Australian Securities Commission v Bank Leumi Le-Israel

Factual background

1. By way of background, the Nexus group consists of Nexus and several wholly-owned subsidiaries, of which the two that are primarily relevant to these proceedings are Nexus Energy Vic P54 Pty Ltd ("Nexus Vic P54") and Nexus Energy WA Pty Ltd ("NEWA").
2. Nexus Vic P54 has an interest in the Longtom gas and condensate resource in the Gippsland basin off the south east coast of Victoria. The Longtom resource is subject to a complex series of documents between Nexus Vic P54 and entities within the Santos group and gas and condensate from the resource is processed by Santos and sold to Santos. Nexus has significant capital expenditure requirements under those arrangements which are secured by a letter of credit in favour of Santos.
3. NEWA has a 15% interest in the Crux resource, which is a gas resource in the Browse basin off the north west coast of Western Australia. The other parties to the Crux venture are Shell Development (Australia) Pty Ltd ("Shell") and Osaka Gas Crux Pty Ltd ("Osaka"). The interest in Crux held by NEWA is in turn the subject of a production licence and other agreements between, inter alia, NEWA, Nexus, Shell and Osaka. NEWA now holds a 15% interest in the assets, although it is liable for an 85% share of liabilities arising out of an earlier joint operating agreement between NEWA and Osaka, including for costs and expenses associated with remediation of suspended wells which existed at a specified time. The joint operating agreement in turn gives specified rights to the other venturers, including a "buy-out remedy" in the case of a failure by NEWA to pay its share of specified expenses. Broadly, the buy-out remedy permits Shell, or Shell and Osaka, to buy out NEWA's interest in the Crux resource at a [redacted] discount to the "appraised value" of that interest as agreed or assessed by an expert, less the amounts by which NEWA was in default. The parties to the joint operating agreement also have pre-emptive rights in respect of a transfer of any party's interest. Subsidiaries of Nexus also hold certain exploration assets.
4. The consolidated audited financial reports for the Nexus Group for the half year ended 31 December 2013 recorded that Nexus then had a net deficiency of current assets in the order of nearly AUD 47 million (Preston 26.6.14 [42]).
5. The Shareholders point out that, in the second half of 2013, a non-executive director of Nexus was also the managing director and chief executive officer of an entity within the Seven Group and, at that time, Nexus had a facility in place from a third party lender. In February 2014, the Seven Group made a conditional proposal to acquire the shares in Nexus at 5¢ a share (Ex A12, App F, Ex R6). The Nexus board also made efforts to explore refinancing and other alternatives prior to entry into agreements with SGH2 reached in March 2014.
6. A proposal for a scheme of arrangement between Nexus and SGH2 was announced on 31 March 2014, which provided for SGH2 to acquire the shares in Nexus for 2¢ per share (Preston 26.6.14 [39]). Part of that proposal involved NIH replacing Nexus' senior lenders and a majority of unsecured debt funders and providing working capital to Nexus and its subsidiaries, including a bridge loan facility of AUD 40 million. At that time, SGH2 also agreed to acquire about two-thirds of subordinated loan notes issued by Nexus, and the acquisition of two-thirds of those notes was completed in April 2014. NIH thereby became the lender to Nexus under a senior facility, which is secured against the assets of Nexus Vic P54 (which, as noted above, holds the interest in Longtom) and against the shares in Nexus' operating subsidiaries. NIH also provided a bridge facility to Nexus Vic P54 which has not been drawn down, and now also holds approximately 60% of the subordinated loan notes issued by Nexus.
7. Nexus Vic P54's interest in the Longtom project was valued by Deloitte in May 2014, in connection with the proposed scheme of arrangement, at AUD 77.5 million, NEWA's interest in Crux was valued by Deloitte at AUD 180 million and its exploration assets were valued by Deloitte at AUD 23.8 million (Ex A1, 2/670; Ex A3, 2052). Those valuations were not admitted as evidence of the fact. However, as the Deed Administrators point out, those valuations are now publicly available and are very likely to influence the range of prices that a potential purchaser would pay for the interests of Nexus Vic P54 and NEWA respectively in the relevant projects.
8. The proposed scheme of arrangement was not approved at a scheme meeting held on 12 June 2014. On 24 June 2014, NIH served an Acceleration Notice which had the effect that the secured monies under the senior debt facility became due and payable by Nexus. Nexus' funding commitments were then in the order of AUD 165 million. The present Deed Administrators were appointed as joint and voluntary administrators of Nexus in June 2014. Commitments under the bridge facility were also cancelled by NIH following the appointment of voluntary administrators and the trustee for noteholders advised that that appointment was an event of default under the Note Trust Deed.
9. NIH provided further funding to the Deed Administrators in late June 2014, which was the subject of orders and directions made by the Court on 27 June 2014, and the terms of that funding were subsequently amended in October 2014 and again in November 2014. As at 21 November 2014, approximately AUD 36 million had been drawn down by the Deed Administrators under the Administrator Funding Agreement and was repayable on 30 November 2014 (Caddy 21.11.14 [10]). The termination date of that facility was subsequently extended to the earliest of several dates, one of which was 5pm (Sydney time) on 22 December 2014.
10. The voluntary administrators subsequently sought proposals in respect of Nexus, its subsidiaries and assets, in a process to which I refer below. The only proposal received was a DOCA proposed by SGH2. The voluntary administrators' report under s 439A of the Corporations Act, issued to creditors on 4 August 2014 (Ex A4) (and admitted only for proof of the fact of the report and not for proof of its contents), was accompanied by an expert report of Lonergan Edwards dated 4 August 2014, which concluded that creditors would achieve a better result under that proposed DOCA than in a liquidation of Nexus. That report also expressed the view that the realisable value of Longtom on a liquidation basis was AUD 40 - 60 million; the realisable value of Nexus' interest in the Crux project was AUD 40 - 80 million; and unsecured creditors would receive a return of between 5¢ and 34¢ in the dollar in a liquidation, implying that the equity in Nexus had no value (Ex A4, 3092, 3095). I recognise that that evidence is not evidence of the fact. Again, as the Deed Administrators point out, that report is now publicly available and is also likely to influence the prices that a potential purchaser would pay for the interests of Nexus Vic P54 and NEWA in Longtom and Crux respectively.
11. A DOCA was approved at a creditors' meeting on 11 August 2014 and executed on 22 August 2014 (Caddy 17.10.14 [27] - [28], [30], Ex A5 1/1). The DOCA provides that SGH2 will pay the amount due to NIH, in the order of $82.6 million as at 31 October 2014, including the amount due under the Administrator Funding Agreement in full. That aspect of the DOCA is an intra-group transaction, so far as the Seven Group is concerned. SGH2 will also pay 74.5¢ in the dollar for principal and interest accrued under the notes of relevant noteholders other than NIH and will pay an amount due to Sedco under a settlement agreement with it. The DOCA also provides for SGH2 to pay any employee priority claims in full; pay an amount which is expected to be sufficient to pay trade creditors in full; and for the transfer of all ordinary shares in Nexus to SGH2 for no consideration payable to shareholders. Plainly, features of the DOCA are beneficial to creditors, at least by comparison with the result of liquidation as estimated in the s 439A report (which I again note was not proved as a fact by the tender of that report). That conclusion is supported by the affidavit evidence of the Deed Administrators (Caddy 21.11.14 [13], Preston 21.11.14 [4]) and by the objective evidence of Nexus' present financial position to which I will refer below. Whether the transfer of the shares in Nexus to SGH2 contemplated by the DOCA was prejudicial, or unfairly prejudicial, to shareholders in Nexus depends, inter alia, on the value of their shares in a liquidation of Nexus. That transaction is at least prejudicial to shareholders if those shares have a residual value.

