3GS Holdings Pty Ltd & Ors v Stone & Ors [2015] VSC 145

PRACTICE AND PROCEDURE - Comity - Whether order made by the High Court of Singapore has any effect on the proceeding.

1 The plaintiffs seek an order pursuant to s 444GA(1) of the Corporations Act 2001 (Cth) ('Act') for leave to transfer all of the shares issued by Jones Group Holdings Pty Ltd (subject to Deed of Company Arrangement) ('JGH') to Fresh Bay (S) Investments Pte Ltd ('Fresh Bay'). Those shares are presently wholly owned by Jones The Grocer Group Holdings Pte Ltd ('JTGGH'), a Singaporean company. The shares in JTGGH are presently held as to approximately 63% by L Capital Jones Ltd ('LCJ'), a company registered in Mauritius, and as to approximately 37% by Maniach Pte Ltd ('Maniach'), a company registered in Singapore.[1] Fresh Bay is a related entity of LCJ, and supports the making of the orders sought by the Deed Administrators.

2 JGH is the 100% owner of the issued shares in 3GS Holdings Pty Ltd ('3GS'), and also of Jones the Grocer International Pte Ltd ('JTGI'), another Singaporean company. JTGI is subject to judicial management in Singapore. 3GS has four wholly owned subsidiaries, Senselle Foods Distribution Pty Ltd ('Senselle'), Jones the Grocer IP Pty Ltd ('JG IP'), Jones Group Franchising Pty Ltd ('JG Franchising'), and Jones the Grocer Stores Pty Ltd ('JG Stores'). The six Australian companies ('Companies') are subject to a single Deed of Company Arrangement ('DOCA') dated 18 February 2015.

3 The ultimate effect of this transaction, if approved, will be to exclude Maniach from having any rights with respect to JTGGH's shareholding in JGH and its subsidiaries. It will not have any effect on Maniach's rights as a shareholder or contributory in JTGGH, with respect to assets of JTGGH other than JTGGH's shareholding in JGH.

4 The DOCA is subject to two conditions subsequent which are required to be satisfied (unless waived) within 60 days of execution of the DOCA, that is by 18 May 2015.[2] These are that all shares in JGH are transferred to Fresh Bay for no consideration, and (in summary) that each owner or lessor of real or personal property that is used or occupied by, or is in possession of the Companies, be prevented from enforcing default rights in respect of the property, until the DOCA has been performed. In this regard application has been made under s 444F(2) (with regard to secured creditors) and s 444F(4) (with regard to landlords) of the Act.

5 The application was heard on 16 April 2015. At the end of the hearing I made the orders sought (with some minor amendments) and indicated that a written judgment with reasons would follow. These are the reasons.

B Section 444GA

6 Section 444GA of the Act provides that:

(1) The administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained:

(a) the written consent of the owner of the shares; or

(b) the leave of the Court.

(2) A person is not entitled to oppose an application for leave under subsection (1) unless the person is:

(a) a member of the company; or

(b) a creditor of the company; or

(c) any other interested person; or

(d) ASIC.

(3) The Court may only give leave under subsection (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.

7 The applicable principles relevant to the exercise of the Court's discretion in an application for leave under s 444GA(1)(b) of the Act have been considered in a number of cases, including: Weaver v Noble Resources Ltd;[3] Lewis, IMO Diverse Barrel Solutions Pty Ltd (subject to deed of company arrangement);[4] Re BCD Resources (Operations) NL;[5] and IMO Nexus Energy (subject to deed of company arrangement).[6]

8 In Weaver, Martin CJ analysed in detail the origins of s 444GA and concluded as follows:

Section 444GA(3) provides that the court can only grant leave if it is satisfied that "the transfer would not unfairly prejudice the interests of members of the company". The section itself gives no other guidance as to the considerations properly taken into account by the court when determining whether or not leave should be granted. It should also be noted that, pursuant to s 445D of the Act, an application may be made by a creditor of the company, the company itself, the Australian Securities and Investments Commission or any other interested person for termination of a deed of company arrangement.

