Australian Securities and Investments Commission v Midland Hwy Pty Ltd [2024] FCA 461 | Case summary

Factual matters 7 The factual matters set out below were the subject of affidavit evidence given by Mr Preston. 8 The Qenos group conducts the largest plastics and chemical manufacturing business in Australia. It has large plants in Sydney (the Botany facility) and in Victoria, at Altona (the Altona facility), but the Botany facility is not currently operating as it was shut down due to a cooling tower failure. 9 The Altona facility has an important place in the production systems for liquefied natural gas (LNG) in South Eastern Australia. Omitting technical detail, the Altona plant takes ethane from Esso's Long Island Point site. Ethane is one of the by-products of LNG production. The Altona facility uses the ethane in producing ethylene and then uses ethylene to produce polyethylene, which it uses in producing various products. If the Altona facility were shut down suddenly, and so could no longer take ethane from Esso's operations, this has a high likelihood of interfering with LNG supplies in South Eastern Australia. However, the Altona facility's arrangements to take ethane from Esso terminate at the end of 2024, by which time Esso's new power generating plant at Hastings will be operational and able to receive the ethane from LNG production. 10 The Altona and Botany facilities are large industrial complexes handling highly hazardous substances. They are subject to extensive environmental licensing regimes and have legacy contamination issues that will be extremely costly to remediate. 11 The Administrators were appointed on 17 April 2024. The first meeting of creditors was to (and I assume did) occur on 30 April 2024, the day after the application was heard. The second meeting of creditors is due to be held on 23 May 2024. There is a strong prospect that a deed of company arrangement (DOCA) will be proposed by LendCo, which will provide for funding of accrued employee entitlement claims, funding to provide for the orderly shutdown and make-safe of the Botany and Altona facilities, a capped fund for distribution to unsecured creditors, and the acquisition by LendCo or its nominee of the land owned by the companies including the sites at Botany and Altona, with a view to remediating those sites and re-developing them for industrial use. 12 The financial performance of the Qenos group has been deteriorating. It has, for a number of years, relied on funding from its parent companies. In the period ended 31 March 2024, the companies had a net loss after tax of $659 million and a net asset deficiency of about $751.5 million. Accrued employee entitlements stand at approximately $190 million. Members of the Qenos group are party to deeds of cross-guarantee. 13 At the time of the Administrators' appointment, the companies had $18 million in cash. No other facilities are available upon which the Administrators may draw. The cash on appointment of $18 million contrasts with the monthly overheads of $15 million to $20 million per month (including employee expenses of $9 million to $10 million per month). 14 Earlier in April 2024, ChemChina International Holdings (Hong Kong) Ltd (ChemChina) sold the companies to a subsidiary of Logos Property Group (Logos) a Singapore-based property developer that specialises in remediating and developing contaminated sites. ChemChina also sold certain debts owed by the companies to a Logos subsidiary, LendCo. That sale completed on 15 April 2024. The Administrators were appointed on 17 April 2024. 15 The Administrators had some previous involvement with the Qenos group, to which I will return in the context of their independence. As disclosed in their "DIRRI" (declaration of relevant relationships and indemnities), in 2023 the Administrators' firm, McGrathNicol, was engaged by Logos' solicitors as part of Logos' due diligence into the prospective acquisition of the companies. That engagement involved reviewing management forecasts to gain an understanding of the companies' cashflow position and funding requirements and to identify commercial considerations that might be relevant if the companies went into voluntary administration. A second phase of the work involved revising the findings based on updated information, instructions or assumptions. The Administrators' firm, McGrathNicol, was paid fees for this work. The engagement did not involve the Administrators giving advice about the prospective acquisition, the recapitalisation of the companies or any other matter that could be subject to review by an administrator of the companies. Nor did it involve advice being given to the companies' boards or individual directors. 