The applicable legal principles

1. Section 444GA of the Corporations Act provides that the administrator of a deed of company arrangement may transfer shares in a company if the administrator has obtained the written consent of the owner of the shares or the leave of the Court. An application for such leave may be opposed by, inter alia, a member of the company. Section 444GA(3) of the Corporations Act in turn provides as follows: "(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."
2. The concept of "unfair prejudice" adopted in s 444GA(3) is also used in other provisions in the Corporations Act and was described, for example, by Sackville J in Australian Securities Commission v Bank Leumi Le-Israel (1995) 134 ALR 101 at 152 as follows: "The fact that a person is prejudiced by an order does not establish, of itself, that the order is unfair: Waldron v M G Securities (Australasia) Ltd [1975] VR 508 (SC(Vic)/Pape J), at 532; Gjergja & Atco Controls Pty Ltd v Cooper [[1987] VR 167], at 173-74, per McGarvie J, at 218-19, per Ormiston J. It is also not necessarily the case that if an "innocent person" is prejudiced by an order, that prejudice is unfair: Gjergja & Atco Controls Pty Ltd v Cooper, at 174. Whether it is or not may depend upon whether the order is essential to give effect to the relevant legislative policy and whether evidence is presented as to the precise nature of the prejudice said to have been suffered." The Deed Administrators rely on the last sentence in that observation to support their submission that the Shareholders bear an evidentiary onus to establish the facts relevant to any prejudice on which they rely.
3. The Shareholders submit that s 444GA of the Corporations Act is a "rather extraordinary provision", to the extent that it confers the power to transfer shares to a third party on a person who is not the owner of those shares, without the owner's consent, and the section should be approached on the basis that the legislature is presumed not to have intended for the disposition of vested proprietary interests without adequate compensation. It seems to me that the provision should be understood in the context that provisions for the compulsory transfer of shares have long existed in the companies legislation, both in respect of schemes of arrangement and takeovers, and the significance of shareholders' proprietary rights in their shares are recognised by the wider concept of "unfair prejudice" in s 444GA(3) of the Corporations Act.
4. The Shareholders also submit that s 444GA(1) does not authorise the transfer of shares other than for valuable consideration: "save in circumstances where the Court is positively satisfied to a high degree of certainty that the shares are in fact valueless on any valuation approach." That submission seems to me to read limitations into the provision that do not appear on its face; to be inconsistent with its statutory purpose and the authorities to which I will refer below; and to give insufficient weight to the fact that the concept of "unfair prejudice" must be determined, not with a single-minded focus upon the interests of the shareholders, but also with reference to the purposes of Pt 5.3A of the Corporations Act and the other interests affected by an administration. The Shareholders also submit that the Court would not make an order under the section where there is a "serious" or "bona fide" dispute, or a serious question to be tried, as to valuation. I also do not accept that submission, which seems to me not to give sufficient weight to the Court's obligation to determine the matter specified in s 444GA(3) of the Corporations Act, whether a transfer "would not unfairly prejudice" the members' interests, by reference to the usual principles for determination of contested factual matters. I will refer to matters which may be relevant to whether the Court is satisfied of that matter and to the exercise of its discretion under s 444GA of the Corporations Act below.
5. The principles applicable to the exercise of the Court's powers under s 444GA of the Corporations Act have been considered in decisions including Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301, Lewis, in the matter of Diverse Barrel Solutions Pty Ltd (subject to a Deed of Company Arrangement) [2014] FCA 53; Re BCD Resources (Operations) NL [2014] VSC 259; (2014) 100 ACSR 450 and Re Mirabela Nickel Ltd (subject to Deed of Company Arrangement) [2014] NSWSC 836. The Shareholders particularly point to the observations of Martin CJ in Weaver v Noble Resources Ltd above at [67] - [68], where his Honour noted that one of the purposes of the section was to address the risk that an "opportunistic creditor" might acquire shares in a distressed company which retained residual equity, although that company was insolvent on a cashflow basis.
6. In Weaver v Noble Resources Ltd above, Martin CJ also undertook a detailed review of the history of s 444GA of the Corporations Act, which I adopted in Re Mirabela Nickel Ltd above and which I again gratefully adopt. The section was introduced into the Corporations Act by the Corporations Amendment (Insolvency) Act 2007 (Cth) with effect from 31 December 2007 and adopted a recommendation made in a report of the Legal Committee of the Companies and Securities Advisory Committee ("CAMAC") on Corporate Voluntary Administration (June 1998) that the law should grant deed administrators the ability to compulsorily sell company shares where necessary for the purposes of implementing a deed of company arrangement under which payment of creditors' debts was dependent upon such a transfer occurring (Recommendation 42, para [6.75], noted in Weaver v Noble Resources Ltd above at [65]-[71]). The Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 in turn noted (at [7.53]) that, prior to the introduction of the section, there was some uncertainty as to whether deed administrators had the power to transfer shares without the holder's consent, and the weight of authority was against such a power. The Explanatory Memorandum noted (at [7.54]) that the purpose of the section was to enable a deed administrator to transfer shares in the company without the consent of shareholders where such a transfer was necessary for the success of the deed. The Explanatory Memorandum also noted (at [7.58]) that: "The Court may only grant leave if it is satisfied that the sale would not unfairly prejudice the interests of shareholders. This is intended to direct the Court to consider the impact of a compulsory sale of shareholders [sic] where there may be some residual value in the company."
7. In Weaver v Noble Resources Ltd above, Martin CJ also noted (at [67], [70]-[71]) that the limitation in s 444GA(3) of the Corporations Act that the Court may only grant leave for a transfer of shares under this section if it is satisfied that the transfer would not unfairly prejudice the interests of members reflects the view expressed in the CAMAC report that the possibility of prejudice to a shareholder would arise if there were some residual equity in the company. His Honour also observed (at [78]-[79]) that: "The expression "unfairly prejudicial" was also considered in the case of Gjergja v Cooper [1987] VR 167 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. [173]" … 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." His Honour also noted (at [80]) that something more than a mere transfer of shares without compensation would be necessary to establish unfair prejudice. In Lindholm v Tsourlinis Distributors Pty Ltd [2010] FCA 1488 at [9]-[10], Finkelstein J took a similar view to that taken by Martin CJ in Weaver v Noble Resources above.
8. In Lewis, in the matter of Diverse Barrel Solutions Pty Ltd above, White J noted (at [19]) that the terms of s 444GA(3), in focusing on the concept of "unfair prejudice" to shareholders, contemplated that a transfer of shares may result in some prejudice to the interests of shareholders and that: "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." His Honour there held that a transfer of shares involved no unfair prejudice where those shares had no residual value and the shareholders would not receive any return on a winding up.
9. In Re Mirabela Nickel Ltd above at [40], I noted that the approach adopted in Weaver v Noble Resources above is consistent with that adopted by the courts in respect of the similar concept of unfair prejudice used in s 445D of the Corporations Act, where the question whether a deed of company arrangement gives a class of creditors less than they would receive in a liquidation is highly material to whether unfair prejudice to creditors is established: Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48; 22 ACSR 169. Mr Simpkins, who appears with Mr Holmes for the Deed Administrators, also draws attention to my observation in Re Mirabela Nickel Ltd above that the question whether shareholders have any residual in a relevant sense "has to be determined by comparison with their position on a winding up, at least where that is the likely or necessary consequence of the transfer of shares not being approved". That determination is less straightforward, of course, where, as I will note below, a winding up of Nexus will not necessarily have that consequence for its operating subsidiaries.
10. There are some similarities and several differences between the situations considered in the cases to which I have referred above and the issues arising in this case. In Re Diverse Barrel Solutions Pty Ltd above, the proposed transferee of the shares was also a substantial lender to the company, and the proposed transferee of the shares in Nexus, SGH2, is here an entity associated with NIH. None of those cases involved complexities of valuation of the scale involved in this application. I also do not understand any of those decisions to involve a situation, as in this case, where a holding company was subject to a deed of company arrangement, but the operating subsidiaries were operating under financing arrangements that presently preserved their solvency and remained under the control of their directors, and would not inevitably pass into liquidation on the liquidation of Nexus. Those decisions also did not involve, or at least did not address, a further complexity which arises in this case, where a possible outcome of a liquidation of Nexus is that, rather than its operating subsidiaries being placed in liquidation, NIH could appoint a receiver which could exercise security rights over their shares and the Longtom assets in a manner that would avoid their liquidation, in order to maximise the value of the underlying assets.
11. The Shareholders in turn submit that a two stage process should be adopted for the grant of leave under s 444GA(3) of the Corporations Act, although they note that courts which have previously considered that section have not specifically adopted that process. At least at some points in their submissions, they accepted that s 444GA(3) of the Corporations Act will not prevent the Court approving a transfer of shares where there is no identifiable "prejudice" to members, including where shares have no "residual value" to members or where a liquidation, without a foreseeable distribution to members, is the only alternative for the proposed transfer: Weaver v Noble Resources Ltd above at [79]. (I note that they may have retreated from that submission in closing submissions.) At least at some points in their submissions, they also accepted that whether any "prejudice" is "unfair" for the purposes of s 444GA(3) of the Corporations Act must be determined in the circumstances of the case and having regard to the policy of the legislation: Re Diverse Barrel Solutions Pty Ltd above at [19]. They also submitted, correctly, that one circumstance where a transfer of shares may well give rise to "unfair" prejudice is where a distribution might have been made to members on an immediate winding up or the contribution of funds by members might have in turn allowed them to increase the value of the shares: Weaver v Noble Resources Ltd above at [76]; Re BCD Resources (Operations) NL above at [57] - [62]; Re Diverse Barrel Solutions Pty Ltd above at [19].
12. The Deed Administrators accepted, in closing submissions, that they bear the legal onus of proving that the discretion to allow the share transfer should be exercised in their favour. They submitted, by analogy with s 31(2) of the Limitations of Actions Act 1974 (Qld), considered in Brisbane South Regional Health Authority v Taylor [1996] HCA 25; (1996) 186 CLR 541, that there is an evidentiary onus on the Shareholders to raise any consideration telling against the exercise of the discretion, but the ultimate onus of satisfying the Court that the discretion should be extended remains on the Deed Administrators. I broadly accept that proposition, with the qualification that, in the present case, the section requires not only (in s 444GA(1)) that the Deed Administrators satisfy the Court that the discretion to grant leave should be exercised in their favour, but also that they satisfy the Court of the matter specified in s 444GA(3), namely that "the transfer would not unfairly prejudice the interests of members of the company".
13. The Shareholders also accepted, in closing submissions, that an evidentiary onus as to particular issues may shift to them, while emphasising, correctly, that the Deed Administrators retain the onus of establishing that the transfer of the shares is not unfairly prejudicial to their interests and that the relevant discretion should be exercised in the applicant's favour. However, the Shareholders also submitted that the Court can only be satisfied of that matter on the standard set by Briginshaw v Briginshaw (1938) 60 CLR 336. I do not accept that a compulsory transfer of shares has the gravity of, for example, of finding a fraud or misconduct or that any different standard should be applied to determining the requirements of s 444GA of the Corporations Act than to determining whether, for example, to approve a scheme of arrangement which might result in the appropriation of some shareholders' interests over their opposition.
14. The substance of the Deed Administrators' case is that there is no "unfair prejudice" to shareholders in the proposed transfer of shares, because they would not obtain a better return for their shares in a liquidation of Nexus than under the DOCA - which requires, in effect, that they would receive no return in a liquidation - and that the Company's creditors would achieve a worse result under a liquidation than under the DOCA. (I have here corrected a misprint in the corresponding paragraph of my earlier summary of judgment, which had incorrectly referred to the DOCA rather than to liquidation in the phrase "return in a liquidation".) The Deed Administrators also submit that any prejudice as might exist is not "unfair".
15. On the other hand, the Shareholders submit that, in this case, the value of the shares has not been proved to the level necessary to establish that there is no "unfair prejudice" to shareholders, or that the Court should alternatively be satisfied that the value of the shares is such that the members retain a "residual equity" in Nexus, which would be destroyed as a result of the transfer, in a manner that would be unfair within the meaning of s 444GA(3) of the Corporations Act: Re Diverse Barrel Solutions Pty Ltd above at [19]; Weaver v Noble Resources Ltd above at [68]. The Shareholders alternatively submit that the Court should exercise its discretion to withhold approval for the transfer under s 444GA of the Corporations Act, although they acknowledge that 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.

The lay and valuation evidence

1. The Deed Administrators relied on lay evidence and they and the Shareholders each relied on expert valuation evidence in the proceedings. In particular, the Deed Administrators relied on affidavit evidence of two of the Deed Administrators (who were each cross-examined), and evidence of Mr Lagogiannis, an executive of Gresham Investment House ("Gresham"), in respect of the sale process undertaken by that entity on behalf of the Deed Administrators in respect of Nexus' assets. The Deed Administrators also led evidence of a consultant to Nexus, Ms Secker, in relation to the capital requirements of the Longtom project.
2. The Deed Administrators relied on a valuation report of Mr Edwards (Ex A12) and a report of Mr Edwards, partly in reply and partly expanding on his primary report (Ex A13). Mr Edwards' report expanded on the matters set out in an earlier explanatory statement issued on 31 October 2014 by the Deed Administrators in respect of the proposed transaction. Mr Edwards' report in turn relied on a report prepared by Mr George and Mr Duncan of Gaffney Cline & Associates ("GCA") (Ex A9) and the Deed Administrators also relied on their reply report (Ex A10). The Deed Administrators also sought to rely on the expert report of a second valuation expert, in respect of discount rates, in reply, but I did not grant them leave to do so for reasons indicated in a separate judgment. In their Summary of Contentions, the Shareholders identified numerous criticisms of Mr Edwards' report, by reference to his comparable transactions analysis, the adequacy of the sales process, the discount rate applicable to Crux and Longtom, the assumed development path for Crux, the reliance on GCA's report as to the value of Nexus' exploration assets, the treatment of the value of Longtom-5, the treatment of Nexus' royalty interest in the WA-424-P licence and the valuation of tax credits to a potential purchaser. As I will note below, the last of those criticisms cannot now be pursued, because the Shareholders rightly did not seek to lead the expert evidence on which it relied.
3. The Shareholders rely on a report of Mr Boardman dated 8 December 2014 (Ex R2), an expert valuation report of Mr Searby dated 8 December 2014 (Ex R3) and a further note of additional matters raised by Mr Searby (Ex R5). The Shareholders ultimately did not read an affidavit of Dr Rumble dated 9 December 2014 or rely on his report in respect of the "value" of tax losses available to Nexus.
4. I will refer to the detail of the expert evidence below. However, in dealing with that evidence, I have had regard to the observations in Elkington v Shell Australia Ltd (1992) 10 ACSR 568 at 571 and on appeal at (1993) 32 NSWLR 11 at 21, to which NIH draws attention, that weight should be given to the "more mundane reality of the marketplace" where valuation evidence reflects "the evaluation of inherently uncertain matters and the making of fairly speculative assumptions in highly significant areas". That observation has particular weight where, as here, there is a high degree of uncertainty in the assumptions which the experts have made in significant matters, including future oil prices and development strategies for Crux, in respect of events which will not occur until many years in the future.