...

The explanatory memorandum further notes that such a sale power may be beneficial as it might be essential to the success of a deed of a company arrangement that a share sale proceeds; for example, if a deed of company arrangement is based on an investor acquiring all of the shares in a company, as is the case in these proceedings.

It is clear then that s 444GA was introduced to give the deed administrator power to transfer shares in a company with either the consent of the members or with leave of the court in the absence of consent.

...

In order to prevent abuse in such a circumstance, the CAMAC report proposed at [682] that the deed administrator should only have the power to sell shares either with the consent of the members or in the absence of that consent, with the leave of the court. The explanatory memorandum picks up the sentiments of the CAMAC report, notes the potential for such abuse, and states that the condition imposed by s 444GA(3), that is, that the court can only grant leave if it is satisfied the sale would not unfairly prejudice the interests of shareholders, "is intended to direct the court to consider the impact of the compulsory sale of shares where there may be some residual value in the company".

...

The meaning of the phrase "unfairly prejudice the interests of members of the company" is not defined by the Act, nor does the Act give any guidance to the particular interests of members which should be addressed by the court but it is clear from the language of the section as a whole, and of s 444GA(3) specifically, that it is the interests of members in their capacity as members, rather than creditors, to which the section is directed.

The expression "unfairly prejudicial" has been considered in other contexts and, in particular, in the context of s 445D of the Act. In Lam Soon Australia Pty Ltd (administrator appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48; 22 ACSR 169 at 183, the Full Court of the Federal Court expressed the view that in determining whether a deed is unfairly prejudicial or unfairly discriminates against a group of creditors, consideration should be given to what they would receive on a winding up. The court stated:

In circumstances where a deed of company arrangement involves the closure of part of a business and the continuation of another part, and a consequent discrimination between groups of creditors, it may be expected that the creditors whose connection is with the continuing business will receive, if not all that they are owed, then at least more than they would receive in a winding up. The alternative to a deed being liquidation, it is likely that the creditors whose connection is solely with the business to be closed will justifiably claim to be unfairly discriminated against, or unfairly prejudiced, if the scheme gives them less than they would have in a winding up. But if the continuing creditors are to be paid more than they would have in a winding up, it is likely that funding from some external source - perhaps, as here, a parent with adequate resources - will be required in order to enable the others to be dealt with in a way that does not involve unfair prejudice or discrimination.

The point I draw from that passage is that one point of comparison, relevant to the assessment of whether there would be unfair prejudice, is between the circumstances of the affected party under the proposal for transfer of shares as compared to their circumstance under a winding up. More recently, again in the context of s 445D of the Act, Master Newnes (as his Honour then was) stated in Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (2005) 228 ALR 598 ; [2005] WASC 261; BC200510499 at [59]-[60] (Fleet Broadband Holdings):

In considering whether a deed is oppressive or unfairly prejudicial or discriminatory under s 445D(1)(f), it is necessary to consider the effect of the deed against the background of the general principles underlying Pt 5.3A, which establish the basic right of a creditor to be paid or to wind a company up, or to have the company administered by the administrator in a way that keeps the company's business going and will see the creditor paid something out of the property of the company. If a deed departs from that, a creditor is more easily able to say that it is operating oppressively: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (above) at 99.

Where s 445D(1)(f)(i) is relied upon, the court looks at the whole of the effect of the DOCA and assesses its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Pt 5.3A, the interests of the other creditors, the company and the public generally: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (above) at 98. In order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness: Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 at 151; Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 34 ACSR 391 ; 156 FLR 453 ; [2000] NSWSC 99. The criteria that guide the court are fairness and practicality of the scheme as a whole: Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 710.

It seems to me that, with respect, a similar approach is properly taken in relation to the notion of unfair prejudice under s 444GA.

