proposed pooling results in the balance of funds held being made available to the general body of creditors. The deed of company arrangement process more easily facilitates a pooling of assets and liabilities given that it requires the approval of creditors prior to seeking the approval from Court. I am advised that there are greater legal impediments in seeking a pooling of assets and liabilities in a liquidation."
13 At the adjourned meeting the plaintiffs summarised the addendum and focused on the advantages and disadvantages of pooling the assets and liabilities of the Hilton's group. The plaintiffs explained that the reason for pooling was based principally upon the accounting processes of the companies. This explanation was substantially in the terms set out in the addendum. The plaintiffs specifically told the meeting that:
(a) each company was set up to employ staff and maintain leases for each store on a geographical basis;
(b) the company formerly known as Hilton's Stores Pty Ltd ("HS") did all of the purchasing for the Hilton's group and forwarded stock to the various stores for sale;
(c) sales from each store would be swept to the HS trading account from which HS would pay for all liabilities including stock, employees and leases;
(d) there were no accounting procedures for inter-entity transactions. If the loan accounts were rebuilt, the inter-entity claims may offset any benefit to creditors of certain Hilton's companies;
(e) the cost involved in the reconstruction and the offset of inter-entity claims dictated that there was no benefit to creditors in completing that exercise. The major creditors of each Hilton's company, with the exception of HS, were employees who would have a priority right against the company assets.
14 The plaintiffs told the meeting that if the creditors resolved that the deeds of company arrangement should be executed, they would make an application to the Court for the approval of the pooling of the assets and liabilities of the group. The creditors present at the meeting did not raise any questions relating to the proposal to pool the assets and liabilities of the group and the resolutions to execute the deeds of company arrangement were passed unanimously on a show of hands and voices by the creditors of Hilton's Stores Pty Ltd (one creditor attended and voted by telephone) and unanimously on a show of hands by creditors of the other Hilton's companies.
15 The plaintiffs have placed before the Court a draft of the deed of company arrangement proposed to be executed by each of the companies in the Hilton's group. They have also placed before the Court a draft deed of assignment and novation to be executed by each of the companies in the Hilton's group and the plaintiffs. It is proposed that each company execute a deed of company arrangement in identical terms. It is a condition precedent of each deed that its substantive provisions will not come into effect unless and until:
(a) each company executes and agrees to become bound by each deed;
(b) the plaintiffs have assigned or procured the assignment by each company of all its assets to Hilton's Stores Pty Ltd in accordance with the deed of assignment and novation;
(c) the plaintiffs have procured the assumption by Hilton's Stores Pty Ltd of all the liabilities of each company which arose prior to 12 March 2003 in accordance with the deed of assignment and novation;
(d) a direction by the Court is obtained that it is proper for the plaintiffs to execute and give effect to the deed of assignment and novation.
16 Each deed of company arrangement contains the following provisions:
(a) each company, other than Hilton's Stores Pty Ltd, acknowledges that it has assigned all of its property and assets to Hilton's Stores Pty Ltd and that Hilton's Stores Pty Ltd has assumed all the liabilities of the other companies which arose prior to 12 March 2003 pursuant to the deed of assignment and novation;
(b) Hilton's Stores Pty Ltd acknowledges and agrees that all the assets of the other companies have been assigned to it and it has assumed all the liabilities of those companies which arose prior to 12 March 2003 pursuant to the deed of assignment and novation;
(c) all claims against each company are admissible to proof against Hilton's Stores Pty Ltd;
(d) all the assets of the companies, less certain expenses incurred by the plaintiffs, together with all of the receivables of the companies, will constitute the fund for distribution to the creditors of all the companies;
(e) there will be a mutual release of all inter-company claims within the Hiltons group so that any debt payable by any Hilton's company to any other Hilton's company or any claim by any Hilton's company against any other Hilton's company is extinguished.
17 The draft deed of assignment and novation relevantly contains the following provisions:
(a) a condition precedent that the Court direct that it is proper for the plaintiffs to execute and give effect to the deed;
(b) from the date of the deed all debts payable by and all claims against any Hilton's company other than Hilton's Stores Pty Ltd are novated to Hilton's Stores Pty Ltd;
(c) Hilton's Stores Pty Ltd assumes all debts payable by and all claims against any Hilton's company and all liability in respect of those claims;
(d) each company, other than Hilton's Stores Pty Ltd, assigns to Hilton's Stores Pty Ltd all of its right, title and interest in and to the assets held by it.