The position of interveners

1. A noteholder in Nexus, TOR, in its capacity as sub-advisor of TOR Asia Credit Master Fund LP, also led evidence and made submissions in the proceedings, having been granted leave to be heard under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW). TOR relied on the affidavits of Mr Schantz dated 21 November 2014 and its solicitor, Mr Vaatstra, dated 18 December 2014. Mr Vaatstra's affidavit in turn exhibited a letter dated 9 December 2014 from the solicitors for Sedco, although that letter was (as Mr Newlinds, who appeared with Ms Wright for the Shareholders, pointed out) largely directed to the prejudice that Sedco considered that it would or did suffer as a result of an earlier adjournment of the hearing on the Shareholders' application and has little weight in respect of the matters now in issue in this application.
2. TOR had a substantial interest in the proceedings, so far as it was owed in excess of AUD 32m, including accrued interest by Nexus, and supported the Deed Administrators' application for leave. TOR's submissions also recorded the fact that other creditors of Nexus, namely Sedco and Samuel Terry Asset Management ("STAM"), supported the Deed Administrators' application. TOR pointed out that each of it, Sedco and STAM were sophisticated investors and had given careful consideration to the DOCA before adopting that position (Schantz 21.11.14 [5] - [10], [26] - [29]). TOR submitted that its loss under the DOCA would be significantly less than the loss which it was likely to suffer if Nexus was wound up (Schantz 21.11.14 [15]).
3. TOR submitted that, as a matter of commercial reality, there was no alternative commercial proposal to the DOCA and that the Shareholders, who would receive no consideration under the DOCA, were "understandably willing to take their chances" on hypothetical scenarios that might or might not arise in the future if the DOCA failed. TOR also pointed to other matters which were adverse to the value of Nexus' assets, including the fact that sales to Santos in respect of gas and condensate produced at Longtom were benchmarked to the Brent oil price, which had dropped by nearly 50% since June 2014 and was forecast to remain at lower levels throughout 2015. TOR also emphasised the extent of previous sale processes which had been adopted in respect of Nexus assets, to which I will refer below, and to the level of offers made in respect of those assets in circumstances that Nexus was not in external administration. TOR also pointed, with some force, to the fact that although the Shareholders contended that SGH2's offer under the DOCA involved a gross undervaluation of Nexus' assets, they had not put any competing proposal to compete with that proposal, nor had any third party done so despite media and specialist coverage of Nexus' position.
4. NIH also made brief written and oral submissions that supported the Deed Administrators' position.

The value of shares in Nexus in a liquidation of Nexus ("scenario 2")

1. Both experts addressed the value of Nexus under "scenario 2" which, broadly, involved a liquidation of Nexus. Mr Edwards' evidence was that his valuation of Nexus under "scenario 2" was derived by adjusting his going concern valuation (undertaken in his "scenario 1", to which I refer below) by applying any applicable discounts or adjustments having regard to the factual circumstances and funding requirements and risks of Nexus (Ex A12, [7]). Mr Searby indicated that he had assumed that this scenario represented a liquidation scenario, in which the assets of Nexus were sold and the proceeds used to satisfy its liabilities (Ex R3 [2.1] - [2.2]). I will first address the question whether a valuation on the basis of "scenario 2" is more appropriate than a valuation on a going concern basis under "scenario 1" and then address the approach adopted by Messrs Edwards and Searby to that value.
2. Mr Edwards' evidence is that that he considers that the correct valuation approach for Nexus, in its present circumstances, is that undertaken under "scenario 2" rather than a "going concern" valuation under "scenario 1", on the basis that the latter valuation disregards the financial difficulties experienced by Nexus and assumes that immediate ongoing funding is available to Nexus, does not take into account the fact that Nexus is in administration and does not currently have funding in place to meet its capital commitments, and therefore overstates the realisable value of Nexus' assets in the absence of the DOCA (Ex A12, [187] - [188]). Mr Edwards also points to several matters which he identifies as relevant to his valuation under scenario 2, including that the Longtom project is not expected to be cash positive until FY 16, on the commencement of production from Longtom 5; that the upfront development costs associated with the Crux project are very high and that Nexus does not have any funding in place to meet those costs in the absence of the DOCA; that the Longtom agreement could be terminated by Santos or Nexus' interest in the Crux project could be diluted or acquired by Shell and Osaka at a discount to market value if Nexus fails to meet its commitments in respect of those projects; and that NIH, as secured lender, would be free to exercise rights available under the relevant facilities if the DOCA is not approved (Ex A12, [171]). I will refer to the evidentiary basis for these matters below. I am persuaded by Mr Edwards' evidence that these matters, particularly when taken as a whole, tend strongly against the adoption of a "going concern" valuation for Nexus, particularly one that assumes (as does "scenario 1") that immediate ongoing funding is available to Nexus.
3. The Deed Administrators' evidence demonstrated the extent of Nexus' present financial commitments and the limits to its ability to meet those commitments from its own resources. The administrators expressed the view in their report under s 439A of the Corporations Act, issued to creditors on 4 August 2014, that Nexus has been insolvent since 12 June 2014 after the bridge facility provided to Nexus Vic P54 by NIH was withdrawn when the scheme of arrangement was not approved by its shareholders (Caddy 17.10.14 [23]). Mr Preston's evidence is that the Longtom agreement requires Nexus to undertake capital expenditure to drill one Longtom well and work over another and requires extra payments to be made by Nexus if those works are not completed, and that obligation is secured under a letter of credit in favour of Santos with a face value of AUD 60 million, which may be drawn down by Santos if Nexus Vic P54 does not meet those obligations (Preston 26.6.14 [21], [25]). Mr Preston also identifies the risk that a failure by Nexus Vic P54 to honour those obligations would be treated by Santos as a breach or repudiation of the Longtom agreement, exposing Nexus to damages for breach of contract. Nexus had a negative cashflow from operating activities in excess of AUD 3.7 million for the quarter ended 31 March 2014 (Preston 26.6.14 [43], Ex A3, p 1928). As at 26 June 2014, the date of the administrators' appointment, trade creditors identified by the administrators were owed in excess AUD 700,000 and Nexus' cash at bank was in the order of AUD 1,200,000 million (Preston 26.6.14 [46] - [47]). There is evidence that Nexus' operating subsidiaries are to a substantial extent dependent on it for financial support. Prior to the administrators' appointment, Nexus had advanced funds to its subsidiaries for payment of their expenses on an "as needed" basis and the books and records of Nexus record intercompany loans owed by those subsidiaries to Nexus of nearly AUD 400 million (Preston 26.6.14 [51]). At the date of the administrators' appointment, Nexus Vic P54 also had overdue payments or payments due by 30 June 2014 in excess of AUD 5 million and current cash at bank of approximately AUD 1 million, with its sole source of cash generation being invoices to the counterparty to the Longtom project, Santos, in respect of the Longtom project, and Santos had withheld payment of AUD 5.7 million payable to Nexus Vic P54 on 13 June 2014, asserting that Nexus Vic P54 owed amounts to it such that it was not obliged to make the relevant payment (Preston 26.6.14 [55]; [60]).
4. Mr Preston's evidence was also that, in the period from the administrators' appointment to September 2014, the liquidity of Nexus and its active subsidiaries was insufficient to meet its expenses as and when they fell due and that, without immediate funds from alternative sources, Nexus' active subsidiaries would be insolvent (Preston 26.6.14 [75]). While the insolvency of the subsidiaries of Nexus was averted by the terms of financing arrangements reached as between the Deed Administrators and NIH, which were approved by the Court in late June 2014, the position arising from those arrangements does not seem to me to be one that could fairly be characterised as such that Nexus was a "going concern", to support a valuation on that basis.
5. For reasons to which I now turn, it seems to me that a liquidation of Nexus is the probable result of the termination of the DOCA, at least in the absence of any more favourable proposal which has not yet been foreshadowed by any party, and that liquidation or receivership is the likely result in respect of Nexus' subsidiaries in that event. I have referred to Nexus' financial position prior to the administrators' appointment, its funding arrangements and the terms of the DOCA above. As at 31 October 2014, Nexus had a net deficiency of current assets in the order of AUD 231.6 million; net non-current assets in the order of AUD 301.6 million; and net assets in the order of AUD 70 million, and its current liabilities included short-term borrowings as at 31 October 2014 in the order of AUD 213 million which had increased to approximately AUD 222 million by 11 December 2014 (Caddy 11.12.14 [13] - [16]). Mr Preston was cross-examined about the extent to which money committed by NIH to the Deed Administrators had been drawn down, and it appears that significant fees have been paid by the Deed Administrators to NIH in respect of commitments of monies that were ultimately not required, as well as for the extension of the terms of the facilities. In particular, additional funding of AUD 135 million was made available at the beginning of October 2014, in anticipation of capital commitments in relation to Longtom and Crux (T12 - 13), which were ultimately not required to be expended. I did not understand Mr Newlinds to put to the Deed Administrators in cross-examination, and it seems to me that there is no evidence to support, any criticism of the Deed Administrators in that regard and it does not seem to me that anything else turns on the point, given the level of Nexus' borrowings before the relevant fees were incurred.
6. The evidence of the Deed Administrators is that, if the amounts due under the Administration Funding Agreement are called, then the Deed Administrators will call a meeting of creditors and recommend that Nexus go into liquidation, in the absence of a more favourable proposal (Caddy 21.11.14 [13], Preston 21.11.14 [4]). In his first affidavit, Mr Caddy expressed the view that, if the conditions precedent to the DOCA were not satisfied and it was necessary to convene a further meeting of creditors, and in the absence of any other proposal and in the light of Nexus' insolvency, the only future for Nexus was a liquidation in which creditors would receive a lower return than they would under the DOCA and shareholders would not receive any return (Caddy 17.10.14 [74] - [75]). Mr Preston expressed his agreement with that view in his second affidavit (Preston 21.11.14 [4]). In his affidavit in reply, Mr Caddy gave evidence of Nexus' financial position as at 31 October 2014 and indicated that he continued to hold the view that, if the conditions of the DOCA were not met, and absent any other proposal, the only option for Nexus would be liquidation and the return to creditors would be lower in that scenario than if the DOCA were implemented (Caddy 11.12.14 [19]).
7. Given the level of Nexus' current debt, and its current assets, it seems inevitable that Nexus would be placed in liquidation at a further meeting of creditors called after the failure of the DOCA. It does not necessarily follow that the operating subsidiaries would then be placed in liquidation. A resolution or order for the winding up of Nexus would constitute an Event of Default under cl 9.1(k) of the Administrator Funding Agreement, which would permit NIH, under its general security agreement and specific security agreement, to appoint a receiver or receiver and manager over the relevant secured property. Mr Preston accepted in cross-examination that, if NIH did not continue funding, then Nexus would pass into liquidation, and that it is more likely than not that NIH would appoint a receiver over the assets and undertakings of Nexus, or at least the secured assets, and that it was uncommon for a secured creditor to leave a liquidator to deal with secured assets, rather than putting in its own receiver to do so (T20). He also accepted that the receiver was likely to seek instructions from NIH as to whether it would fund the ongoing operations of the business of the subsidiary companies (T21). However, Mr Preston's evidence was that, in the event of a receivership, the receiver might well conduct a sale process of the shares in the subsidiary companies and, if Seven made an offer for the shares, execute the relevant sale, after investigating the level of interest that had been expressed by third parties in the asset, the funding available to maintain the asset to facilitate a sale process, and the sale processes that have been run to date (T21). It seems likely that NIH would then appoint receivers to the Longtom assets and the shares; that is a matter of inference since, although NIH was heard in the proceedings under r 2.13 of the Supreme Court (Corporations) Rules, it did not lead evidence as to its intentions in that regard. The Deed Administrators also point to the probability that a failure to meet expenditure obligations in respect of Longtom, in a liquidation of Nexus, could amount to a repudiation of the agreements with Santos, although that depends upon whether, for example, NIH as secured creditor would fund the performance of those obligations to preserve the value of the Longtom asset.
8. The Shareholders submit that the possibility that Nexus or its subsidiaries will pass into liquidation on termination of the DOCA has not been established by the Deed Administrators because they have not called relevant officers of NIH to establish that it would not continue to fund Nexus or its subsidiaries. I do not accept that submission. First, the Deed Administrators have given evidence, which I accept, of their assessment of the likely outcome of the termination of the DOCA. Second, the Court can have regard to the objective facts of Nexus' position, to which I have referred above, to draw that inference. Third, as Mr Simpkins points out, the officers of NIH cannot be said to be in the Deed Administrators' camp so as to support any inference arising from their not having been called, both because the Deed Administrators occupy a role which requires that they maintain continued independence from NIH as a secured creditor of Nexus and because, as borrower and lender, Nexus and the Deed Administrators on the one hand and NIH on the other are in some respects in different interests, albeit they also share a common interest in the success of the DOCA.
9. The Shareholders also point to a range of possible alternatives on termination of the DOCA, including the possibility that SGH2 might propose a more favourable deed of company arrangement; that the DOCA being varied to provide for SGH2 to purchase all of the assets of the subsidiaries but not the shares in Nexus; or the DOCA might terminate and NIH appoint a receiver to Nexus and fund that receiver to allow the business of the Nexus Group to continue as (in the Shareholders' submission) a "going concern"; or Nexus might be placed in liquidation with NIH funding the subsidiaries to allow them to continue as (in the Shareholders' submission) "going concerns"; or the DOCA might terminate with Nexus and its subsidiaries being placed in liquidation without such funding. It seems to that the first three scenarios, involving a proposal for an amended DOCA or the purchase of assets without a purchase of the shares in Nexus are speculative, in the sense that no such amendment proposal has been put and there is no evidence to suggest that it would be put. I have addressed the evidence as to the position if a receiver was appointed to Nexus, or its subsidiaries above. A situation where Nexus is placed in liquidation does not seem to me to be properly described as a "going concern" scenario, even if NIH were then to provide some funding to the liquidator or the subsidiaries as the Shareholders hypothesise. In particular, potential purchasers of assets of Nexus are not then likely to approach that situation as though they were dealing with a solvent company with ongoing funding sufficient to meet its ongoing needs. The Shareholders also submit that SGH2 and NIH would act in a commercially rational manner. However, making that assumption, the proposition that NIH's commercial interests would be served by meeting the substantial capital requirements of Nexus in the short and middle term, in circumstances that SGH2 had not acquired ownership of the relevant shares, rather than appointing a receiver so as to bring about repayment of its loans from a sale of the secured assets, seems to me to be a matter of speculation, not a prospect established by the evidence.
10. Both parties' expert evidence and submissions were generally directed to the position where, to quote paragraph 25 of the Deed Administrators' written closing submissions, "the assets of Nexus are sold and the proceeds used to satisfy liabilities". The assets of Nexus are its shares in its subsidiaries, whereas the parties' evidence generally addressed the likely outcome in respect of the sale of the assets of those subsidiaries, in a manner that tended to treat those assets of the subsidiaries as if they were assets of Nexus. The experts retained by the Deed Administrators and Shareholders respectively each prepared valuations under two scenarios, the second of which was directed to a liquidation of Nexus, and tended to assume a liquidation of the operating subsidiaries, without specifically addressing the possibility of a receivership over the shares in those operating subsidiaries or the Longtom asset.
11. The Deed Administrators submit that the value which would be realised for Nexus' assets, if Nexus was placed in liquidation, depends on what prospective purchasers are willing to pay for those assets in an orderly sale process in a liquidation, which depends on their perception of the value of the assets and of what Nexus, as a forced seller, would be prepared to accept for them. That submission seems to me to require two qualifications, namely, that the relevant assets are held in the operating subsidiaries of Nexus, and not directly by Nexus and, second, that the value of the assets might also have to be determined in an alternative scenario, where receivers were appointed to the operating companies or their assets and sought to realise those assets, with the benefit of an indemnity from their appointor, NIH, and took all reasonable care to sell the assets for their market value, in accordance with their obligations under s 420A of the Corporations Act, and the proceeds of sale, to the extent that they are in excess of NIH's debt, were then distributed to Nexus. In the event, the evidence does not indicate that there is any difference between those outcomes in this case. Mr Simpkins also submits, with substantial force, that the value of Nexus' shares that would be realised in a liquidation does not depend on a notional "true" value or on the value that would be realised by a willing but not anxious seller and a willing but not anxious buyer in a situation other than liquidation (or, on the alternative scenario, other than liquidation and the appointment of a receiver to the operating subsidiaries).

