Rewards Land Pty Ltd (admins apptd) (recs and mgrs apptd) v Jones [2010] WASC 233
Facts
Rewards Projects (RP) is the responsible entity for various managed investment schemes set up to cultivate fruit and timber products for and on behalf of scheme members, and operated on land in Western Australia and elsewhere.
RP and a company called Rewards Management (RM) are both wholly owned subsidiaries of Rewards Group Limited (RGL). RM had a contract with RP to manage the harvest and sale of produce grown on the land.
The various parcels of land in question (Property) were mainly owned by two other companies, Rewards Land Pty Ltd (RL) and the Ark Fund Ltd (Ark). RL and Ark leased the land to RP for the purposes of carrying out the business of the schemes.
The applicants (Receivers) were the receivers of the Property, and were appointed in early June 2010. The respondents in the proceedings (Administrators) were the administrators of RG and both of its subsidiaries, as well as Ark, and were appointed on 16 May 2010.
Earlier proceedings
In earlier, related proceedings the Court had:
These proceedings
These proceedings were commenced as an interlocutory process by the Receivers, seeking delivery up of the Property from the Administrators. These proceedings were brought pursuant to section 440C of the Corporations Act 2001(Cth) (Act), which requires the leave of the court (or administrator consent, which in this case was obviously not forthcoming) to achieve this result.
The underlining principle of provisions such as section 440C is to provide a 'shield' for the administration period to allow for proponents to formulate deed of company arrangement (DOCA) proposals and for administrators to put these proposals along with other relevant information to creditors, to allow for a proper determination as to the merits (or otherwise) of the continued operation of an insolvent company, without the risk of enforcement action or other proceedings by disaffected parties.
Section 440C
The substantive issue in the proceedings was whether leave ought to be granted pursuant to section 440C. His Honour outlined in some detail the object of part 5.3A of the Act – to provide for the maximisation of the chances of the business and property of an insolvent company to continue in existence, or in the event that that is not possible, to provide a better return for creditors and members in the immediate winding up of that company.
The Receivers' submission was that the Administrators were neglecting their management of the Property to such an extent that significant and irreversible damage to the Property and in turn to their appointor’s realisable interest in the Property had and would continue to occur. One of the Receivers deposed to visual inspections of damage from (among other things) white scale infestation, rapid weed growth, lack of spraying of citrus trees, each of which would, it was submitted, require significant expenditure in order to rectify.
It was further deposed that the deterioration of the Property exposed RL and Ark to the real prospect of claims from various government agencies and nearby land owners for damage caused by the Administrators’ management of the Property, further reducing the prospect of the recovery, or realisation of, the Property in the short term.
The Administrators submitted that the funding agreements they had entered into in June 2010 with multiple parties (pursuant to earlier proceedings referred to above) under which at least $1.3 million had already been provided to the Administrators, were designed for the purpose of maintaining the scheme operations and potentially supporting a viable DOCA proposal. The Administrators also submitted therefore that there was no evidence to suggest that the entire Property was managed in such a way that it would have a deleterious effect on the return to secured creditors.
Findings
His Honour found that although the Receivers’ case was arguable, there were insufficient grounds to find in their favour. His Honour also found that there was a likelihood of a DOCA being proposed unless the Receivers were allowed to take possession of the Property.
His Honour noted that there was no conclusive evidence about the management of the entire Property, but only ‘piecemeal’ evidence in respect of certain parts of the Property (which was situated in various locations and under various conditions of nature and operation). In other words, the Receivers’ assertion about the impact of the administration on their appointer’s secured interest was not accurately measured against the available evidence.
The Court ordered that the application for leave be refused.
Lavan comment
Secured creditors should be mindful that a Court will not easily find in favour of removing the protection for insolvent companies from the processes of enforcement during the period of an administration. It appears that even if the Receivers had been successful in this Application, they may have faced additional litigation pursuant to section 440D of the Act before recovering the Property. They would almost certainly have faced the same evidentiary difficulties. Secured creditors will need to establish a compelling case before seeking to enforce property rights during administration.
For further information please contact:
Partner, Alison Robertson on (08) 9288 6872 / alison.robertson@lavanlegal.com.au or
Solicitor, Daniel Butler on (08) 9288 6714 / daniel.butler@lavanlegal.com.au.
