Calabretta v Redpen Developments Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 369 of 2014

IN THE MATTER OF OCEANLINX LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404 BETWEEN: VAUGHAN NEIL STRAWBRIDGE AND JASON MARK TRACY IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF OCEANLINX LIMITED (ADMINISTRATORS APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404

JUDGE: YATES J DATE: 23 May 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The plaintiffs are the joint and several administrators of Oceanlinx Limited (administrators appointed) (receivers and managers appointed) (Oceanlinx or the company). 2 On 11 April 2014, this proceeding was commenced seeking, firstly, curative orders concerning the validity of their appointment and, secondly, seeking an extension of the convening period for the meeting of the company's creditors to be held pursuant to s 439A of the Corporations Act 2001 (Cth) (the Act).

Background 3 Oceanlinx is involved in the development of, and building and installing, machinery that is capable of harnessing wave energy for the generation of power that can be transferred to electricity grids. It relies on private and public funding, including by way of tax rebates, to finance its activities. The focus of Oceanlinx's business has been the development and commissioning of a green wave powered generator (the generator), which cost the company approximately $10 million to develop. Unfortunately, in early March this year, the generator sank during its commissioning off the coast of South Australia. This event represented a significant loss of the company's investment and jeopardised the future funding of its research and development. 4 On 5 March 2014, a directors' meeting of Oceanlinx was held. The minutes record that, with one abstention, it was resolved that: it was the opinion of the directors that Oceanlinx was likely to become insolvent at some future time, and Oceanlinx should appoint an administrator under s 436A of the Act. 5 On 21 March 2014, Tibor Vertes, the chairman of Oceanlinx, sent an email to David Ross of Hall Chadwick stating: In accordance with the attached signed true copy of the minutes of the meeting of the Board of Directors of Oceanlinx Limited (ACN 077 104 404) on 5 March 2014, Oceanlinx hereby appoints you (David Ross) and Brent Kijurina, both of Hall Chadwick Chartered Accountants, as Joint and Several Administrators of Oceanlinx Limited, under s 436A of the Corporations Act 2001, with such appointments to take effect on receipt of your consents in writing to said appointments. 6 On 2 April 2014, the first meeting of creditors was held. Mr Ross and Mr Kijurina were removed as administrators and replaced by the plaintiffs, Vaughan Neil Strawbridge and Jason Mark Tracy. 7 In affidavits made on 11 and 17 April 2014, Mr Strawbridge has deposed that, at the first meeting of creditors, the solicitors for Ali Baghaei, who is one of the directors of the company and who is recorded in the minutes as having voted in favour of the two resolutions I have noted, raised doubts regarding the validity of the original appointment of Messrs Ross and Kijurina as administrators of the company. Later, on 7 April 2014, Mr Baghaei informed Mr Strawbridge that he did not believe that the resolutions recorded in the minutes of the meeting of 5 March 2014 had been passed. Rather, Mr Baghaei said that the directors discussed the fact that the company was insolvent or was likely to become insolvent. According to Mr Baghaei, the directors also considered appointing an administrator, but no resolution to that effect was made. That said, in a letter dated 10 April 2014, Mr Baghaei's solicitors have advised that he (Mr Baghaei) supports the continuation in office of the plaintiffs as administrators, noting that their appointment is supported by an overwhelming majority of creditors by value and in number, including the major secured creditor Macquarie Bank Limited (Macquarie Bank). 8 The uncertainty raised by Mr Baghaei's belief concerning the invalidity of the appointment of the original administrators, is the sole basis advanced by the plaintiffs for the curative relief they seek. 9 In his affidavit, Mr Strawbridge has also deposed that, to his knowledge, Messrs Ross and Kijurina had not consented in writing to their appointment as administrators of the company at the time that the directors' meeting was held on 5 March 2014. However, there is no suggestion that they had not duly consented at the time of their appointment by Oceanlinx on 21 March 2014: see s 448A of the Act.