Value of Crux under scenario 2

1. I now turn to the value of the assets of Nexus' subsidiaries on a liquidation of Nexus. The valuation expert called by the Deed Administrators, Mr Edwards, estimated the net realisable value of NEWA's interest in Crux as AUD 40 - 80 million under scenario 2 (Ex A12 [179]), which reflects a gross value of AUD 91 - 131 million having regard to restoration costs which would be incurred by the purchaser (Ex A12 [179], Ex A13 [81]). Mr Edwards reached that value on the basis that a sale would likely occur at a significant discount to the underlying value of the asset in a liquidation of Nexus (Ex A12 [178], Ex A13 [77]); that there was a wide difference in the offers previously received for Crux, the lowest being USD 33 million and the highest being USD 94 million (Ex A12, App F; Ex A13 [78]); and third party offers would now likely be adjusted downward because of the fact of liquidation (or, by extension, receivership) and a material fall in oil prices since the date of the earlier offers (Ex A13 [79]). It may not be entirely clear that a fall in the current oil price could be expected to have a significant impact in respect of a project which is not likely to produce gas or condensate until the years 2023 - 2025 at the earliest. However, I accept that significant volatility in the oil price may well be a matter that would be relevant to potential purchasers of NEWA's interest in Crux.
2. Mr Edwards' valuation relies on offers received by Nexus in the sale processes undertaken by Nexus and it is desirable to address a wider dispute as to the adequacy of earlier sale processes for the assets at this point. The explanatory memorandum for the proposed scheme of arrangement summarised steps that had been taken by the Nexus board, from October 2012, in order to seek to divest a tranche of Nexus' (or, more precisely, NEWA's) participating interest in the Crux joint venture and, from May 2013, to achieve a divestment of the Longtom project (Ex A3, p 1913). The Deed Administrators point out, after a process by which Nexus and its advisors approached a range of potential buyers or partners, ten of which were given data room access, it received two proposals in respect of Crux, which implied a value for Nexus' 15% interest in Crux of less than USD 100 million (CB 2/1367E). The Deed Administrators point out that Nexus sought to divest the Longtom project, receiving offers, some of which had a non-binding character, in February 2013, November 2013 and March 2014. The Deed Administrators also point to successive production outages at the Longtom project which have adversely affected that project and Nexus. The Shareholders submit that the sale processes conducted by Nexus since September 2012 were not for the whole of its assets and cannot be relied on as a reasonable estimate for the net realisable value of those assets or as a "check" on any other valuation approach. I do not accept that submission, since there is no reason to assume that the price offered for a major asset, sold separately, will be less indicative of its value than when all of a company's assets or its shares are sold at once.
3. Following their appointment, the then voluntary administrators engaged Gresham to conduct a sales process for the Nexus Group, its subsidiaries and/or their assets, which provided for final offers to be due on 30 July 2014 (Caddy 17.10.14 [17] - [19]; Lagogiannis 21.11.14 [2] - [3]; Ex A8A). A letter from Gresham dated 15 August 2014 (Ex 8A) set out the steps which had been taken by Gresham to review material available as a result of the earlier reviews of sell down strategies, refinancing strategies and potential acquisitions of Nexus; the preparation of marketing documentation and associated documentation; the identification of potential bidders; and the conduct of the sale process. That letter also summarised reasons provided by the parties which had been given access to the data room for not making an offer, which included concerns as to the risk profile of Longtom and the terms of its arrangements with Santos. The Deed Administrators point to the wide range of interested parties contacted in that process and feedback sought from potential purchasers, several of which referred to risks associated with the Longtom and Crux assets, and a smaller number of which referred to timetable constraints in the sale process. The Deed Administrators also point out that, as I noted above, that sale process generated only one offer, being the DOCA proposal from SGH2.
4. That sales process took place within a compressed timetable. A schedule attached to Ex 8A, which was contained in a larger version in MFI2, contained some references by potential purchasers to the limited time allowed for the sale process, within the context of a substantially larger number of comments addressed to issues as to the valuation and risk attached to the process or, in one case, a party observing that the assets did not fit with their strategy before noting that the timetable would not have worked for it. There is no evidence as to whether other entities that referred to timetabling concerns would have been potential bidders for the assets in any event.
5. One of the Deed Administrators, Mr Preston, accepted in cross-examination that "Seven" (or, more precisely, NIH), because of its ability to provide or not provide further funding, had an ability to control the timing of activities within the deed administration and that the conduct of the sales process required Seven's (or NIH's) agreement to a timetable and the provision of funding (16.12.14 T16). He did not, however, accept that the Deed Administrators would have preferred a longer timeframe for the sales process, and his evidence was that the Deed Administrators would have used the same timeframe for that sale process (T16). Mr Caddy, another of the Deed Administrators, also accepted in cross-examination that Seven (or, more specifically, NIH) was able to constrain the timetable in respect of the deed administration and the sale process, but also did not accept that he would have preferred a longer sale process (16.12.14 T28).
6. The Shareholders submit that the offers received by Nexus since November 2013 are not a complete summary of the offers received and cannot be relied on as a reasonable estimate for the net realisable value of the assets; and that the sales process adopted by the Deed Administrators in June 2014 was insufficient and allowed limited time and restricted access to documents. There seems to me to be little substance in the complaint as to limited access to documents, where any sales process at any time is likely to be constrained by the confidentiality obligations owed by Nexus at least to Santos and Shell. The Shareholders also attack the short time allowed for the sale process and Mr Newlinds referred to the several comments by potential purchasers as to the timing of the sale process, to which I referred above. It does not seem to me that those comments establish either that the sale process was objectively too short, and still less that the entities that made such comments would in fact have made substantive bids had the timing of that process been extended.
7. The Shareholders also rely on the absence of evidence of Mr Lagogiannis directed to an assessment of the "adequacy" of the sale process, as distinct from the fact of what occurred in it. It seems to me that, where Mr Lagogiannis gives evidence of the structure of the sale process, then the assessment of its adequacy is a matter that can properly be left to the Court, and I should not draw any adverse inference from the fact that he has not sought to give opinion evidence as to that matter. The Shareholders do not go further to establish any evidentiary basis for the proposition that, had a longer sales process taken place, any participant would in fact have made an offer for Nexus, its subsidiaries, Longtom or Crux, still less that that offer would or might have been made at a level that would permit Nexus to repay its creditors and restore value to the Nexus shares.
8. I have had regard to the question of the weight that can be placed upon the sales process, given the Deed Administrators' fair acknowledgement of the extent to which NIH had control, or at least significant influence, over that process, and particularly its timing, through its control of the funding of the Deed Administrators. In some circumstances, it seems to me that the influence of a secured creditor, which was associated with one of the purchasers, over the sale process adopted, including the time available for that sale process, might well be sufficient to lead a Court to conclude that it could place no reliance on the sale process or alternatively that it should decline to approve a transfer of shares under s 444GA of the Corporations Act in the exercise of its discretion. I have ultimately concluded that I can place reliance on the sale process in this case, because it commenced before the Deed Administrators had been appointed, under the control of Nexus' board, and with the involvement of external advisors. I have not neglected the fact that one of the directors on Nexus' board has, at relevant times, had an association with Seven Group. It seems to me that the evidence of the steps which have been taken to seek to realise value for the assets supports Mr Edwards' reliance on the sales process to derive a value for the assets under scenario 2.
9. On the other hand, Mr Searby values NEWA's 15% interest in Crux in scenario 2 at AUD [redacted] which, after adjustment for restoration costs of AUD [redacted], would amount to AUD [redacted] (Ex A13, [75]). Mr Searby developed a somewhat complex analysis of a value which a third party would pay for Crux (Ex R3 [4.69] - [4.71] and Appendix 5), based on the manner in which the third party would approach the existence of Shell's buyout rights in respect of Crux. Mr Searby's analysis of the possible price payable by a third party purchaser for the Crux project had regard to the fact that the purchaser is acquiring a minority stake in an illiquid asset and he applies a discount for "lack of control" and "lack of marketability" (Ex R3, [5.27]). There are several difficulties with that approach. The first, as the Deed Administrators point out, is that Mr Searby assumes in that analysis that Shell and a third party purchaser could anticipate what the other would pay, or at least what the other would value the asset at, and that Shell would value the asset at close to the going concern value which Mr Searby attributes to it of AUD [redacted] (Ex R3, A5.23). That assumption has the difficulty, to which Mr Edwards pointed in reply, that Shell's stated valuation of the asset (to which I will refer below) implies that Nexus' interest, on a going concern valuation, has a substantially lower value than Mr Searby's valuation (Ex A13, [84]). The second difficulty with that approach is that there is no reason to think that Shell, or any third party purchaser, would disregard the fact that NEWA was in liquidation or that receivers had been appointed, in determining the price which might be paid for the asset, or would seek to acquire it other than for the lowest price for which it could be acquired, or that Shell would exercise its rights under the relevant agreements if it anticipated that it could, for example, acquire NEWA's interest in the asset more cheaply in a direct purchase from a liquidator or receivers. The third difficulty with that approach is that it seems to me highly unlikely, as a matter of fact, that a potential purchaser for a substantial gas exploration asset in liquidation would reason in that manner which Mr Searby assumes, by deriving a discount for control and illiquidity from the discount for control in contested takeovers of solvent companies. The fourth difficulty with that approach is that, as the Plaintiffs point out, Mr Searby's approach to the liquidation value of Crux stands in stark contrast with third party offers in fact made for the asset, in February 2013, and prior to the appointment of the Deed Administrators and outside the compressed sale process adopted by them, in the range of USD 33 million to USD 94 million (Ex A12, Appendix F; Ex A13, [78]). The fifth difficulty with that approach is that there is no reason to think that Shell or a third party would simply disregard the Deloitte or Lonergan Edwards valuations of Crux in the public domain, to which I referred above, and offer multiples of those valuations as Mr Searby assumes. For all these reasons, I prefer Mr Edwards' approach to the valuation of Crux under scenario 2 to that of Mr Searby.
10. I should add, for completeness, that it does not seem to me that an issue which arose in respect of the valuation on a going concern scenario, in respect of the use of a smaller processing vessel for Crux, to which I will refer below, raises any uncertainty as to the liquidation value of Crux. There is no evidence that, and no particular reason to think that, a potential purchaser of Crux in a liquidation of Nexus or a liquidation or receivership of NEWA would alter the amount it was prepared to pay to purchase the asset because of the mere possibility that a smaller processing vessel could be developed, involving very substantial complexities and very substantial costs, as one of several means to seek to bring the project to completion, particularly where (as I will note below) Shell and not NEWA or the purchaser would likely determine the development strategy to be adopted for Crux.

