Anchorage Capital Master Offshore Ltd v Sparkes

Consideration and determination

The salient aspects of the evidence may be summarised as follows.
The Company is a public company listed on the Australian Stock Exchange which acts as a holding company of subsidiary companies incorporated in Malaysia (the Subsidiaries). It is convenient to refer to the Company and its Subsidiaries together as the IOU Group.
The Company does not trade or carry on any business, other than through the Subsidiaries. The Company does not have any employees, and does not lease any property. Its directors and senior management personnel are engaged as contractors.
The Company's shares were suspended from trading on the Australian Stock Exchange at the request of the Company on 16 March 2023, when it issued a release to the market stating that it had discovered that a significant fraud had been committed against the IOU Group. The suspension remains in place, and the external administration of the Company from 26 April 2023 became a further reason for the suspension. The Company remains listed, and it will be open to the directors to apply to have the trading suspension lifted upon the voluntary administration coming to an end, if the directors consider that it is in the Company's best interests to do so.
The structure of the IOU Group is as follows:
At the present time, the directors of the Company are not the directors of the Subsidiaries.
The information gathered by the Administrators to date indicates that, with the exception of iSentric Sdn Bhd (iSentric), IOU Pay (Asia) Sdn Bhd (IOU Pay Asia) and Arte Mobile Technology Pte Ltd (Arte), the Subsidiaries are dormant and do not have any assets.
According to the interim report for the half year ended 31 December 2022, the IOU Group has net assets of approximately AUD$47.011 million.
Based on the Administrators' review of the Company's books and records, Mr Walley has given evidence that the Company holds the following assets: 1. cash at bank of approximately $55,000; 2. the right to recover its costs of certain proceedings in the Federal Court of Australia against Clee Capital Pty Ltd pursuant to a costs order made in favour of the Company in those proceedings on 3 April 2023; 3. its shareholdings in each of the Subsidiaries; 4. an intercompany loan of approximately AUD$6.667 million owed by iSentric to the Company; and 5. an intercompany loan of approximately AUD$48.490 million owed by IOU Pay Asia to the Company.
Mr Walley's evidence casts some doubt on the recoverability of the debts owed to the Company by iSentric and IOUpay. The Administrators' investigations undertaken to date have revealed that both of those Subsidiaries have been trading at a loss in the current financial year. However, Mr Walley has also given evidence describing IOU Pay Asia as the main victim of the alleged fraud, which is currently the subject of a civil recovery action in the High Court in Malaysia.
Insofar as the Company's shareholdings in iSentric and IOU Pay Asia are concerned, Mr Walley has given evidence that iSentric operates a mobile banking and payments business and that it has intellectual property, systems and customer relationships which may be of value to a buyer if iSentric were to be sold. IOU Pay Asia operates a buy now pay later commercial lending business which Mr Walley has also deposed may have intellectual property, systems and customer relationships of value. There is no evidence of the likely value of such assets of iSentric and IOU Pay Asia.
However, as shown at [15] above, iSentric owns 100 per cent of IOU Pay Asia, which in turn owns 21 per cent of i-Destinasi Sdn Bhd, a company incorporated in Malaysia (IDSB). The 21 per cent shareholding in IDSB has a book value of $21 million, being the price paid by IOU Pay Asia for the shares in December 2021. Mr Walley has given evidence that IDSB makes dividend payments of approximately AUD$80,000 per month to IOU Pay Asia. Those are dividends used to support the financial position of IOU Pay Asia and, in turn, iSentric and the Company.
Mr Walley has also given evidence that IDSB is currently waiting on renewal of critical licence approvals in respect of its Accountant General Code for salary deduction of Federal Government Servants by the Malaysian Government. Mr Walley understands from a director of IDSB that the renewal is expected to be forthcoming. IOU Pay Asia has entered into an agreement to acquire a further 13 per cent of IDSB on terms that the acquisition is to be completed within 60 days of IDSB acquiring that approval.