16 McGrathNicol was then engaged by the companies' solicitors in March 2024 to assist in advising about the preparations necessary to enable the Administrators to accept appointment. This engagement involved reviewing and considering financial forecasts and the companies' ability to remain solvent, undertaking contingency planning and advising on preparations to enable the Administrators to accept appointment as voluntary administrators. As with the earlier engagement, this engagement did not involve giving any advice to the companies, their boards or any individual director. McGrathNicol did not receive any remuneration for this engagement. 17 It was in the context of this contingency planning engagement that the Administrators assessed the funding that the companies would require if they were to continue to operate during any voluntary administration. In the weeks leading up to their appointment, the Administrators undertook discussions with LendCo. They negotiated the funding agreement with LendCo. The funding agreement provides for up to $200 million to be advanced, in tranches, upon the Administrators issuing "utilisation notices". The funding agreement was contingent on orders being made under s 447A of the Act, to the satisfaction of the Administrators. Mr Preston deposed that, in his assessment, and in view of the urgency for the funding, the history and present financial and operational position of the companies, the extent of current indebtedness, and the extent of security of the companies' assets, it is unlikely that more favourable terms could have been obtained from any other source. 18 The funding pursuant to the funding agreement will be sufficient for the Administrators to continue to trade the Qenos business in the short to medium term. Importantly, continuing the operations of the business in the short to medium term will allow for the retention of employees with critical knowledge of the operations and ability to manage the significant operational and environmental hazards. 19 Continuing operations in the short to medium term will allow for a managed slow down and winding up of operations, without the significant environmental hazards and disruption to the LNG supply in South Eastern Australia which would come with a sudden shut down. Such a process would, on Mr Preston's evidence, allow the Administrators to transform the companies from being the owner of sites where they conduct petrochemical operations, to being the owner of sites where such operations had been shut down safely and in a way that mitigates the impact on stakeholders. In his assessment, continuing to operate the business in this way will allow the Administrators a better opportunity of realising value from the sale of component parts of the existing business (it being unlikely that there would be any buyer for the entire business, including for reasons associated with the extent of the companies' indebtedness, operating losses and lack of long-term supply of ethane). 20 On Mr Preston's evidence, if the entry into the funding agreement were not approved, it would be necessary for the Administrators to shut down the business abruptly and take steps to terminate the administrations, put the companies into liquidation, terminate the staff and disclaim the companies' assets. Disclaiming the companies' onerous assets would include disclaiming the land held by the companies in Botany and Altona. Practically, if these steps are taken, the DOCA that LendCo has indicated it intends to propose will not eventuate. 21 The making of an application under s 447A of the Act was foreshadowed in a communication to creditors of the Qenos group, but little detail of the application and the nature of the funding was provided. The application and supporting affidavits were, however, provided to ASIC. ASIC did not seek to appear to raise any concerns.

Consideration 22 Section 90-15(3)(a) of the IPS confers a broad power on the Court to make "an order determining any question arising in the external administration of the company". This power enables the Court to provide directions in the nature of judicial advice to external administrators. 23 Section 447A of the Act provides the Court with a broad power to make "such order[s] as it thinks appropriate about how [Pt 5.3A of the Act] is to operate in relation to a particular company". Here, the Administrators sought orders varying the operation of Pt 5.3A of the Act in relation to the operation of s 443A(1) (which, unless modified, imposes liability on administrators for debts incurred in the performance of their duties) and s 443D (which provides administrators with a statutory indemnity out of the company's property, subject to exceptions). 