18 The plaintiffs have sought the direction from the Court because they contend that pooling is a significant measure which will almost inevitably affect the rights of certain creditors. They have also contended that the process of ascertaining the assets and liabilities of each Hilton's company is commercially impracticable in the sense that the cost of the time involved to determine liabilities on a company by company basis cannot be justified given the assets and liabilities of the group and the estimated return to creditors.
19 There is no specific provision in the Act which allows for or enables the pooling of assets of a group of companies in either a liquidation or an administration situation. However, in Mentha v GE Capital Ltd (1997) 154 ALR 565, Finkelstein J expressed the opinion at 571, that:
"the power to enter into a deed of company arrangement under Pt 5.3A is sufficiently broad to permit an arrangement binding on two or more insolvent companies pursuant to which their respective assets and creditors will be consolidated".
His Honour considered it appropriate to give the administrators the direction sought in respect of a deed of assignment and a deed poll, similar to the deed of assignment and novation presently before the Court, that it was proper for them to execute and give effect to those two documents.
20 It is interesting to note that in Corporate Groups: Final Report, May 2000, the Companies & Securities Advisory Committee recommended (at 143) that:
"The Corporations Law should be amended to permit an administrator to pool the administration of several companies, either where no creditor who attends the creditors' meeting votes against the proposal or the court otherwise approves."
Although it is probably desirable that the right to pool and the terms upon which pooling should be allowed should be specifically recognised in the Act, I am satisfied that a pooling proposal such as that in the present case is within the powers given to administrators in Pt 5.3A of the Act so long as the creditors present and voting at the meeting in favour of pooling have been given full information about the proposal for pooling and the reason why it has been proposed by the administrators.
21 The issue of the pooling of funds of two or more companies in a liquidation context is more problematic: see generally Mentha v GE Capital Ltd (supra) at 571. Nevertheless, the possibility of pooling in a liquidation context has been recognised in a number of cases. In Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209, Young J directed a liquidator to act upon a resolution of creditors of companies in administration under Pt 5.3A of the Act that the companies be wound-up and the assets and liabilities of the companies be pooled. However, Young J proceeded on the basis of giving the liquidator a direction pursuant to s 447A of the Act that he should treat the resolution of creditors as valid for all purposes. Young J set out a number of basic principles which support and underpin the principle that pooling of assets and liabilities of companies in administration under Pt 5.3A of the Act is appropriate. Young J said at 216-217:
"These [principles] are:(1) That where there is to be consolidation of the assets and creditors of a group of companies, normally that result should be obtained by a formal scheme of arrangement under s 411 or some other appropriate section of the Corporations Law.
(2) In exceptional cases, the liquidator can obtain approval of a compromise bringing about consolidation which he has entered into under s 477(1)(c).
(3) The bankruptcy rule that where it is impracticable to keep the assets and liabilities of different companies in a group separate they may be consolidated if the consolidation is for the benefit of creditors generally if no creditor objects, applies in a corporate winding up.
(4) Where a company has been under administration and the resolution is passed when Pt 5.3A of the Corporations Law is still applicable, the court may make the appropriate directions to the liquidator under s 447A.
(5) It would be possible for the court to advise a liquidator in a court winding up that he should consolidate debts, but it would be unlikely that the court would do so unless every creditor agreed or a regime was put in place for creditors to object.
These principles were approved by Santow J in Re Switch Telecommunications Pty Ltd (In Liq); Ex parte Sherman [2000] NSWSC 794; [2000] 35 ACSR 172 at 184. In that case Santow J approved of the liquidators of two companies pooling assets and liabilities where there was an inability to identify precisely which creditors belonged to which company or which assets and liabilities belonged to which company. Santow J approved the pooling arrangement, albeit not pursuant to any provision in Pt 5.3A of the Act, but recognised that pooling in appropriate circumstances might be allowed pursuant to Pt 5.3A of the Act.