Mr Walley has given evidence that any future sale of IOU Pay Asia's current 21 per cent stake in IDSB (or any increased stake if the transaction referred to immediately above proceeds) would likely need to be distributed from IOU Pay Asia to iSentric, and then distributed from iSentric to the Company, in order to be available to the Company. Mr Walley notes that the directors of each of IOU Pay Asia and iSentric would need to consider the solvency of that company before determining whether to make any distribution to its upstream shareholder.
In relation to the Company's liabilities, Mr Walley has given evidence that it has debts of approximately $897,799 owed to creditors that he describes as trade creditors. As the Company does not in fact trade, those "trade creditors" are principally the Australian Stock Exchange and the Company's directors and advisers.
The Company also owes AUD$2.002 million under an intercompany loan from Arte. Mr Walley has given evidence that the purpose of this loan appears to have been to fund operating expenses incurred by the Company prior to a capital raise undertaken in 2021. The Court was informed at the hearing on 23 May 2023 that this debt is not presently due for repayment.
Arte's interim financial report for the period from 1 July to 31 December 2022 records that it had total assets valued at approximately SGD$3.100 million (including the debt owed by the Company, which was recorded in the amount of approximately SGD$1.822 million), and current liabilities of approximately SGD$94,000. Mr Halliday has given evidence that, based on his review of Arte's interim financial report, Arte would be capable upon receipt of any funds in repayment of the debt owed by the Company of declaring a dividend to be paid to the Company as its sole shareholder, in the amount of any residual amount held by Arte less the payment of its currently liabilities (approximately SGD$94,000) and any tax obligations arising from the declaration of the dividend. On that basis, Mr Halliday deposed that, as a matter of commercial reality, any repayment of that debt by the Company to Arte would simply allow funds to be returned to the Company as the 100 per cent shareholder of Arte. The submissions made on behalf of the Company at the hearing on 23 May 2023 embraced this analysis.
The Finran Loan Agreement provides a loan facility of up to AUD$4.5 million on which the Company may draw at any time during a period of 12 months after the date of the agreement. There is no obligation for the Company to draw down the whole of the funds available under the facility. There is no limit on the number of draw down notices that may be issued, provided that the total amount of funds drawn remains within the facility limit. Each notice must be for a minimum amount of AUD$10,000.
Clause 2.2 of the Finran Loan Agreement requires the Company to apply drawings in an order of priority that is consistent with the undertakings of the directors that are recorded in paragraph 8 of the orders in Appendix 1 to these reasons.
The loan is secured over property identified in a General Security Deed to be executed by the Company and Finran Pty Limited at the same time as the Finran Loan Agreement.
The outstanding principal and interest are repayable 13 months after the date on which the Finran Loan Agreement is entered into.
Each of the Company's present directors has given evidence that he considers the terms of the Finran Loan Agreement to be favourable to the Company to enable it to pay its current creditors and to continue to operate, and to meet its operating expenses as and when they fall due, for a period of at least 12 months. Each of Mr Woszczalski and Mr Shahruddin has given evidence that he supports the plaintiff's application to bring the administration of the Company to an end on the basis that the loan is to be made available to the Company on the terms of the Finran Loan Agreement.
Mr Sallway has undertaken a cashflow analysis for the Company for the period from mid-May 2023 until mid-June 2024 on the basis that the Company has funding of AUD$4.5 million available under the Finran Loan Agreement from mid-May 2023 and the Company will immediately pay all of its creditors (including Arte) and Administrators' fees in the amount of AUD$708,651. Mr Sallway's analysis shows that this will leave the Company with sufficient remaining funds under the Finran Loan Agreement to meet its monthly operating expenses of approximately AUD$43,221 together with the audit fee of approximately AUD$125,000 that will be payable in October 2023, until June 2024. The other assumptions incorporated into Mr Sallway's cashflow analysis are based on the historical operating expenses of the Company, adjusted by certain changes that each of the current directors have deposed they intend to make with immediate effect that will significantly reducing those operating expenses by reducing the fees payable to the directors and eliminating unnecessary travel costs. Mr Sallway's analysis conservatively assumes that the Company will not receive any funds from dividends paid by IDSB, contrary to the position to date. [2]
On the basis of his analysis described above, Mr Sallway concluded that the Company will become solvent after entering into the Finran Loan Agreement because that facility will enable the Company to pay all of its existing creditors and pay its ongoing debts as and when they become due and payable until June 2024, when the facility expires. At that time, the Company will need to either raise funds to repay the facility to renegotiate the facility so as to extend its term. Mr Sallway noted that, after entering into the Finran Loan Agreement, the Company would have a period of 12 months to arrange for the raising of capital, sale of assets or refinancing on the security of its assets, so as to be able to repay the Finran loan facility in June 2024.
