Beach House Group Pty Ltd, Re [2008] QSC 350

1-1 SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION FRYBERG J 2008 QSC 350 No 12031 of 2008 MARIA VIDAKOVIC AND PETER VIDAKOVIC Applicants and BEACH HOUSE GROUP PTY LTD (ACN 098577667) Company and DANIEL PETER JURATOWITCH Third Party and BRUNO ANTHONY ROBERT SECATORE Third Party and DEPUTY COMMISSIONER OF TAXATION Third Party BRISBANE ..DATE 17/12/2008 ORDER -- 1 of 13 -- 1-2 ORDER 1 10 20 30 40 50 60 HIS HONOUR: I have before me an application to wind-up Beach House Group Pty Limited, ACN 098 577 667. The applicants are Peter and Maria Vidakovic who are creditors to whom the company is indebted in the sum of $76,300 approximately. The application is supported by the Commissioner of Taxation, who claims that the company is indebted to him in the sum of $1.175 million approximately. No creditors have appeared to oppose the winding-up, but it is opposed by Bruno Robert Secatore and Daniel Peter Juratowitch, who are the administrators appointed to the company on 19 November. Their appointment, it will be noted, preceded by two days the filing of the winding-up application. The administrators oppose the making of an order today and seek to have the application adjourned. It is not necessarily their final position that they will oppose the making of an order, but they submit, in short, that the time since their appointment has been insufficient for them to identify whether there exists a reasonable chance of selling some assets of the company and thereby benefiting the creditors in a way which might not occur if it was wound up. Section 440A of the Corporations Act provides that the Court is to adjourn the hearing of an application for an order to wind-up a company if it 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 that it be wound up. It is, therefore, necessary for me to look at the position of the company and to determine -- 2 of 13 -- 1-3 ORDER 1 10 20 30 40 50 60 what is in the interests of the creditors. It must be done on the evidence as it stands now unless the application is to be adjourned to enable it to be done with more certainty in the future. The application for the adjournment must, of course, be supported by some evidence that at least gives rise to a substantial possibility that the administrators may be able to come up with a deed of company arrangement superior to what would occur in the event of a winding-up. The company carried on, and still carries on, business as the franchisor of a number of gymnasiums or health clubs in several states of Australia. It did this originally through a franchising operation, but in more recent times established some half dozen outlets which it operates directly and it has been attempting to change its business model from a franchise model to a licensing model. There does seem to be a degree of instability in the identification of its business model. Some 18 months ago a private equity firm expressed interest in purchasing a half share in the company, but after carrying out due diligence investigations it decided not to proceed. The company has been the subject of 13 statutory demands and four judgments since 10 April 2008. There are matters raised by the Australian Securities and Investments Commission which are part of the ongoing investigations of the administrators and which, no doubt, would be taken up by any liquidators. The administrators' investigations suggest that the major contributing factors to the company's failure were that: -- 3 of 13 -- 1-4 ORDER 1 10 20 30 40 50 60 1. The franchise model being used by the company was not earning the expected revenue because franchisees were not able to pay the agreed franchise fees; 2. Leased premises entered into by the company were on unfavourable terms in the sense that the rental obligation exceeded the revenue generated in some cases; 3. A related company, Skinsama, had been placed in liquidation and as a result the company has become liable for a significant debt owed by that company under guarantees which it had provided; 4. The company had moved away from its core business of franchising; 5. Another associated company, Skinsama Investments, a different company from the one that has been placed in winding-up, which is in receivership, has been placing financial strain on the company; and 6. The membership targets on the gym sites were unachievable, with consequent unprofitable trading. Figures produced by the administrators for the company's trading performance show that in 2007 it made a pre-tax profit of some $914,000, but in 2008, on the basis at least of management accounts, made a loss of $724,000, and in the -- 4 of 13 -- 1-5 ORDER 1 10 20 30 40 50 60 current financial year to mid-November had made a profit of some $292,000. Those figures must be treated with some reserve. More alarming is the company's asset position. The estimated realisable value of its assets at present is a little under $308,000. That does not take into account plant and equipment, but the plant and equipment even in the books is valued only at about $260,000. It also does not take into account loans of some $3.56 million, but as the administrators note, the realisable value of those loans is unknown. One might be a little bit cynical about the prospect of recovering the full amount. Finally, it does not take into account goodwill which presumably is the major asset of the company. That would seem to depend entirely upon the company's trading arrangements and, on the basis of what is before me, they seem somewhat bleak. Interestingly, there seems to be no work-in-progress, but perhaps that is due to