Value of Longtom under scenario 2

1. Mr Edwards valued Nexus Vic P54's interest in Longtom, under scenario 2, at between nil and AUD 20 million (Ex A12, [185]). Mr Edwards' lower estimate of value for Longtom at nil reflected a negative net present value under scenario 2; his higher valuation had reference to a third party offer made in March 2014 of USD 49 million, which he adjusted downwards to reflect additional capital requirements for Longtom (Ex A12 [175]) on the basis that any offer now made would be lower than previous offers to reflect that increase in capital costs. Mr Edwards expressed the view that the sale processes were the best indication of likely value to be realised on liquidation (Ex A13 [28]) and that, after adjusting for that additional capital expenditure, any offer in a liquidation is unlikely to exceed AUD 20 million (Ex A13 [31]). I accept the substance of Mr Edwards' reasoning in this respect. It also seems to me that there is little utility, in a liquidation or receivership scenario, of addressing a theoretical valuation of Longtom or Nexus Vic P54 since a purchaser of the assets or the shares in those entities or in Nexus would likely engage in the same kind of due diligence process as earlier potential purchasers and would be expected, all things being equal, to reach similar values, before adjusting them downwards for the additional capital expenditures and the possibility that Nexus would be a forced seller in a liquidation or receivership. It is also likely, or inevitable, that a potential purchaser would have regard to the valuations attributed to Nexus Vic P54's interest in Longtom by the Deloitte and Lonergan Edwards' reports that are in the public domain.
2. I am conscious that Mr Edwards' liquidation value for Longtom is substantially less than his going concern value for Longtom, to which I refer below; however, Mr Searby himself accepted that a discount of 30% - 40% would be applied in a liquidation, although I have expressed reservations as to his approach below, and it is not surprising that a substantial exploration asset, requiring substantial capital expenditures, would create difficulties in realising full value in a liquidation or receivership.
3. On the other hand, Mr Searby valued Nexus VicP54's interest in Longtom, under scenario 2, at AUD [redacted]. Mr Searby had regard to the possibility that three parties "may" make bids for that interest in a liquidation, and observed that the offers made by the third party on which Mr Edwards relied may have been made "after distress had already been highlighted" (Ex R3 [3.41] - [3.42]). As Mr Edwards points out, that offer cannot have had regard to subsequent capital expenditure forecasts, which had not been identified at the time that offer was submitted.
4. Mr Searby's assessment of the value of Longtom (and also the exploration and royalty assets to which I refer below) under scenario 2 depends on his applying a 30% - 40% discount to his going concern valuation of those assets (Ex R3 [3.45]). The percentage identified by Mr Searby was not directed specifically to petroleum or gas assets, or petroleum or gas exploration assets, and appears to be asserted as a general rule, equally applicable to any kind of asset, irrespective of the level of risk attached to it. I am not persuaded by evidence of that generality, and it seems almost inevitable that a purchaser in a liquidation would have regard to matters such as the nature of the assets; the risk attached to them; the existence or absence of other potential purchasers for them; and the other matters that would normally affect the price to be paid for an asset in a competitive market, in determining the extent to which it would discount an offer made for the assets in liquidation. I am not persuaded by Mr Searby's evidence that such a discount is generally applicable in a liquidation, and Mr Searby offers no other basis to assess the value of those assets in a liquidation.

Value of other assets under scenario 2

1. Mr Searby attributed a value of AUD [redacted] to exploration assets and AUD [redacted] to royalty assets in scenario 2. Mr Edwards did not separately value exploration assets and royalty assets on the basis that they would be included in offers made by the purchasers to which he had regard. I accept Mr Edwards' approach to these assets, consistent with my accepting his reliance on the earlier offers for those assets as the most reliable indicator of their value under scenario 2.

Value of tax losses and PPRT credits

1. Mr Edwards does not allow any value for tax losses and PRRT credits for Nexus' interest in Crux (Ex A12, [180]). Mr Searby attributed a value of AUD [redacted] to tax losses and PRRT credits under scenario 2, in reliance on the evidence of Dr Rumble which has not been read by the Shareholders. Notwithstanding that that evidence was not led, the Shareholders submit that the tax losses would have a value to a purchaser such as SGH2 provided that Nexus has the same owners and the same control through the period from the start of the loss year to the end of the income year; or satisfies the same business test by carrying on the same business, entering into no new kinds of transactions and conducting no new kinds of business, and refer to Income Tax Assessment Act 1997 (Cth), s 165-5, summarising Subdivision 165-A, in that regard. The Shareholders also submit that the fact that Nexus is in voluntary administration does not affect those tax losses as long as its business carries on through the administration and after the DOCA when the losses are to be used. I will assume, without deciding, that those submissions are correct. However, the next step in the Shareholders' reasoning, namely that it is "commonplace for tax losses to be sold by a company in liquidation by the use of either a deed of company arrangement or a scheme" was not established by evidence, nor was the amount which may be paid by a potential purchaser for such losses established.
2. It seems to me that Mr Searby's valuation attributed to tax losses and credits cannot be sustained, because the evidence which underpinned it - and particularly evidence to allow any rational assessment of the value which a potential purchaser would allow for any tax losses given their inherent uncertainty, including their vulnerability to changes in the tax system - was not led. Mr Newlinds' decision not to lead that evidence was plainly correct, since it had emerged on voir dire that the evidence was based on an assumption that Nexus or its operating subsidiaries would have sufficient income to utilise the tax losses, which plainly could not be sustained. I also do not accept the Shareholders' further submission that, if the evidence of the value of those tax losses is "unsatisfactory", then they should be valued at face value, which seems to me to lead to the perverse result that those losses would be valued most highly if that value was unsupported by evidence . I also do not accept the Shareholders' alternative submission that the Deed Administrators have otherwise not proved the value of those tax losses, since Mr Edwards' evidence as to the risks attached to those tax losses provides a basis for not allocating value to them, in the absence of an evidentiary basis for a suggestion that a potential purchaser would take a different approach.