24 The applicable principles were summarised recently by Beach J in Crosbie (administrator), Re Godfreys Group Pty Ltd (administrators appointed) [2024] FCA 60 at [70]-[75] as follows: [70] The power under s 447A to make orders limiting the personal liability of administrators under s 443A is well-established. [71] In Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd) (admins apptd) (2010) 82 ACSR 142, Gilmour J explained (at [30]): The principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A can be summarised as follows: a) the proposed arrangements are in the interests of the company's creditors and b) typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors; c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement; d) notice has been given to those who may be affected by the order. (citations omitted) [72] In order to avoid the consequence of s 443A, when a company in administration borrows funds from a third party financier to help fund the company's ongoing trade during administration, administrators commonly seek orders limiting their personal liability. [73] Where the continued trade is for the benefit of creditors, personal liability of administrators can be and has been excluded, including pursuant to s 447A, prior to any such liability being incurred. [74] Further, the Court is empowered under s 90-15 of the IPSC to make such orders as it sees fit in respect of the administration of the group. The function of such orders, or judicial directions, is not to determine the rights and liabilities associated with a particular transaction, but rather to confer a level of protection on the administrator. But the fact that a s 90-15 direction may relate to a decision or action of a commercial character does not prevent such a direction being made. [75] In In the matter of Courtenay House Capital Trading Group Pty Ltd (in liq) [2021] NSWSC 256, Black J at [2] observed: The Court's power to give a direction under s 90-15 of the IPSC at least allows the Court to give a liquidator advice as to the proper course of action for him or her to take in a liquidation, and the Court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion, although it typically will not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision. 25 In addition, the Administrators observed that the term "creditors" as it is used in Pt 5.3A includes those who would be able to prove in a winding up, and so included contingent creditors (citing Brash Holdings Ltd (administrators appointed) v Katile Pty Ltd [1996] 21 VR 24 (Brooking, JD Phillips and Hansen JJ) referring to s 553). The Administrators noted that, if operations were to be stopped abruptly, that would expose the companies to claims from, amongst others, Esso as it would result in breach of the offtake agreement. 26 Applying those principles to the present case, it is clear that the funding agreement will allow the companies' business to continue to trade in the short to medium term. Given the lack of any real prospect of a sale pursuant to which the companies' business will continue to be operated indefinitely, the direct economic benefit to creditors from continued trading is not as obvious as it may be in other cases. Nevertheless, I am satisfied that the funding agreement is in the interests of the companies' creditors notwithstanding that the companies' liabilities stand to be increased by up to $200 million (plus interest). 27 On the evidence, obtaining funding pursuant to the funding agreement benefits creditors in three ways. First, it allows for the anticipated DOCA to be proposed, which is expected to include payment of employees' entitlements in addition to making provision for a fund for creditors. Secondly, by obviating the need for the Administrators to put the companies into liquidation immediately and disclaim onerous property, entry into the funding agreement allows for the controlled and orderly wind down of the companies' affairs and for the value of assets, including such elements of the business as may be saleable, to be maximised for the benefit of creditors. Thirdly, it avoids the companies' liabilities being blown out by potential damages claims for breach of its offtake agreement, and unquantified exposures for any environmental and safety breaches associated with a sudden shut down. If breach of the offtake agreement did, as the Administrators apprehend, result in a slow down of LNG production and availability in South Eastern Australia, the exposure associated with a sudden shutdown at Altona may be very significant. 28 The Administrators submitted that, in addition to the commercial interests arising, the significant safety and environmental risks and knock-on consequences to the LNG supply were such that "the public interest weighs firmly in favour of the orders being made". 29 There is, however, a question as to how public interest considerations ought to be treated in an application such as the present. That question arises because the principles applicable to such applications focus on the benefits to, and potential prejudice to, creditors associated with the orders sought. 30 After the hearing, the Administrators filed a supplementary note regarding cases where interests other than the interests of creditors have been considered. 31 One of the cases the Administrators identified was Re Mowbray College [2012] VSC 300 (Mowbray). In that case, Robson J considered an application by the administrator of Mowbray College for orders approving his acceptance of a $1 million loan from the Victorian Government that would allow the school to continue to operate to allow year 12 students to complete the second term (otherwise the school would have had to be closed that day). 