the nature of the company's business. The assets, therefore, are very small when compared to the liabilities. There are three major headings of liabilities. The first, "Employee entitlements" is $404,000. There are secured creditors of $8.386 million and claims by unsecured creditors for 43 and a-half million dollars. There is some reason to think that those claims may be exaggerated to the extent that they comprise claims by landlord creditors. It seems that at -- 5 of 13 -- 17122008 D.1 T(2)14/MBP(BNE) M/T BRIS5 (Fryberg J) 1-6 ORDER 1 10 20 30 40 50 60 least five of those creditors may have over claimed by a considerable amount and, therefore, that one could legitimately discount the $22.8 million of unsecured creditors in this class by a considerable amount. Even if one does that, the total of unsecured creditors will be well over $20 million, probably nearer to $30 million, a vast amount by comparison with the assets, unless by some miracle the realisation of the goodwill and the plant and equipment produces a very large amount. The administrators contend that there are a number of benefits which may be derived by creditors if there is time given to allow the further investigation of the company's position and the exploration of sale prospects. They point to evidence of an offer in a very embryonic form from the directors of the company to put $1.4 million into a deed of company arrangement. That offer is not in the form of a proposed deed and it is not possible to know all the strings attached to it. However, one string is known, and that is that half of that amount of money must go to the Commonwealth Bank, one of the secured creditors. There will, therefore, be only $700,000 for unsecured creditors. Even that money is very uncertain. Its provenance is vague. It is apparently going to come from the sale by a related company, Skinsama Debit Collections Proprietary Limited, of its business of collecting the amounts owing to the present company. -- 6 of 13 -- 17122008 D.1 T(2)14/MBP(BNE) M/T BRIS5 (Fryberg J) 1-7 ORDER 1 10 20 30 40 50 60 Evidence is before me that there has been an agreement entered into by that company for the sale of its business for over $2 million. That agreement is subject to a number of conditions and there is no evidence that it has been so far performed, although one would have expected from the terms of the schedules that if it has been successful, a large amount of money, perhaps half of the available money, would have already been received. In any event, the amount of money that would be received in this way, $1.4 million, is really a very marginal amount when one takes into account the magnitude of the company's liabilities. Second, it is suggested that the adjournment will allow the possible sale of the businesses. The figures regarding their current operations do little to inspire hope that any large amount would be recoverable from such a sale. No details have been given by the administrators of the negotiations which have been conducted. There have been discussions with three potential purchasers, but the administrators testify that as the discussions are confidential, they are unable to elaborate further in an affidavit. I am not sure that they are so unable. I do not think there would be a breach of confidentiality if further information were provided by a secure affidavit in a sealed envelope, but that option has not been explored. In any event, the position is that I have no idea of what sorts of figures are contemplated, but on the profitability -- 7 of 13 -- 17122008 D.1 T(2)14/MBP(BNE) M/T BRIS5 (Fryberg J) 1-8 ORDER 1 10 20 30 40 50 60 figures given to me, I do not think that they could be very large. No firm offers have so far been received. The business model is unstable and it seems to me that the description "pie in the sky" may not be too far from the mark in this regard. Even if one is less cynical about the sale prospects, I observe that if the company is placed in liquidation, it will still be possible for the liquidators, or more likely the receivers who would be appointed by the secured creditors, to sell the company's assets as an ongoing business and, therefore, to achieve whatever could be achieved by the administrators. I do not have any reason to think that the receivers would, having regard to their duties acting on behalf of mortgagees to take reasonable care to sell for a fair value, not carry out their duties in a similar way to the administrators. Mr Martin on behalf of the administrators referred me to sections 440B and 440C of the Corporations Act, but I do not think that that makes much difference. I will refer to those sections in a little more detail in a moment. The third possible benefit referred to in support of the adjournment was that on 24 December, there is to be a creditors meeting and on that day it will then be possible to get some idea of the attitude of the creditors. That is true and it is a factor which I think would be a relevant consideration. I am prepared to proceed today on the basis that a majority, in value at least, of creditors do support the continuance of the administration and therefore support -- 8 of 13 -- 17122008 D.1 T(2)15/MBP(BNE) M/T BRIS5 (Fryberg J) 1-9 ORDER 1 10 20 30 40 50 60 the adjournment of the winding-up application. There is evidence in the material of the attitude of some of the creditors, both a secured creditor and some unsecured creditors; although the secured creditor is the Commonwealth Bank, which, as I have said, stands to get a particular benefit from the proposed deed of company arrangement. Mr Martin submitted that if the