Conclusion - valuation under scenario 2

1. For the reasons set out in paragraphs 39 - 49 above, it seems to me that a valuation on scenario 2 should be adopted in preference to a valuation under scenario 1. (I have added this statement of my conclusion, which did not appear in this form in my earlier summary of my reasons, to make express the approach adopted in that summary). For the reasons set out in paragraphs 50 - 66 above, I prefer Mr Edwards' approach to the valuation of Longtom (and also the other exploration assets to which I referred above) and Crux under scenario 2 to that of Mr Searby. I am reinforced in this view by the fact that, as Mr Edwards points out, there is a stark contrast between Mr Searby's valuation of Nexus' shares at between [redacted] on scenario 2 and the last traded sale price of those shares, at 1.3¢ on 11 June 2014, particularly in circumstances where Nexus' debt has increased since that date and the oil price and market values of oil and gas companies have fallen since that date (Ex A13, [175]).

The value of shares in Nexus on a going concern basis ("scenario 1")

1. Each expert also prepared "scenario 1" valuations, which are broadly equivalent to going concern valuations. Mr Edwards described his "scenario 1" valuation as directed to a "fundamental going concern valuation of the assets, assuming non-distressed seller and buyer, in an arm-length's transaction, and assuming immediate ongoing funding was available to continue operations" (Ex A12 [7]), and Mr Searby adopted the same definition for Scenario 1 in his report (Ex R3 [2.1]). For the reasons which I have set out above in dealing with "scenario 2", it does not seem to me that Nexus and its subsidiaries can properly be characterised as either going concerns or as a non-distressed seller of their assets, even if, as the Shareholders contend, those subsidiaries would be placed in receivership or otherwise funded by NIH in the case of a liquidation of Nexus.
2. There were numerous differences of methodology between Mr Edwards and Mr Searby in respect of the valuations under scenario 1. The differences between Mr Searby's methodology and Mr Edwards' methodology involve a difference as to discount rate, which has an impact of AUD [redacted] on a discounted cash flow valuation; a difference as to the oil price to be applied which has an impact of AUD [redacted] on a discounted cash flow valuation; and a difference of AUD [redacted] reflecting differences as to the applicable development option for Crux. Mr Edwards accepted in cross-examination that aspects of those differences involved questions of judgement, and it follows that the valuation range for Crux, on a discounted cash flow valuation, may well be wider than either expert acknowledged, reflecting a range between the alternate scenarios which each adopt. That matter may have been of considerable significance if, contrary to my view, it were appropriate to value Crux, NEWA or Nexus using a discounted cashflow valuation on a going concern basis.
3. The Deed Administrators submit that the going concern valuations are ultimately irrelevant, since Nexus is not a going concern (a proposition that is plainly correct) and its operating subsidiaries would not be going concerns on a liquidation of Nexus. The latter proposition also seems to be correct, so far as the operating subsidiaries have historically been dependent on Nexus for funding, and subject to the issues as to further funding by NIH which I have addressed above. It seems to me that the going concern valuations are ultimately not relevant to the matters that I need to determine. Mr Edwards does not rely on his going concern valuation for his analysis of Nexus' position under scenario 2, and makes clear that that valuation was only prepared because the Australian Securities & Investments Commission required it, in respect of the information to be provided to shareholders in respect of the proposed transaction. Mr Searby also does not rely on his going concern valuation, in order to derive his valuation of Longtom and the exploration assets under scenario 2, although it is relevant to his approach to the price that Shell or a third party purchaser would attribute to Crux. It is ultimately not necessary to determine the correctness of that valuation, where I have not accepted the reasoning by which Mr Searby seeks to adjust it, in respect of Longtom or the exploration assets to reflect a liquidation of Nexus and, by extension, a liquidation or receivership of its operating subsidiaries, and I have also not accepted his approach to deriving the price at which Shell or a third party would offer to acquire Crux under scenario 2.
4. I should nonetheless refer to the matters which were in issue in respect of the going concern valuations, in deference to the efforts that Mr Edwards and Mr Searby devoted to their preparation and which the parties devoted to their submissions, and against the contingency that an appellate court might take a different view as to their relevance. It will not, however, be necessary to determine several of those disputes, where it seems to me that their existence would itself affect the range of the value to be attributed to the shares in Nexus on a going concern basis, if (contrary to my view) a discounted cash valuation on a going concern basis were appropriate.

Valuation of Crux under scenario 1

1. Mr Edwards valued NEWA's interest in Crux under scenario 1 as AUD 170 - 210 million, based on a discounted cashflow analysis and comparable transactions (Ex A12 [150], [154] - [155], Appendix E; Ex A13 [104] - [115]). Mr Searby also undertook a discounted cashflow analysis using both Mr Edwards' model and a model prepared by RISC, the company with which Mr Boardman is associated, as adjusted by him (Ex R3 [4.33] - [4.34]). There is an issue as to the forecasts included in the RISC model, which it is not necessary to resolve given the views that I have reached on other grounds. Mr Searby values Nexus' interest in Crux at between AUD [redacted], including PPRT credits and tax losses, under scenario 1 (Ex R3, Table 2.1, [4.53]). Mr Edwards, in his reply report, identifies differences between the RISC model adopted by Mr Searby and the model adopted by Mr Edwards with respect to Brent oil prices, operating costs, capital expenditure levels, the date of first gas production and discount rates. The inclusion of PPRT credits and tax losses in Mr Searby's valuation cannot be sustained, for the reasons noted above in respect of scenario 2.
2. There were significant differences between the experts in respect of the applicable discount rate to be adopted in a discounted cashflow valuation, particularly in respect of Crux but also in respect of Longtom. Mr Boardman adopted the lowest discount rate of 7% for Crux (Ex R2, [146]ff). Mr Searby did not agree with that lower discount rate, which appears to be significantly lower than the rates adopted by other analysts, including for the oil and gas industry generally. Mr Searby adopted a range between 9.1% and 10.4% for the discount rate to be applied to Crux, as well as Longtom (Ex R3, [2.10]; Ex A13 [121]). Mr Edwards adopted a discount rate of 13.5% for Crux in undertaking his discounted cashflow analysis (Ex A13, [121]). The use of the 10.4% discount rate, which is the higher end of Mr Searby's discount rate range, in place of Mr Edwards' 13.5% discount rate for Crux would increase the value of Crux by AUD [redacted] on a going concern basis and the use of a 9.1% discount rate, the lower end of Mr Searby's discount rate range, by a further AUD [redacted], for a total of AUD [redacted]. I will address this issue generally here.
3. Mr Edwards' and Mr Searby's evidence addressed aspects of the discount rate, including the level of the risk-free rate, the market risk premium, beta and gearing, the treatment of project risk and whether, as Mr Boardman contended, the weighted average risk of capital could be assessed, not by reference to the assets, but by reference to the cost of capital of potential purchasers of them. First, Mr Edwards and Mr Searby differed as to whether the current Australian bond yield should be normalised on the basis that it is unsustainably low at present, as Mr Edwards contends. Mr Searby objected to the normalisation of the bond yield on the basis, inter alia, of historical developments in relation to Australia's AAA credit rating, although his cross-examination exposed that objection was made without adequate examination of that history. Nonetheless, it appeared that issue was properly one of expert judgment and it could not be said that either approach could not properly be adopted.
4. Mr Edwards adopted a market risk premium of 6% and Mr Searby adopted a market risk premium of 5.36% based on a forward looking analysis and the experts differed as to whether a historical approach or a forward looking approach should be adopted in establishing that market risk premium. Mr Searby relied on analyst estimates as to the cost of capital for Nexus, without recognising that at least some of those estimates were not specific to Nexus, but were industry wide estimates. Mr Edwards did not accept that the market risk premium applied by Mr Searby was within a reasonable range, expressing the view that it was low compared with that applied by valuation practitioners generally (17.12.14, T67). Nonetheless, I again could not find that Mr Searby's approach was not reasonably open.
5. Mr Edwards and Mr Searby also differed as to whether the beta used in the calculation of the discount rate should be derived from the ASX index as a whole, as Mr Edwards does, or by reference to the ASX 300 (which comprises much but not all of the value of the ASX market) and an international MSCI world index as Mr Searby does. Mr Searby also expressed the view that that the gearing assumption should also first be deleveraged and then normalised, and Mr Edwards contended to the contrary. Mr Edwards accepted in cross-examination that the deleveraging approach adopted by Mr Searby had considerable support in the valuation literature, although he did not accept that Mr Searby's approach was orthodox and his approach was unorthodox (17.12.14, T68). He also accepted that those matters were questions of judgement for the valuer and he did not suggest that Mr Searby's approach was wrong as a matter of methodology and accepted that approach would be adopted by many qualified and respected valuers (T68 - 69).
6. Mr Edwards and Mr Searby also differed as the increased discount rate of 13.5% applied by Mr Edwards for Crux, by contrast with his 12% discount rate for Longtom. This reflected a significant difference of methodology between the experts, in respect of Crux, as to whether the project risk should only be taken into account in a "risked" cashflow for the project, and whether any additional risk relating to the early stage of the project can properly be taken into account in the discount rate (as Mr Edwards contends) or that would involve double counting (as Mr Searby contends). Mr Edwards was prepared to accept that project-specific risks would, to the extent possible, be reflected in a risked cashflow (17.12.14 T70). However, his evidence was that, even on the basis that a risked cashflow included all project specific risks, it was still appropriate to have regard to the impact of market risk on the specific project in setting the discount rate for that project (T70 - 71). Mr Edwards also did not accept that all project risks for Crux had in fact been taken into account in the relevant cashflow (T74 - 76) and pointed, for example, to the fact that there was no allowance in cashflows for further production suspensions, although there had to date been suspension of production in respect of Longtom (T77). Mr Edwards also emphasised his view that an early stage project was exposed to higher levels of market risk and that an equity investor would require a higher rate of return to invest in such a project, which needed to be allowed for in the discount rate (T78 - 79). Mr George also observed, in his report in reply, that the market may tend to increase the discount rate, even in respect of a risked cashflow, to compensate for risks that are harder to incorporate, because they are difficult to quantify.
7. The issue as to the applicable discount rates is of particular significance in respect of a scenario involving a development of Crux as a "backfill" to the Prelude project undertaken by Shell. Mr Edwards did not accept that there was double counting involved in, on the one hand, deferring the start date of the Prelude project by reference to announcements made by Shell and at the same time increasing the beta for Crux to deal with uncertainties as to start date (T95). I am persuaded by Mr Edwards' evidence in that regard, so far as an adjustment to reflect the best available information as to start date, at a point in time, does not eliminate the uncertainties that arise from the risk of future adjustments to the start date, in respect of a complex project over a 14 year period, or the wider risk to which he refers in respect of the early stage of the project. Mr Edwards accepted, however, that the question of the beta applied was ultimately one for expert judgement (T96).
8. It also seems to me that, as the Deed Administrators point out, the fact that stockbroking analysts have applied discount rates of 9% - 10.6% for larger corporate entities in the oil and gas exploration field (Ex A13, [164]) suggests that the discount rates adopted by Mr Searby may be low, and provides some support for the higher discount rate adopted by Mr Edwards, although not necessarily for the precise figures he adopts. Although I am inclined to accept some aspects of Mr Edwards' approach, as noted above, I do not consider that I am in a position to accept either Mr Edwards' or Mr Searby's approach to the discount rate as a whole, in preference to the other. This issue emphasises the range of the potential valuations that could arise on a discounted cashflow valuation on a going concern basis that did not have regard to comparable transactions, but I have indicated above why a liquidation valuation is appropriate in the circumstances.
9. There is also an issue between the experts as to the appropriate oil price assumption to be adopted in a discounted cash flow valuation. Mr Edwards adopts the real (that is, money of the day) long term Brent oil price of USD 90 - 95 per barrel to value Crux, based on analyst forecasts of the long term Brent oil price in 2014 dollar terms, as sourced from a UK service which provides consensus analyst forecasts (Ex A13, [90], [93], Appendix B, T101). Mr Edwards also has regard to forward market prices for Brent oil, although he accepts Mr Boardman's comment that the forward curve is less reliable for longer term forward prices (Ex A13 [91]). Mr Edwards accepted that his approach to oil prices assumed that the oil price would not change in real terms, notwithstanding that the oil price would clearly fluctuate and suggested that matter could properly be adjusted by the discount rate (T104). Mr George also expressed a view as to oil prices, which he characterised as in the nature of an "assumption" as to the future, by which I understood him to indicate that it was something less than a forecast as to the future (17.12.14, T9 - 10). It also appeared from Mr George's cross-examination (17.12.14, T21ff) that his references to future oil prices were intended to be largely or entirely for the purpose of assessing the economic viability of extraction of the relevant resources, rather than for their valuation. Mr George's evidence in reply, confirmed on cross-examination, was that he did not disagree with Mr Edwards' approach (17.12.14 T28 - 29), although that fell somewhat short of a reasoned endorsement of that approach. Mr George also noted that the conversion of a real price to a nominal price would involve an implicit inflation assumption (T29).
10. Mr Boardman and Mr Searby sourced their Brent oil price assumptions from estimates made by the US Energy Information Administration, in its Annual Energy Outlook 2014 released in April 2014. Mr Edwards noted that the oil price has fallen significantly since that date and that current analyst estimates are significantly lower (Ex A13 [94]ff). Mr George's evidence was in turn that the energy prices shown in the US Energy Information Administration report were expressed in 2012 real dollar numbers, and would require an inflation assumption to express them in nominal terms (17.12.14, T33). The use of the US Energy Information Administration report is further complicated by the fact that that publication included, as well as the base case adopted by Mr Boardman and Mr Searby, a low oil price case and a high oil price case, involving significantly different figures, reflecting different assumptions as to the level of energy supply and demand. Mr Boardman's evidence was that he adopted the base case because it was widely accepted within the industry as being the reference case, and there was not sufficient time to run sensitivities in oil prices in preparing his report (T126).
11. I also do not consider that I am in a position to accept either approach in respect of oil prices in preference to the other. The issue again emphasises the range of potential valuations that would arise on a discounted cashflow valuation on a going concern basis that did not have regard to comparable transactions. However, I have indicated above why a liquidation valuation is appropriate in the circumstances, and this issue therefore does not need to be determined.
12. The experts' reports also consider several alternative development options that could be adopted for Crux. That consideration should be understood, however, in the context of an important observation by Mr George, that NEWA, as a minority participant in Crux, may have limited influence over the development option adopted by Shell as its majority participant and operator. Mr George notes that Shell has [redacted], and Mr George also observes that the alternative options would take time to mature and are subject to uncertainty.
13. Mr Searby's valuation of Crux has regard to three possible development options, namely a stand-alone 2.2 Mtpa FLNG facility; a stand-alone 3.6 Mtpa FLNG facility; and the development of Crux as a backfill to Shell's Prelude development (Ex R3 [4.16]ff). The report prepared by GCA, on which Mr Edwards relied, considered the second and third options and an alternate standalone tariff scenario. Mr Searby expresses the view that the option of a backfill to the Prelude development provides the highest value based on his starting date assumption and discount rate; Mr Edwards expresses the view that the 2.2 Mtpa facility would result in a lower value than the Prelude value, based on his higher discount rate, but that view is expressed by reference to Mr Searby's assumed starting date, and Mr Edwards has not adjusted it to reflect his own later assumed starting date, so that Mr Edwards' analysis provides no assistance as to the impact of the 2.2 Mtpa scenario if his later assumed starting date were correct.
14. Mr Edwards did not model the value of the Crux project on a basis of use of a smaller (2.2 Mtpa) processing vessel, being a possibility that was the subject of a report previously provided by RISC to Nexus, and which is the subject of evidence given by the principal of RISC, Mr Boardman. The Deed Administrators submit that Mr Boardman's evidence in that regard was admitted as evidence of his assumptions only, and that there are no facts in evidence that prove any opinion he gives as to that matter. However, that part of Mr Boardman's report was admitted as evidence of his understanding, and there is therefore evidence that he, as a consultant having considerable industry experience, considers that the use of a smaller processing vessel is a potentially viable alternative to the approaches modelled by Mr Edwards.
15. The Deed Administrators submit that they need not prove that a particular "hypothetical development scenario" could not have been profitable if no evidence has been adduced from which it could reasonably be inferred that it could be profitable. I broadly accept that submission, so far as purely hypothetical scenarios are concerned, but it does not follow from that proposition that the Deed Administrators could have established that there was no residual value in Nexus' shares, on a discounted cash flow basis under a going concern basis, without addressing a scenario which would potentially give rise to such value, once there was evidence that that scenario was more than hypothetical. The existence of the alternative scenario, involving the use of a smaller vessel for the Crux project, may have given rise to difficulty in respect of a going concern valuation, where it had not been modelled by Mr Edwards. However, it seems to me that that matter would have had less weight, had a going concern valuation otherwise been relevant, where Mr Boardman's valuation of Crux on a comparable transaction basis, as I note below, supported Mr Edwards' valuation of Crux on a discounted cash flow and comparable transaction basis.

