Re Colorado Group Ltd [2011] VSC 260 – one day you’re in fashion, the next you’re in administration

The Colorado Group operated a retail and wholesale business in Australia and New Zealand, which incorporated five major brands.   Within the group, there were six active companies, including Colorado GP, which was a special purpose company, incorporated for a proposed financial restructuring.

Joint and several administrators and receivers and managers were appointed to companies within the Colorado Group, following its failure to recapitalise or refinance its debt and reduce its debt burden.

The Colorado Group owed approximately $440 million to primary secured lenders and $28 million to some 537 unsecured creditors.  They were also employee entitlements of approximately $8.284 million.

Following his appointment to the Colorado Group as an administrator, Mr Algeri wrote to the creditors and indicated that he would seek an extension of time within which to convene a second creditors’ meeting to enable the receivers and managers to sell the business as a going concern and the administrators to consider a possible deed of company arrangement.

At the hearing of the application before Justice Judd in the Victoria Supreme Court, Mr Algeri deposed that if the second creditors’ meeting was held without giving the receivers an opportunity to complete the sale process, it was likely that the companies would be wound up and some 3,400 employees would lose their jobs.  There was also a large number of suppliers who comprised a portion of the unsecured creditors.  He submitted that if the companies in the group were wound up, the suppliers would lose their cash flow.

The receivers supported the administrator’s application for an extension of time and submitted that the business would need to be sold as a going concern to maximise the return to creditors.  At the time of the application, the group had approximately $69 million in inventory and the goodwill and brand names of the group were valued at around $29 million.  It was also suggested that if the group went into liquidation, the employee entitlements of around $8 million would crystallise.

Judd J held that when considering an application for an extension of time to convene a creditors’ meeting under section 439A of the Corporations Act 2001, the Court will attempt to strike a balance between the expectation that the administration will be conducted relatively speedily and summarily and the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising a return to creditors.

In particular, where an administration involves a business group that is large and complex and there is a prospect of a successful realisation of assets through negotiations with third parties, then there is no predisposition against granting an extension of time.

Ultimately, where it is in the best interests of the creditors, including employees and suppliers, that the convening period be extended, with the support of the secured creditors and their receivers, it is appropriate to grant an extension of time to convene the second creditors’ meeting, if that would permit the sale process to run its course and facilitate the exploration of a possible recapitalisation of the group by way of deed of company arrangement.

Lavan Legal comment

This case demonstrates the importance of co-operation between administrators and receivers and managers where there is a large amount at stake.

The application to extend the convening period by nine months was considered reasonable given:

  • the level of debt of the Colorado Group;

  • the clear co-operation between the administrators and receivers in their efforts to maximise the return to creditors; and

  • the potential for the business to be sold as a going concern.

For more information, please contact:
Dean Hely                                                             Frances Hamlett
Partner                                                                 Solicitor
(08) 9288 6772                                                     (08) 9288 6831                      

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.