The expression "unfairly prejudicial" was also considered in the case of Gjergja v Cooper [1987] VicRp 15; [1987] VR 167 at 173 ; [1987] VicRp 15; (1986) 10 ACLR 577 at 581 in the context of the Companies (Acquisition of shares) (Victoria) Code. McGarvie J stated in that case:

The word "prejudice" is used in the sense of disadvantage. I consider the adjective "unfairly" conveys that an order which prejudices a person is only to be made if upon taking into account the various circumstances and considerations which is proper to consider in the exercise of discretion, the order is regarded by the court as providing the fair and just solution. Usually the exercise of a discretion prejudices someone. The governing consideration in the exercise of a discretion is what the justice of the case requires. In other words, the order to be made is that which the judge regards as the fairest order, having regard to the various interests to be reconciled and the considerations relevant to the exercise of the discretion.

It seems to me that those observations are of some pertinence to this case because they elucidate the point that consideration of the notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair. As Master Newnes identified in Fleet Broadband Holdings, it is also important to note s 435A which sets out the objects of Pt 5.3A of the Act, of which s 444GA forms part. That section provides:

The object of this part is to provide for the business property and affairs in an insolvent company to be administered in a way that:

(a) maximises the chances of the company or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

Before moving on to the circumstances of this case I would also observe that a mere transfer of shares without compensation cannot of itself constitute unfair prejudice, otherwise the section's operation would be significantly constrained. So, something more would have to be established before it could said that unfair prejudice to the members of the company could arise. [7]

9 These principles have been adopted and applied in the subsequent cases.

10 In Lewis, additional observations were made by White J regarding the question of residual equity in the shares sought to be transferred under the DOCA:

Plainly enough, subsection (3) contemplates that a transfer of shares may result in some prejudice to the interests of members of a company. The adverb "unfairly" indicates that the Court must be satisfied that such prejudice as may result should not be "unfair". Whether or not "unfair prejudice" will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to the existing shareholders if the leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted.[8]

... there is no example in the case law where the Court has declined to grant leave under s 444GA where no unfair prejudice has been established for the purposes of s 444GA(3) of the Corporations Act. I nonetheless accept that the Shareholders are correct that, on the proper construction of 444GA of the Corporations Act, the satisfaction of s 444GA(3) of the Corporations Act is a prerequisite to the exercise of the Court's discretion in favour of approval of a transfer, but does not require the Court to approve such a transfer or, as the Shareholders put it, merely "open[s] the gate" to the exercise of a discretion in favour of the transfer under s 444GA(3) of the Corporations Act. I note, however, that the structure of Pt 5.3A of the Corporations Act and the creditors' interests at stake may mean that, in the usual case, leave would be granted in favour of a transfer of shares which would realise value for creditors, if the fact that members were not unfairly prejudiced by that transfer was established.[9]

12 Also in IMO Nexus Energy, Black J considered in detail, in the specific factual context before him, the question of the appropriate method of valuing the position of the shareholders if a deed proposal did not proceed (that is, the methodology approved by White J in Lewis, as set out at paragraph 10 above), in the context where (as in the present case), the shares were shares in a parent company which had various operating subsidiaries. This is developed further below.

Application of the principles to the present case

13 Mr Stone has deposed, by reference to the accounts of the Companies made available to him, that Senselle and JG Stores, the two primary trading entities in the group of Companies, are both insolvent, and that all of the Companies are insolvent after the financial statements of each of the Companies are adjusted to account for the Companies' (and JTGGH's) inter-company loans.[10]

14 Of course, as the principles set out above make clear, for the purpose of making the assessment under s 444GA(3) of the Act, the relevant question is not one of insolvency, but of whether the shares to be transferred may have residual value, if the transfer were not approved. The issue of whether any residual value might remain in the shares is addressed in paragraphs 45 to 52 of the First Stone Affidavit, and also in the affidavit of Mr Stone sworn on 27 March 2015 ('Second Stone Affidavit').