Valuation of Longtom under scenario 1

1. Mr Edwards values Nexus Vic P54's interest in Longtom under scenario 1 in a range of AUD 50 - 65 million and Mr Searby in a range of AUD [redacted] (Ex R3, [3.14]). Mr Edwards' reply report indicates the differences largely reflect their differing discount rate, differing oil price assumptions and a different treatment of abandonment costs of AUD 7.8 million.
2. Mr Edwards adopted a discount rate of 12% for Longtom. Mr Searby adopted a range between 9.1% and 10.4% for the discount rate to be applied to Longtom, as well as Crux (Ex R3, [2.10]; Ex A13 [121]). The difference as to discount rate between Mr Edwards and Mr Searby has an impact of AUD [redacted] for Longtom. The difference in oil prices has an impact on the valuation of Longtom on a discounted cash flow basis of up to AUD [redacted]. I have referred to the manner in which Mr Searby sourced his oil price assumption above. Mr Edwards estimated the future Brent oil price, in respect of Longtom, by using the forward curve for oil futures, and his report in reply indicates that he uses forward market prices to value Longtom as being the best unbiased market evidence of future prices in the short to medium term. Mr Edwards contends that the prices received for gas at Longtom are not significantly sensitive to the Brent oil price, because they were contracted to 31 December 2018 and were not linked to changes in that price, but no evidentiary reference was given for that assumption. As I noted above, I do not consider that I am in a position to adopt either approach in preference to the other and this would have impacted on the appropriate valuation range if (contrary to my view) a discounted cashflow valuation on a going concern basis were appropriate.
3. Mr Searby also adopts lower restoration costs for Longtom based on management estimates; however, Mr Edwards points out that Mr Searby's estimate does not include costs of the restoration of Longtom 5, although both experts assume that that well would be developed. There is also a difference between Mr Edwards and Mr Searby so far as the treatment of Longtom 6 is concerned, in the going concern valuation of Longtom. Mr Edwards expresses the view, based on Mr George's report, that it is not economic and has no value (Ex A12 [143], Ex A13 [6]; EX A9 [1.4.4]). Mr Searby attributes a value of AUD [redacted] to Longtom 6, but does not appear to develop the question of its economics (Ex R3 [3.13]). Mr Searby relies, to value Longtom by reference to comparative transactions, on a higher offer for Longtom of AUD [redacted] on a 100% project basis made in November 2013 (Ex R3, [3.16]); Mr Edwards points to the likely reduction in such an offer given increased capital expenditure, reduction in reserve estimates and the suspension of production at Longtom 3 (Ex A13, [25]). It is not necessary for me to determine these matters given the conclusions I have reached on other grounds.

Valuation by reference to comparable transactions

1. An alternative approach to a valuation under scenario 1 is to have regard to comparable transactions. Mr Boardman had regard to comparable transactions and derived a going concern value for Crux of AUD 193 - 210 million from those transactions (Ex R2 [75], [104]). Although there were significant difficulties with the form of Mr Boardman's report, he was plainly very experienced in the relevant field and it seems to me that he had the expertise to undertake that analysis. That analysis provides considerable support for Mr Edwards' going concern valuation of Crux as in the order of AUD 170 - 210 million (Ex A12 [169]). I also accept that, as the Deed Administrators submit, it is very likely, if not inevitable, that potential purchasers of NEWA's interest in Crux would have regard to comparable transactions in a similar manner to Mr Boardman and Mr Edwards.
2. Mr Searby did not adopt an analysis based on comparable transactions generally, but took issue with Mr Edwards' treatment of a particular comparable transaction in respect of Crux, involving Origin Energy (Ex R3 [4.40] - [4.49]; Ex A13 [110] - [115]). Mr Searby nonetheless noted that, on his analysis, that transaction would support a value for Crux of AUD [redacted] (Ex R3, [4.49]) which is much lower than his discounted cashflow valuation of Crux, and in the same order as Mr Boardman's and Mr Edwards' going concern valuations of Crux on that basis.
3. Mr Searby also referred to previous "expectations" of Nexus management as to the capital that could be raised by reference to Crux, as a "cross-check" on his valuation. I accept Mr Edwards' evidence that little weight can be given to that expectation, particularly where it has not given rise to any transaction consistent with it (Ex A13, [73]).
4. The Shareholders in turn rely, as a comparable transaction, on the sale by Nexus to Shell of 2% of Crux in December 2012, pursuant to the exercise of a put option. It appears that put option was agreed at the time of a consolidation of interests involving Nexus, Shell and Osaka and was subsequently exercised by Nexus following a review of funding alternatives available to Nexus (Nexus ASX Announcement, 19 December 2012, Ex J1, 2/1367). I am unable to place significant weight on this transaction, both by reason of the passage of time, to which Mr Edwards refers, and by reason of the lack of exploration of the detail of that transaction, including the process by which the amount paid was derived, in the evidence. The Shareholders also submit that: "Mr Edwards ignores the fact that Seven has been falling over itself to obtain the shares and stands ready to pay $210,000,003 for them". I am also unable to accept that submission, which has the obvious difficulty that the structure of the transaction involving SGH2 involves the payment of amounts to pay out the creditors of Nexus and cannot be attributed, as the Shareholders do, largely or wholly to the equity in Nexus.
5. I am reinforced in my view that a comparable transaction valuation is preferable to a discounted cash flow valuation, under scenario 1, by the fact that, first, as Mr Edwards points out, Mr Searby's and Mr Boardman's discounted cash flow valuations of Crux are materially greater than values adopted by the operator, Shell, in its commerciality reports as to the projects. Those reports implies a substantially lower value of [redacted] in respect of NEWA's 15% interest in the project (Ex R3 [A5.20]; Ex A13 [119]; CB2A/1871). That matter tends against acceptance of their approach. Second, as Mr Edwards also points out, there is a stark contrast between Mr Searby's valuation of Nexus' shares at between [redacted] per share on a going concern basis and the last traded sale price of those shares, at 1.3¢ on 11 June 2014, particularly in circumstances where Nexus' debt has increased since that date and the oil price and market values of oil and gas companies have fallen since that date (Ex A13, [175]).