32 In considering the application, Robson J noted that the loan may prejudice unsecured creditors by greater debt being taken on without any increase in fee revenue. His Honour observed (at [37]) that orders made under s 447 must be directed to furthering the objects of the administration provisions of the Act, which are directed to improving the insolvency position for creditors and shareholders. To overcome that problem, the State of Victoria agreed to stand behind unsecured creditors, such that their interests were not prejudiced. As the matter was dealt with in this way, Mowbray does not provide assistance in assessing the role of the "public interest" in applications under Pt 5.3A. 33 The Administrators also referred to Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189 (Wallwork J) (Woodings). That case concerned an application under s 447A to set aside a resolution to enter a DOCA and have an order made that the administration end forthwith. It was contended that it was in the "public interest" that the company be wound up due to the activities of a de facto director which infected the meeting at which the DOCA proposal was approved. 34 His Honour rejected a submission that s 447A did not permit the court to make a winding up order on public interest grounds. Having addressed earlier cases in which public interest considerations (and not just the interests and views of current creditors) were treated as relevant in an application to stay a winding up (Re Denistone Real Estate Pty Ltd [1970] 3 NSWLR 327 (Street J)) and in approving schemes of arrangement of companies in liquidation (Re Mascot Home Furnishers Pty Ltd [1970] VR 593 (Gillard J)), Wallwork J said as follows (199-200): It is apparent from the decided cases that public interest consideration[s] were a very important aspect of the court's jurisdiction under earlier legislation. In my view, the same principles should be applied insofar as they are not inconsistent with the present Corporations Law. 35 His Honour went on to acknowledge (at 200) that s 483A of the Corporations Law required the administrator to form an opinion as to the creditors' interests, but did not refer to the public interest, and then went on to consider other provisions (ss 438D, 440A, 444D, 444E and 445E). His Honour observed (at 201) that s 447A "provides the general power of the court to make orders concerning how Pt 5.3A of the Corporations Law is to operate in relation to a particular company" and noted that s 447A(4) permits a creditor (amongst others) to make an application under s 447A, that s 447B allows for orders to be made during an administration to protect creditors' interests and that, pursuant to s 447E, there is a power to make orders to protect creditors and members of a company in administration in certain circumstances. His Honour concluded (at 203): I am satisfied that s 447A gives power to the court to order a winding up of the company in the public interest in a case such as this. Such a power is not inconsistent with the provisions in Pt 5.3A, and in the light of the decided cases which are referred to in these reasons, it is in the public interest that the company be wound up and not be allowed to be further manipulated by Mr Morris or his associates. 36 This conclusion in Woodings was cited with approval in Australian Securities and Investments Commission v Midland Hwy Pty Ltd (Admin Appt) (2015) 110 ACSR 203; [2015] FCA 1360 at [65] (Beach J) and Deputy Commissioner of Taxation v Premiercorp Pty Ltd (admin apptd) [2013] FCA 778 at [31] (Farrell J). 37 The Administrators also relied on the decision of Lindgren J in Federal Commissioner of Taxation v Wellnora Pty Ltd (2007) 163 FCR 232; [2007] FCA 1234 (Wellnora), a case concerning how an administrator should exercise a casting vote. There, Lindgren J stated in relation to the operation of s 447A of the Act (at [171]): In my view, the power conferred on the Court by s 600B [which provided for the setting aside or variation of a resolution of creditors carried on a casting vote] is an ample one which can be exercised by reference, not only to the interests of creditors, but also by reference to the public interest and commercial morality. A similar observation applies in relation to the power conferred on the Court by s 447A. Although Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 concerned an application to set aside under s 445D, I treat what Campbell J said in that case at [286]ff about the relevance of public interest considerations to the exercise of the Court's discretion as applicable, generally speaking, to the discretion under the two sections just mentioned. (Emphasis added.) 