15 The Second Stone Affidavit (and particularly paragraphs 9 and 10 and exhibit 'JGS-32') essentially deals with three potential scenarios with respect to the assets of JGH and its subsidiaries as at the time of the appointment of administrators. 'Scenario 1' assumes a (clearly hypothetical) situation where, instead of the Companies going into administration in November 2014, they had instead had a fully supported orderly sale process undertaken commencing at that time, and that process achieving a successful outcome. In Scenario 1, there would have been no eventual dividend to JTGGH as the shareholder/contributory in JGH (which is the relevant consideration for s 444GA(3)).[11]

16 In 'Scenario 2', instead of a DOCA having been executed, what would have occurred (again hypothetically) upon the appointment of administrators is a quick sale of the Companies' businesses through the voluntary administration process (unsupported by external funding), followed by a liquidation of the Companies. Again, it is clear that there would have been no eventual dividend to JTGGH as the shareholder/contributory in JGH.[12]

17 'Scenario 3' represents a liquidation (or unsupported administration) of the Companies. In Scenario 3, the Deed Administrators (now liquidators) would immediately shut down the operations of the Companies, and their plant and equipment be sold. Again, it is clear that there would have been no eventual dividend to JTGGH as the shareholder/contributory in JGH.[13]

18 The 'alternative scenarios' put before the Court reflect to some extent what was done in IMO Nexus Energy, although this case is factually simpler than that one principally because of the smaller scale and scope of the Companies' operations, and because all of JGH's Australian subsidiaries are also subject to the DOCA, and JTGI is insolvent and subject to judicial management in Singapore.

19 In my view, as in IMO Nexus Energy,[14] the only realistically likely outcome of the Court not granting leave under s 444GA(1) here is the liquidation of all six of the Companies - that is, Scenario 3. I note that there is no evidence of any prospect of further external funding support being provided if the DOCA is terminated.

20 Of course, as set out above, the evidence in respect of each of the scenarios shows that under each scenario, the financial position of the subsidiaries of 3GS, and of 3GS itself, were such that there was and is no prospect of any dividend ever being paid to JTGGH as the sole shareholder of JGH, in respect of JGH's shareholding in 3GS, in respect of JGH's shareholding in JTGI, or otherwise. With respect to whether there is any value in JGH, by reference to its shareholding in JTGI, above the book value used in a valuation conducted by Crowe Horwath:[15]

(1) Mr Stone has allocated a nil value to those shares;[16]

(2) The affidavits of Goh Thien Phong (interim judicial manager of JTGI) made on 19 December 2014[17] and 11 March 2014,[18] and exhibit 'SYXW2' to the affidavit of Stephanie Yeo Xiu Wen [state who this is] made on 16 March 2015[19] make it clear that there is no likelihood of any dividend to JGH as shareholder of JTGI.

21 Each of the three scenarios has in any event, it was submitted, been overtaken in part by what has actually occurred in the course of the administration (and deed administration) of the Companies. During this period, the Administrators borrowed $2.47 million, to fund the ongoing trading operations of the Companies under administration; and a further $500,000 has been borrowed by the Deed Administrators for the deed administration remuneration and expenses. This borrowing has all been undertaken on secured terms, which will see the debts so incurred being repaid in priority to ordinary unsecured creditors and shareholders, if the DOCA is terminated.[20] It follows that the likely outcome for creditors and shareholders if leave is not granted is in fact worse than Scenario 3.

22 In the circumstances and on the evidence it is tolerably clear that as there is unlikely to be any dividend to shareholders or contributories in any scenario, there is no unfair prejudice (if there is indeed any prejudice at all) to JTGGH (and derivatively, no unfair prejudice to LCJ and Maniach as shareholders of JTGGH) suffered by reason of the transfer of the whole of its shares in JGH to Fresh Bay. There is no evidence to support any contention to the contrary.