Valuation of other exploration assets on a going concern basis

1. Mr Searby also relied on evidence of Mr Boardman in respect of the valuation of exploration assets on a going concern basis; however, by reason of its form, that evidence was received only as evidence of Mr Boardman's understanding (Ex R2 [51] - [61]; Ex R3 [5.18]). Mr Edwards relied on the valuation of Mr George for the Auriga and Caelum resources (Ex A9 [2.7.1 - 2.7.5]; [4.1] - [4.6.3], Ex A12 [157] - [158]). It is not necessary to reach a finding as to those matters given the conclusions that I have reached on other grounds.

Conclusion as to valuation on going concern basis

1. If it were necessary to rely on a going concern valuation, on a discounted cashflow basis, in order to reach a view as to the value of the shares, it seems to me that the extent of the differences between the experts, particularly as to discount rate, and the recognition that those differences involve matters of judgement and reflect the uncertainties in the future prospects of the assets, are such that the Court would have had to find that there was a potentially wide range as to the value of those assets. The extent of that value range may in turn have affected the question whether it could be established that the transfer of the shares were not unfairly prejudicial to the Shareholders. However, had I considered that a going concern valuation was appropriate, I would have held that the comparable transactions analysis adopted by Mr Boardman and Mr Edwards provided a proper basis for the valuation of those assets, which was likely to be adopted by potential purchasers of the assets. The result of that approach would have led to a substantially lower value for Crux that Mr Searby derives on a discounted cash flow basis.
2. In any event, I have held above that the relevant assets are properly valued on the basis of scenario 2, essentially a liquidation valuation, rather than scenario 1 on a going concern valuation. Had I considered that a going concern valuation was appropriate, I would now have invited further submissions as to the outcome of adopting a valuation of Crux on a comparable transaction basis.

Tax losses

1. Notwithstanding that the Shareholders did not read the evidence of Dr Rumble to support a valuation of tax losses, they submitted that value should be attributed to those tax losses on the basis that they would, or might, subject to certain conditions, be available to a purchaser such as SGH2. That approach seems to me to be both speculative and not relevant to the value of the shares to the Shareholders, who cannot realise that value in a liquidation of Nexus or a liquidation or receivership of its subsidiaries.

Dealings between Seven Group, Nexus and Shareholders

1. In their Summary of Contentions, dated 8 December 2014, the Shareholders contended that the shares in Nexus have a value to Seven Group Holdings Ltd ("SGHL"), the parent entity of NIH and SGH2, which was unrelated to the value of the business, and which was to be assessed on the basis that it was a going concern. They also contended that the business of Nexus was viable and solvent prior to Seven's involvement and "remains and will continue to remain sound and viable" and that Nexus' "potential insolvency" had been caused by a "deliberate commercial strategy of Seven designed so that it can obtain the shares for no consideration". The Shareholders also attack the process by which Nexus was placed in voluntary administration, and put that attack in the strong terms that, "[i]f not for [SGH2's and NIH's] implementation of its strategy, Nexus would be solvent, trading and paying its debts as and when they fall due". The Shareholders in turn put their submission as to the effect of Seven Group's involvement in strong terms: "The current state of affairs has been reverse-engineered by Seven, which has had complete control of each stage of the process. By the time of the second meeting of creditors, which voted for the DOCA, Seven as secured creditor had the ability to cause Nexus to become insolvent, the ability to control the time available to the Administrators to conduct their sales process, and as the majority noteholder would control any meeting of creditors under Pt 5.3A."
2. The evidence did not establish, and I do not accept, the first premise of that submission that NIH "caused" Nexus to become insolvent, at least in any wider sense. So far as the evidence goes, Nexus had been likely to become insolvent for a considerable period, and is now insolvent, because it had and has substantial financial commitments in respect of Longtom and Crux, its only operating income was from Longtom, and that income has been disrupted both by disputes with Santos in respect of its obligation to make payments and operational difficulties with Longtom-3. I accept that the immediate cause of Nexus' solvency was NIH's actions, following the failure of the scheme of arrangement, but there is no reason to assume that any lender, whether at arms' length or otherwise, would have provided ongoing financial support to Nexus for an indeterminate period in the absence of any demonstrated ability to repay the amounts borrowed.
3. In their Summary of Contentions, the Shareholders also contended that, if the orders now sought by the Deed Administrators were not made, Seven would resume negotiations with Shareholders which would produce an agreement for the sale of the shares at value and that, if Nexus passed into liquidation, the probability was that Seven or another interested party will "purchase the business and possibly the shares as a going concern". First, it seems to me that those propositions are speculative. Second, the fact that Shareholders may be deprived of an opportunity to sell their shares at value, arising from a position of strategic advantage, does not seem to me to involve either prejudice or unfair prejudice, if the true position is that those shares have no residual value, having regard to the prior ranking claims of creditors.
4. The proposition, implicit or explicit in the Shareholders' submissions that, in effect, value should be attributed to the shares because, absent a transfer of those shares by operation of s 444GA of the Corporations Act, SGH2 might be required to negotiate to acquire them seems to me to be inconsistent with the statutory purpose of the provision, recognised in the Explanatory Memorandum to which I have referred above. A corresponding argument was rejected by Martin CJ in Weaver v Noble Resources Ltd above at [83] and by Finkelstein J in Lindholm v Tsourlinis Distributors Pty Ltd above at [10], and that argument also seems to me to be inconsistent with the focus on the residual value of the shares in the case law to which I have referred above. There would also be little scope for the application of s 444GA of the Corporations Act if, in any case where a shareholder objected to his or her shares being acquired, and even if they had no residual value, shareholders could resist the application on the basis that there was "prejudice" or "unfair prejudice" because they were deprived of the opportunity to force the transferee to negotiate with them to achieve a transfer, or to decline to transfer those shares if their expectations were not met.
5. In closing submissions, the Shareholders also characterised this application as "a step in a negotiation between Seven and the [S]hareholders to acquire their shares in Nexus", in which the Court had been "co-opted" so that the negotiation "is now occurring between Seven through its agent the [Deed Administrators] and the Court with the shareholders' role being that of advocate but not decision-maker". That submission does not seem to me to properly recognise the nature of the statutory mechanism established by s 444GA of the Corporations Act; or the fact that the Deed Administrators are not NIH's, SGH2's or Seven's "agent", but are performing their role under the DOCA and within the context of Pt 5.3A of the Corporations Act, and that other interests, including the (admittedly small number of) employees of Nexus, noteholders (including third parties such as TOR) and trade creditors of Nexus and its subsidiaries are also affected by the application. That submission also seems to me to misunderstand the Court's role in respect of determining an application under that section.
6. The Shareholders also submit that their loss of the opportunity to negotiate directly with Seven for the sale of their property is itself "unfair prejudice" for the purposes of s 444GA(3) of the Corporations Act. I also do not accept that submission, which, as I noted above, seems to me to have the consequence that, wherever the section would otherwise apply to authorise a transfer of shares over a shareholder's objection, it could not achieve that result, because that would, by necessity, deprive the shareholder of its ability to negotiate a sale with a potential transferee or, indeed, simply to decline to transfer its shares to that transferee.
7. For completeness, I should note that I had raised, in the course of hearing, whether "unfair prejudice", for the purposes of s 444GA(3) of the Corporations Act, might arise in circumstances that the Shareholders were required to address complex valuation issues within a relatively short time period, because of the time constraints imposed as a result of the limited period to which NIH had committed to fund the Deed Administrators, and the relatively short extensions of that period to allow this hearing to take place. The Shareholders relied on that matter in oral submissions. It ultimately does not seem to be necessary to determine whether, in principle, issues of that character could constitute "unfair prejudice" for the purposes of s 444GA(3) of the Corporations Act, or provide a discretionary basis to withhold approval for a transfer of shares under that section, since it seems to me that they would not do so in this case. As the Deed Administrators point out, the structure of Mr Edwards' report was clear (although the underlying documents were not identified) at least from 30 October 2014 and the Shareholders were not required to serve evidence until several weeks later; Mr Boardman, who gave expert evidence for the Shareholders, had previously conducted several assignments for Nexus and would have been familiar with its assets; the Shareholders included associates of several former directors of Nexus, and one of them was given access to documents produced subject to claims of commercial confidentiality. Mr Searby in fact produced a comprehensive expert report, although I have not accepted several aspects of his approach, and a relatively strict approach to objections to evidence was initiated by the Shareholders, although the Deed Administrators then responded in kind. I accept that the proceedings had been conducted under time constraints, but that is a regrettable necessity of proceedings involving commercial urgency and not, in itself, a source of unfairness.

Conclusion and orders

1. There was no suggestion that the shares in Nexus had any residual value, if I adopted Mr Edwards' scenario 2 valuation, as I have done. I therefore proceed on the basis that the shares have no such residual value. So far as the case law identifies relevant factors as including whether the shares in Nexus have residual value that may be lost if leave is granted, I am therefore satisfied that those shares do not have residual value in a liquidation of Nexus, which will likely bring about either a liquidation or receivership of the operating subsidiaries. There seems to me to be no prospect of the shares obtaining value within a reasonable time, and there is no suggestion that the Shareholders could or would fund Nexus so as to assist that to occur, given the extent of its existing debts and its capital commitments in respect of Longtom and Crux. To the extent that Mr Newlinds sought to identify a prejudice to shareholders in that SGH2 might make a more favourable offer, if the present transaction were not approved, it seems to me that that proposition is speculative and, if one were to engage in speculation as to that matter, it would be equally possible that secured assets would be sold within a liquidation or receivership to repay the debts owed to NIH, with the loss in value involved in that process being borne in part by noteholders other than NIH, such as TOR.
2. In these circumstances, I am not satisfied that the proposed transfer of shares to SGH2 involves prejudice to shareholders in Nexus. If, contrary to that view, there is such prejudice, it does not seem to me to be unfair prejudice, given the benefits that the transaction will deliver to other constituencies, independent of SGH2 and NIH, including trade creditors, noteholders other than NIH, employees and those who will benefit from the continuance of the underlying business of the operating subsidiaries.
3. For these reasons, I order that Messrs Caddy, Preston and McGrath as joint and several deed administrators of Nexus Energy Ltd (subject to Deed of Company Arrangement) ("Nexus") be granted leave, under s 444GA of the Corporations Act, to transfer all of the existing shares in Nexus from each shareholder recorded on the register of members to SGH Energy (No 2) Pty Ltd in accordance with cl 7.5 of a Deed of Company Arrangement dated 22 August 2014 between the Deed Administrators, Nexus and SGH Energy (No 2) Pty Ltd.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 February 2015