38 As referred to above, the companies' two facilities are highly regulated and hazardous sites. The ongoing operations at the Altona facility cannot be terminated with the flick of a switch. They need to be wound down in a controlled and managed process. It is self-evidently in the public interest that the Administrators be in a position to do that and not have to terminate the operations in a sudden or uncontrolled manner, or without the management and advice of long-standing staff with knowledge of the complex systems and environmental hazards at play. Moreover, on the evidence, any sudden shutdown of the Altona plant would have consequences for "upstream" LNG production, given that the offtake of ethane is critical to Esso's existing LNG production system. Those consequences have the real potential to affect the supply of LNG in South Eastern Australia, as winter approaches. 39 Section 90-15(1) of the IPS provides that the Court "may make such orders as it thinks fit in relation to the external administration of a company". Section 90-15(4) specifies, on a non-exclusive basis, matters that may be taken into account. Without restating those matters, it is clear that they extend beyond the direct commercial interests of creditors (see, eg, s 90-15(4)(e) concerning public confidence in registered liquidators as a group). Further, aspects of the present application relied on s 447A of the Act. That provision is cast in wide terms, empowering the Court to "make such order as it thinks appropriate about how this Part is to operate in relation to a particular company". 40 I accept, of course, that the broad powers are (in the present context) to be exercised consistent with the object of Pt 5.3A of the Act and that the orders must have a nexus with how the Part is to operate in relation to the companies in question. There are indications in the cases (particularly Wellnora) that public interest considerations may have a role in applications of the present kind. Further, it would, in my view, be wrong to read the authorities' focus on creditors' interests as suggesting that administrators should take a course of action that is cavalier or reckless as to environmental hazards and risks, or that is blind to potential widespread public impacts, simply because proceeding in that manner would be advantageous to unsecured creditors. Nevertheless, in the absence of full argument and a contradictor, I would be loath to, and do not, conclude that the powers under s 90-15 of the IPS and s 447A of the Act could properly be used where the only interest served is the public interest. In the present matter, it is not necessary to go that far because, as set out above, the course that the Administrators proposed has benefits to creditors. 41 Accordingly, in the present case, it is not necessary to rely on any "public interest" conclusion to support the orders sought by the Administrators. 42 Having regard to all of these matters, I consider it appropriate that the Administrators have the benefit of judicial advice that they were justified in entering into the funding agreement. It is also appropriate that the Administrators be relieved of personal liability pursuant to s 443A of the Act. Entry into the funding agreement has distinct benefits to the body of creditors (as compared with the abrupt cessation of operations, immediate entry into liquidation, disclaimer of onerous property and likely significant increase in claims against the companies related to the for ethane offtake agreement with Esso). 43 I have considered the Administrators' pre-appointment engagements. They do not present any impediment to the making of the orders sought by the Administrators. In Re Ten Network Holdings (2017) 252 FCR 519; [2017] FCA 914, O'Callaghan J considered pre-appointment engagements. The Administrators summarised what his Honour said about such appointments (at [10], [21]-[22] and [61]-[63]) as follows in their written submissions: As O'Callaghan [J] explained: (a) It is commonplace for large and complex companies, or companies operating in a complex group of related companies, to engage an insolvency practitioner to undertake a contingency plan in the event that it becomes necessary to appoint administrators. (b) Directors contemplating potential insolvency should be encouraged to engage with qualified professionals early, to develop restructuring plans that will increase the chance of rescue or maximise the amount that can be salvaged for the benefit of creditors and, if at all possible, members. (c) Ethical issues (including conflicts of interest) can arise where a potential administrator assumes the role of administrator or liquidator but, provided that appropriate safeguards are put in place to guard against the existence or appearance of any conflict of interest, the fact that significant long-term and highly-paid work is undertaken for such a purpose should not of itself give rise to a reasonable apprehension of bias or otherwise preclude appointment as administrators. (d) The test to apply was whether a fair-minded lay observer might reasonably apprehend that the administrators might not bring an impartial mind to the resolution of the questions they may be called upon to decide. 