23 It is hardly surprising that the affected shareholder JTGGH has not made any submissions. There is a deadlock between LCJ and Maniach, the shareholders of JTGGH. LCJ agrees to the transfer. Maniach did not in this Court oppose the relief sought. Maniach has commenced oppression type proceedings in Singapore and applied for the appointment of a Judicial Manager. These matters are yet to be heard and determined by the High Court in Singapore. However on 15 April 2015 (a day before the hearing before me) Maniach obtained an injunction in the High Court of Singapore effectively restraining JTGGH from transferring any of its shares to Fresh Bay ('the Singapore Order'). The matter is returnable on 18 May 2015. The application by Maniach is obviously part of a wider dispute between the shareholders of JTGGH.

24 I have considered the Singapore Order and am of the opinion that the order - which of course in the interests of comity must be given due consideration - does not restrict me in any way from making the proposed orders. So much was effectively and properly conceded by Mr Snyder of Counsel who made a limited appearance for Maniach.[21] It is common ground that Maniach intends to fight the 'battle of the shareholders' in Singapore where presumably broad relief is available to a party, such as Maniach, alleging oppression. Although the Singapore Order may operate on the directors and officers of JTGGH based as they are in Singapore, they have with respect no effect on my separate consideration of this application under our peculiar provisions. It is, for the reasons given, desirable that the Deed Administrators effect the transfers and as pointed out there is no unfairness to JTGGH on the evidence before me. Of course the members of JTGGH are free to continue their dispute. The matter may have been different if Maniach had sought a companion order before me, to the effect that the shares not be transferred because of the underlying oppression case in Singapore. It chose not to do so.[22] This is not meant as a criticism.

25 Maniach did not seek to argue that the proposed orders would undermine the efficacy of the Singapore Order and perhaps effectively render it nugatory. Maniach simply submitted that the Court was not constrained, but that the Singapore Order was a matter that may be taken into account.

26 In my opinion the Singapore Order is not a sufficient reason for this Court to decline to grant the desired and otherwise justifiable relief. As pointed out the Singapore Order is a narrow order restricted to the directors and officers (and others) of JTGGH. The proposed orders are of course not in breach of the Singapore Order. The orders are different, and operate on different parties, in respect of the particular nature of the applications in the different forums according to different corporate and insolvency regimes. To the extent that they may undermine the Singapore Order - if indeed this be the case, although no submission was made to such effect - this is precisely a permitted and legitimate consequence of my previous point.

27 This leaves only the question of value to the creditors of each of the Companies as to the proposal. As the DOCA[23] makes clear, it is a requirement of the Deed that all Participating Creditors, which definition excludes only the Companies themselves and JTGGH (but not JTGI)) are to be paid their debts in full. The comparison with the likely dividend scenarios for creditors in the liquidation that will inevitably follow a refusal of leave under s 444GA(1), as set out in Scenario 3 for each entity in 'JGS-32' to the Second Stone Affidavit, is stark. There is no reasonable prospect of any return to ordinary unsecured creditors.[24] The benefit to all Participating Creditors of the DOCA continuing is unquestionably large.

28 Because Participating Creditors are to be paid in full, there is no detriment suffered by the Companies or the Participating Creditors by the exclusion from proof of their inter-company loan claims under the DOCA.

29 This leaves only the position of JTGGH, qua creditor of the Companies, to be considered. The Companies' s 439A reports to creditors,[25] as summarised at 'JGS-21' to the First Stone Affidavit, identifies that JTGGH is a creditor of the Companies, as follows:

30 The evidence includes a balance sheet of JTGGH as at 31 May 2014, which discloses, as current assets of JTGGH, loan amounts similar to those set out above (save that the JG Stores debt to JTGGH was then in the order of $3.4 million). Importantly, the balance sheet discloses that JTGGH owed $21 million to L Capital Asia LLC (LCJ's parent company[26]), and that its net equity position as at 31 May 2014 was - $3.32 million. The logical consequence of this is that the shareholdings of each of Maniach and LCJ in JTGGH were then worthless, even if full value (based on recoverability) was to be attributed to each of the debts owed by the Companies to JTGGH. Mr Shantanu Mukherji, a director of both LCJ and JTGGH, has confirmed the accuracy of the balance sheet both at the time, and subsequently.[27] And of course, JTGGH is subject to an application to be placed in judicial management in Singapore at the present time. That application has been presently adjourned pending the outcome of this proceeding.[28]

31 Further, under Scenario 3 (liquidation) in respect of the Companies, the estimated dividend value of JTGGH's claimed debt of $6.2 million is likely to be less than $100,000, after putting to one side the potential claims against JTGGH for insolvent trading under ss 588V and 588W of the Act,[29] and the impact of the Companies' obligations to repay monies borrowed during the administrations and deed administrations in priority to unsecured creditors such as JTGGH, as raised at paragraph 20 above.