Mr Walley has critically reviewed Mr Sallway's analysis. Taking all of the issues raised by Mr Walley into account, counsel for the Company submitted at the hearing on 23 May 2023 that the analysis demonstrates that the Finran Loan Agreement will restore the Company to cashflow solvency. Indeed, it shows that the Company is likely to have access to more cash than it will require because Mr Sallway estimates that there will be approximately AUD$375,000 more funds available under the loan facility than the Company will require, even assuming that the Company receives nothing from any IDSB dividends and that it immediately pays the debt of AUD$2.002 million to its subsidiary, Arte. That debt is not presently due, and repayment of the debt would be likely to result in an inflow of funds back to the Company in any event for the reasons explained at [27] above.
Both parties submitted, and I accept, that the present uncertainty about the precise steps that the Company will take in order to repay or renegotiate the Finran loan in June 2024 does not detract from the conclusion that the Company will be solvent within the meaning of s 95A of the Corporations Act immediately upon entering into the Finran Loan Agreement and becoming entitled to draw on the AUD$4.5 million facility. The question raised by s 447A(2)(a) is whether the Company is solvent, not whether it is likely to be solvent in more than 12 months' time, although any likelihood of future insolvency may be relevant to the exercise of the discretion whether to make an order ending the administration.
As explained by the Court of Appeal in Anchorage Capital Master Offshore Ltd v Sparkes, [3] the question of present solvency (or, in this case, solvency immediately upon entering into the Finran Loan Agreement) is directed to the Company's ability to pay its debts, including debts that will fall due in the immediate or near future, as and when they become due and payable. The Court of Appeal said: [4] "[244] A company is insolvent only when it is unable to pay its debts as and when they fall due. His Honour rightly recorded that it was uncontroversial that the test of insolvency is prospective, so the question is not simply whether the company can pay debts falling due at or around the date the question arises, but whether, as at that date, it can pay debts falling due in the future; that how far into the future the Court should look is a question to be answered having regard to the particular facts of the case; and that normally, a court will not look far into the future because there are so many unknowns and contingencies, though sometimes it may be appropriate to do so. [245] The primary judge rightly recognised a distinction between proof of the relevant fact - present insolvency - and prediction of the prospect of inability to pay a future debt when it becomes payable. The relevant question is not whether, at the date of alleged insolvency, it is more probable than not that the company will be unable to repay all its debts when they become due at some long distant date; as the primary judge put it, that is only to say that the company is likely to become insolvent at some time in the future. The distinction between a company that is insolvent, and one that is likely to become insolvent in the future, is enshrined in legislation. The correct question is whether, at the date of alleged insolvency, it can be said that the company is already in a state of inability to pay those debts when they fall due. [246] The cases to which reference has been made illustrate that it will usually be more difficult to infer insolvency on the basis of liabilities that will not be payable for years than from debts payable within months - which supports the view that a higher degree of certainty is required to support such an inference in those circumstances. As Giles JA said, the time frame is influenced by the circumstances, including the nature of the company's business and, if known, of the future liabilities. As Briggs J said, the significance of future debts will be influenced by the particular facts, and where the company is still trading and the profile of future cashflow is very uncertain, regard to future debts may make little difference, whereas where its business is in run-off, and its future cashflow known, it may be determinative. Generally speaking, the longer the period to elapse before a debt becomes due, and the greater the potential for intervening events to impact the company's ability to pay it, the less sound a basis it will provide for a conclusion of present insolvency. [247] Undoubtedly there are cases, of which Associated Dominions is perhaps the paradigm, in which it can be seen now that the company has liabilities which, when they mature even some years in the future, it will be unable to pay. If it can be said, at the date of alleged insolvency, that the company is already unable to pay those debts when they mature in the future, it will be insolvent. But such a conclusion requires a high degree of assuredness that that will be the case. The primary judge did not err in holding that before drawing a conclusion of insolvency based on long term liabilities, a high degree of probability that the company would be unable to repay them when they fell due is required. Even if the company is 'balance sheet' insolvent in the long term, it may be necessary to consider its prospects in the meantime, as to whether it might be able to generate sufficient profit to pay the long term debt. However, if the company is 'balance sheet' solvent, that will be very telling in the case of long-term debts, as it will usually indicate that it will have sufficient assets and time to realise them to discharge its long-term liabilities."