adjournment is not granted, the administration terminating in liquidation will mean that the protection afforded to the company from its landlords by section 440C, will be lost. That section provides that: "During the administration of a company, the lessor of property used or occupied by the company cannot take possession of the property or otherwise recover it, except: with the written consent of the administrators; or the leave of the Court." No such provision protects liquidators. That is true, but there is nothing in the Act to stop the landlords from terminating their leases with the company. Events have already occurred which in a typical form of lease, which is in evidence, would permit that to be done, so that the appointment of a liquidator cannot aggravate the situation insofar as conferring rights upon the landlords is concerned. Notwithstanding the existence of these rights, the fact is that there is no evidence that any landlord to date has in fact terminated a lease and, as I have said, the administrators have been carrying on the business for a month. -- 9 of 13 -- 17122008 D.1 T(2)15/MBP(BNE) M/T BRIS5 (Fryberg J) 1-10 ORDER 1 10 20 30 40 50 60 Commonsense suggests that it is in the landlord's interests as much as anybody else's to have the businesses sold as ongoing businesses and to grant just the same latitude to a liquidator as they would grant to an administrator. The protection of section 440C in this regard, therefore, seems to be protection against something which is not really a threat. The other aspect of the Corporations Act is the protection which an administrator has from the attentions of secured creditors by reason of the prohibition on the enforcement of a charge under section 440B, but again similar reasoning applies. It is in the interests of the secured creditors to see the businesses sold as a going concern, although it must be admitted that they are likely to appoint receivers and therefore the costs of the exercise are likely to increase. They are, however, small when one looks at the total amount of liabilities. There are some aspects in favour of a liquidation. The administrators' report suggests that the company has made payments which would be recoverable as preferences, and also that the directors may well have been conducting insolvent trading for a number of months at least. If that is so, a liquidator will be able to take action against them for that trading and against those to whom preferences have been given. That is in the interests of creditors and there is also an aspect of public interest in action being taken against directors who carry on trading with an insolvent company. -- 10 of 13 -- 17122008 D.1 T(2)15/MBP(BNE) M/T BRIS5 (Fryberg J) 1-11 ORDER 1 10 20 30 40 50 60 Both sides have referred me to the decision of the Court of Appeal in Creavy v Deputy Commissioner of Taxation. In that case there was an appeal from a winding-up order made in the Trial Division and the Court of Appeal referred to the section which is currently before me, s 440A(2). Justice McPherson, with whom Justices Davies and Pincus agreed, said at page 3 of the transcript: "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." That, of course, is not the test to be applied to me today in considering an adjournment. It would be premature to place such a burden upon the administrators at a time when their whole position is that they have not had sufficient time to consider whether to recommend liquidation. Nonetheless, it does set out what would be the test once the adjourned application for winding-up came on for hearing, and it gives some idea of what the target of any information gathering which may take place during an adjournment will be. Knowledge of that sort enables one to get some idea of how likely it is that an adjournment will be productive of anything beneficial. -- 11 of 13 -- 17122008 D.1 T(2)16/MBP(BNE) M/T BRIS5 (Fryberg J) 1-12 ORDER 1 10 20 30 40 50 60 I am not satisfied that the evidence sufficiently discloses a benefit, a likelihood that anything worthwhile will be produced by granting the adjournment. It seems to me unlikely that anything that will affect the position of the creditors in a significantly beneficial way will emerge from the granting of an adjournment. In reaching that conclusion, I have taken into account also the fact that the applicant is content for the administrators to be appointed as liquidators and they have signalled their willingness to accept that appointment in the event that an adjournment is refused and a winding-up order is made. In considering the question, I have also had regard to the decision of my colleague McMurdo in Re Octaviar Limited [2008] QSC 216. That was a much more complex case than the present. It depended very much on its facts and in particular on the fact that the administrators in that case had not yet been appointed, although they were about to be appointed, whereas in the present case the administrators have been in place for about a month. In short, I have come to the conclusion that the application for the adjournment should be refused. I take it in those circumstances there is nothing further to be said before dealing with the actual winding-up application. MR MARTIN: That is the case, your Honour, other than of course to file the consent of Mr Secatore and Juratowitch to be liquidators of the company. -- 12 of 13 -- 17122008 D.1 T(2)16/MBP(BNE) M/T BRIS5 (Fryberg J) 1-13 ORDER 1 10 20 30 40 50 60 HIS HONOUR: Leave to read and file that consent is granted. There will be an order appointing those two gentlemen as the liquidators. ... ----- -- 13 of 13 --