22 In Re Charter Travel Co Limited [1997] 25 ACSR 337 Young J accepted that pooling could be effected in respect of two companies in liquidation where there were court appointed liquidators in exceptional circumstances where no creditor objected and it was impracticable to keep the assets and liabilities of the two companies separate.
23 As a matter of principle and also commercial practicality, I consider that where the affairs of a number of companies in a commercial group are intermingled or inextricably mixed together in circumstances where it can be said that creditors have been dealing with a commercial or corporate group, it is appropriate that in a liquidation or administration situation the assets and liabilities of the companies in the group be pooled. Although such a concept interferes with the rights of creditors and intrudes into the principle that in an insolvency situation the unsecured creditors of a company are entitled to a rateable or a proportionate share of the assets of their particular debtor, in a situation of intermingling of assets and liabilities there should be little complaint that some creditors will be substantially disadvantaged whereas other creditors will be significantly advantaged by a pooling situation: Academic writers do not appear to be against such a proposal; see HAJ Ford et al (eds), Ford's Principles of Corporations Law, 11th ed, 2003, p 133; M Gillooly (ed), The Law Relating to Corporate Groups, 1993, pp 123-127; Companies & Securities Advisory Committee, Corporate Groups: Final Report, May 2000, p 143; S Whelan, "Administration of Insolvent Groups - The Present State of `Pooling'" (1998) 6 Insolvency Law Journal 107.
24 I am satisfied that the direction sought should be given, although I have one observation about the information upon which the creditors acted in approving the pooling proposal. It is apparent from the information supplied to creditors by the plaintiffs and the investigations that they have undertaken that unless pooling occurs, substantial costs will be incurred which will erode the balance available for distribution to creditors. If pooling does not occur it is inevitable that all creditors will be worse off than if pooling does occur. The plaintiffs have also concluded that there will be a possibility of no distribution to creditors at all in the absence of pooling. I am satisfied that the creditors have been given substantial information about what is involved in, and envisaged by, the process of pooling and the reasons why the proposal for pooling has been propounded. However, it does not appear from the material circulated to creditors, and what they were told, that it was made explicit that the effect and consequence of a pooling process is that some creditors might be advantaged and some creditors might be disadvantaged by the pooling process because there would otherwise be a rateable distribution from each company depending upon the amount of assets available and the extent of the debts or liabilities of that company. In the present circumstances the likelihood of such advantage and disadvantage occurring is remote because the cost and consequence of determining the appropriate rateable distribution from each company, in all probability, will eliminate any significant return to creditors.
25 In the context in which the present application arises it is for the creditors to make the relevant decision but that decision should be based on full and comprehensive information. Although explicit information as to the effect and consequences of pooling in principle should have been given to the creditors prior to their voting on the relevant resolutions, I do not consider in the circumstances that this should be an impediment to the direction sought being given. In the events which have occurred all creditors will be better off than if pooling did not occur.
26 I am satisfied that the plaintiffs have the power to enter into the deed of assignment and novation, but I consider it appropriate for the direction sought to be given, having regard to the fact that although there is no suggestion that the pooling proposed is not within the power of the plaintiffs, whether that power has been validly and effectively exercised will depend upon the particular circumstances of each pooling arrangement. I am satisfied that the provisions of the deed of assignment and novation will carry into effect the pooling proposed and that the creditors of all companies will not suffer any disadvantage. In those circumstances the direction sought should be given by the Court.
I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg. |
Associate:
Dated: 13 August 2003
Counsel for the Plaintiffs: |
P D Crutchfield |
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Solicitor for the Plaintiffs: |
Arnold Bloch Leibler |
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Date of Hearing: |
18 July 2003 |
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Date of Judgment: |
18 July 2003 |
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Date of Reasons: |
13 August 2003 |
ACN 004 987 866 PTY LTD (formerly HILTON'S STORES PTY LTD)
ACN 005 824 457 PTY LTD (formerly HILTON'S STORES (VIC) PTY LTD)
ACN 086 202 619 PTY LTD (formerly HILTON'S STORES (NSW) PTY LTD)
ACN 008 076 524 PTY LTD (formerly HILTON'S STORES (SA) PTY LTD)
ACN 086 202 593 PTY LTD (formerly HILTON'S STORES (WA) PTY LTD)
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