The plaintiff submitted, and I accept, that a period of 12 months is a long way into the future in the present case, where the directors of the Company were appointed only weeks ago and have not yet been able to take control of the affairs of the Company due to the administration but have already identified changes to be made to reduce the Company's operating expenses significantly. I also accept that the AUD$47.011 net assets of the Company and its Subsidiaries means that, even after taking into account the issues raised by Mr Walley about the value of some of the Company's assets, [5] there is significant scope for the Company to realise assets in order to repay the Finran loan facility in 13 months or to refinance the loan against the security of some of those assets. It is also relevant to take into account the likelihood of continued shareholder support for the Company from Finran Pty Ltd and/or other shareholders who have recently conveyed to Mr Halliday their willingness to underwrite future capital raisings by the Company of up to AUD$1 million in the case of one shareholder and up to AUD$5 million in the case of another shareholder.
In short, there is a very real likelihood that the Company will be able to repay the Finran loan facility when it falls due in June 2024. As both parties submitted, the evidence certainly does not support a finding with the requisite high degree of assuredness that, at the time it enters into the Finran Loan Agreement, the Company will be unable to repay that loan 13 months later.
The plaintiff submitted, and I accept, that the Finran Loan Agreement maximises the chances of the Company continuing in existence by allowing all creditors to be paid and the Company to be restored to the control of its recently elected board of directors, so that all necessary strategic management decisions concerning the future of the Company, including its future at the expiry of the 13 month term of the proposed funding agreement, can be made by those directors. By contrast, the continuation of the administration would paralyse the Company, impair its prospects of restoring the quotation and trading of its shares on the Australian Stock Exchange, and increase the level of funding required to meet the increasing costs of the administration, all of which would put the Company's continued existence at risk.
After hearing the evidence and submissions summarised above, I was satisfied on the balance of probabilities that the Company will be solvent at the time when proposed order 3 comes into operation to end the administration because it will have sufficient funds available to be drawn down under the Finran Loan Agreement to pay its existing debts and its debts to be incurred during the next 12 months. Moreover, the proposed orders establish a regime whereby all of the Company's existing debts will be paid promptly after the administration comes to an end, with the possible exception of the debt owed to Arte for the reasons referred to at [27] and [35] above. The evidence did not suggest that the Company will be unable to repay the Finran loan facility when falls due in 13 months' time, nor that there is a sufficient risk of that occurring to warrant the Court declining to exercising its discretion under s 447A(2)(a) to make an order bringing the administration to an end.
I was therefore satisfied at the conclusion of the hearing on 23 May 2023 that the administration should end, and that it was appropriate to make orders in the terms sought under s 447A(2)(a), including the orders under ss 198G(3)(b) and 437D(2) of the Corporations Act facilitating the Company entering into the Finran Loan Agreement. I made the orders set out in Appendix 1 to these reasons.

At a glance

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Before

Source

Judgment (4 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (1)