32 The above matters make it clear that the only person who may realistically suffer detriment as a result of JTGGH's claims qua creditor being excluded, and then only to a small extent, is L Capital Asia LLC, as by far the largest creditor of JTGGH. LCJ supports the Deed Administrators' application for leave.[30] So too, it may reasonably be inferred, does L Capital Asia LLC, given that both LCJ, and Fresh Bay Investments Pte Ltd, the DOCA's proponent, are its wholly-owned subsidiaries.[31]

33 Insofar as secured creditors and landlords are concerned there was effectively no opposition.[32] The sections require a material adverse effect on achieving the purposes of the DOCA if the secured creditor or landlord proceeded with enforcement or recovery action and further that the interests of secured creditors and landlords are adequately protected.

34 It is self-evident, given the conditions subsequent referred to above, that unless secured creditors and landlords are restrained, the conditions subsequent will not be met causing a failure to implement the DOCA which provides substantial benefits by comparison with the other scenarios. Further secured creditors and landlords have liberty to apply in the event of a change in circumstances. In my view they are adequately protected.

[1] The corporate structure is set out in the diagram which is 'JGS 4' to the affidavit of Jason Glenn Stone sworn on 20 March 2015 ('First Stone Affidavit'). The diagram is attached as a schedule to this judgment.

[2] Due to some confusion the date may well be 17 April 2015 but nothing turns on this.

[3] [2010] WASC 182; (2010) 79 ACSR 237 ('Weaver').

[4] [2014] FCA 53 ('Lewis').

[5] [2014] VSC 259; (2014) 100 ACSR 450.

[6] [2014] NSWSC 1910 (' IMO Nexus Energy').

[7] Weaver [59], [64]-[65], [69], [74]-[80].

[10] Paragraphs 40 to 44 of the First Stone Affidavit.

[11] See the Second Stone Affidavit [10].

[12] See the Second Stone Affidavit [10].

[13] See the Second Stone Affidavit [10].

[15] 'JGS-22' to the First Stone Affidavit.

[16] Second Stone Affidavit at [5.4] and [5.7].

[17] 'JGS-7' to the First Stone Affidavit.

[18] 'JGS-36' to the affidavit of Jason Glenn Stone sworn on 13 April 2015 (Third Stone Affidavit).

[19] 'JGS-37' to the Third Stone Affidavit.

[20] The First Stone Affidavit [26]-[34], the Second Stone Affidavit [3], and the Third Stone Affidavit [15].

[21] At the commencement of the application Maniach indicated that it did not intend to appear or take part in the application. However, Maniach took the view (which was entirely appropriate) that it was desirable to inform the Court of the Singapore Order. An affidavit of Simon John Dollard was filed deposing to the Singapore Order and other matters. There is nothing in the affidavit that affects this application and it is not necessary to rule on its admissibility. There was no dispute that the Singapore Order was made.

[22] The orders made on 31 March 2015 permitted Maniach to oppose the applications and file submissions in this regard.

[23] 'JGS-14' to the First Stone Affidavit.

[25] 'JGS-11' to the First Stone Affidavit.

[27] 'JGS-41' to the Third Stone Affidavit.

[29] See 'JGS-32' to the Second Stone Affidavit.

[30] 'JGS-42' to the Third Stone Affidavit.

[31] See the Third Stone Affidavit [4] and [5].

[32] Although an appearance was filed by Scentre Limited, it consented to the proposed orders.