44 As O'Callaghan J pointed out, there are obvious benefits to companies seeking input from qualified insolvency professionals prior to entering into voluntary administration. Here, such appointments enabled the Administrators to "hit the ground running", with a clear view of the companies' operations and needs. Given the nature of the engagements, I do not consider that they were such as to compromise the Administrators' independence in any relevant way. Should any matter emerge in the future that gives rise to a presently unforeseen conflict associated with the prior engagements, that can be addressed if and when it arises. 45 The Plaintiffs also sought an order pursuant so s 37AF(1) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act), for suppression of the confidential exhibit JP-2 to Mr Preston's first affidavit, being a copy of the funding agreement. 46 Section 37AF(1) provides that the Court may, by making a suppression order or non-publication order on grounds permitted in Pt VAA of the FCA Act, prohibit or restrict the publication or other disclosure of, among other things, information that relates to a proceeding before the Court and is information lodged with or filed in the Court. 47 The order was sought on the grounds set out in s 37AG(1)(a) of the FCA Act, namely, that the order is necessary to prevent prejudice to the proposed administration of justice. 48 The Plaintiffs submitted that the funding agreement contains commercially sensitive terms as between the Administrators and LendCo, including regarding how the funding operates and how it will be brought. The Plaintiffs relied on Deputy Commissioner of Taxation v Italian Prestige Jewellery Pty Ltd (ACN 116 031 022) (in liq) (2018) 129 ACSR 115; [2018] FCA 983 in which Markovic J made orders pursuant to s 37AF of the FCA Act in relation to a Funding Deed. At [60], Markovic J referred to and relied upon the reasons of Gleeson J in Deputy Commissioner of Taxation v ACN 154 520 199 Pty Ltd (No 2) [2017] FCA 755 at [40]-[41] where her Honour said: In previous cases which are substantially similar to this case including Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079, Victoria v Goulburn Administration Services (in liq) [2016] VSC 654 and Victoria v CTM Training Solutions Pty Ltd (in liq) [2017] VSC 47, the proposed funding deeds were kept confidential as between the special purpose liquidators and the funder. There is no reason why this matter should be any different. The clear public interest in the due and beneficial administration of the estates of insolvent companies for the benefit of creditors is a relevant consideration in favour of a s 37AF order in this case. I was satisfied that an order pursuant to s 37AF should be made to protect commercially confidential information provided in support of the application. 49 I am satisfied that it necessary to prevent prejudice to the proper administration of justice for the funding agreement be kept confidential until the end of the administration or further order, whichever is earlier. 50 As to the form of the orders proposed by the Administrators, I was satisfied that it was appropriate to make orders in the form sought by the Administrators, but with a few adjustments. The only substantive adjustment related to notification to creditors. The Administrators' proposed form of order allowed for any person with a sufficient interest to apply to the Court to vary the orders. While such orders go some way to protecting the position of creditors, if funds had already been drawn down under the funding agreement, any application by a creditor to vary the orders approving the funding agreement may lack utility. I invited the Administrators to address that concern by undertaking not to draw down on the funding agreement until 48 hours after the first meeting of creditors, to take place at 1.30pm on 30 April 2024. The Administrators were willing to, and did, give that undertaking. This allowed creditors a short period following the holding of the first creditors' meeting (at which they were to be informed of the orders made) in which to approach the Court if they wished to have those orders varied or otherwise to stop funds being drawn down under the funding agreement. 51 Further orders were made on 2 May 2024 as the originating process omitted Qenos Pty Ltd, which ought to have been listed as a plaintiff, whereas the digital file set up by the Plaintiffs listed it as the Fifth Plaintiff. This resulted in the orders made on 29 April 2024 capturing Qenos Pty Ltd, but omitting another entity. These matters have been addressed by the joinder, nunc pro tunc, of Qenos Pty Ltd and the amendment of the initial orders (again nunc pro tunc) to extend to the Eleventh Plaintiff, as well as leave being granted to the Plaintiffs to file an amended originating process that rectifies the record. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Button.

Australian Securities and Investments Commission v Midland Hwy Pty Ltd

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Cases Cited (16)