The financial position of the company 10 As at February 2014, Oceanlinx had total assets of $1,059,882 excluding its intellectual property. However, its intellectual property is one of its main assets. Mr Strawbridge described this intellectual property as "its registered patent, patents pending and other intellectual property relating to the wave powered generators it has been developing". 11 Upon successful registration for an R&D tax incentive with AusIndustry (the tax rebate) after the financial year ending 30 June 2014, Oceanlinx may be entitled to a rebate of approximately $3.2 million. This rebate represents payment, in part, of monies already expended by the company on eligible R&D projects. 12 As at February 2014, Oceanlinx had total liabilities of $7,674,930. 13 There are five currently-employed employee creditors of the company, one of whom is Mr Baghaei. In total, these creditors are owed approximately $130,000, including entitlements. 14 There are approximately 59 unsecured creditors who are owed a total of $2,843,616. These unsecured creditors include general trade creditors and Goodman Industrial Funds Management Limited, the lessor of premises at Suite 102, 112-118 Talavera Road, Macquarie Park, from which Oceanlinx conducts its business. 15 The company's main source of funding has been through: secured lending from Macquarie Bank; loan notes from investors; equity funding from shareholders; R&D tax rebates for research and development expenses incurred in the previous financial year, and the Australian Renewable Energy Agency (ARENA). 16 Mr Strawbridge's evidence is that, had the generator been successfully commissioned and connected to the grid, Oceanlinx would have received additional funding for its further operations. However, without access to sufficient funding to continue operations, the company was, at the time the generator sank, insolvent or was likely to become insolvent. Mr Strawbridge said that, absent further funding or sufficient payment under an insurance policy, referred to below, the company "will remain insolvent". 17 On 26 March 2014, Macquarie Bank appointed Rahul Goyal and Cassandra Mathews of Korda Mentha as receivers. The assets and undertakings of the company are currently subject to this appointment and the company is trading under the receivers' direction. There is evidence that the receivers are currently taking steps to ensure the receipt of the tax rebate by the company. 18 There is also evidence that the receivers are pursuing an insurance claim in respect of the generator. In his first affidavit, Mr Strawbridge said that if this claim is successful, it could be sufficient to substantially repay creditors or restore the company to a position of solvency. Further, payment of the claim could be sufficient either to fix the generator or provide Oceanlinx with funds to build and commission another generator. In his first affidavit, Mr Strawbridge also said that Oceanlinx may be entitled to further funding from ARENA should the damaged generator be made operational again, although there is no guarantee that this funding will occur. 19 It is anticipated that the tax rebate will be sufficient to discharge the company's debt to Macquarie Bank, with the intellectual property remaining with the company unencumbered or largely unencumbered. Lodgement of the company's tax return is expected to be in July 2014. Information provided by the receivers indicates that the company will not receive the tax rebate prior to the end of September 2014. The receivers have indicated their intention to continue managing the company until the tax rebate is received. They have indicated that it is not their current intention to realise any of the company's material assets prior to receipt of the tax rebate.

Deed of company arrangement proposal 20 Mr Baghaei has informed Mr Strawbridge that he intends to propose a deed of company arrangement for Oceanlinx. Mr Strawbridge expects that any such proposal would require, as a condition precedent, that the company retain its intellectual property unencumbered or largely unencumbered. No proposal for a deed of company arrangement has been made or foreshadowed by any other person.

Validation of the plaintiffs' appointment 21 Section 447A(1) of the Act provides that the Court may make such order as it thinks appropriate about how Pt 5.3A of the Act is to operate in relation to a particular company. 22 In Calabretta v Redpen Developments Pty Ltd (in liq) (2010) 183 FCR 47 at [35]-[37], I noted the breadth of the power granted by s 447A(1), in terms which are apposite to the present case: In Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 at [17] the High Court made a number of observations concerning the width of the power conferred by s 447A(1). The High Court noted that there is nothing on the face of the provision which suggests that it should be read down. The High Court further noted that the words of the provision are wide enough to confer power to make orders which will have effect in the future but which are occasioned by something that has been done or not done under Pt 5.3A before an application is made under s 447A(1). Section 447A(1) has been used on a number of occasions to overcome a deficiency in the appointment of an administrator, including where a resolution founding the appointment of an administrator was invalid: Deputy Commissioner of Taxation v Portinex Pty Ltd (2000) 156 FLR 453; Sutherland v Robert Bosch (Aust) Pty Ltd (2000) 33 ACSR 680; Shirlaw v Graham [2001] NSWSC 612; Panasystems Pty Ltd v Voodoo Tech Pty Ltd (2003) 21 ACLC 842; McIntosh v CMX Technologies Pty Ltd (2005) 56 ACSR 283; Re Pasdonnay 53 ACSR 717; Re HPI Australia Pty Ltd (2008) 26 ACLC 1,230. The discretion whether to exercise the power is undoubtedly a plenary one, to be exercised having regard to all the circumstances of the case that have been brought to the Court's attention by the applicant for relief and by those who have an interest in the matter and who may be affected by the granting of that relief. One relevant consideration is whether substantial injustice would be caused by effectively validating an otherwise invalid appointment: McIntosh 56 ACSR 283 at [32]. 23 More recently, in National Australia Bank Ltd v Horne (2011) 85 ACSR 639, Almond AJA (with whom Buchanan and Mandie JJA agreed) observed (at [33]): In my opinion it is clear from the decision of the High Court in Australasian Memory that the Court has power to alter how Part 5.3A, specifically how s 436C in Part 5.3A, is to operate in relation to the Company and could exercise that power by ordering that Part 5.3A is to operate as though the purported appointment of the administrators by the chargee on 18 October 2010 was valid. This was all but conceded in argument by senior counsel for the appellants. Once such an order is made, the Act will operate as declared and so will operate in respect of actions taken from the nominated date or event. In that sense, an order which validates the appointment of administrators has retrospective effect, an understanding which appears consistent with Australasian Memory, as observed by Gyles J in Re Pasdonnay Pty Ltd. Nevertheless senior counsel for the appellants submitted that any order made under s 447A must be consistent with the objects of the Part. 24 Later, at [41]-[42], his Honour said: In Australasian Memory, the Court had occasion to consider the issue of accrued or vested rights in the context of s 447A(1). In doing so, the Court distinguished between two kinds of case. In the first kind of case, steps were taken by members or officers of the company or by third parties which were predicated upon the termination of an administration other than by entering a deed of company arrangement or going into liquidation. In the second kind of case, steps were taken that were predicated upon a company having validly entered a deed of company arrangement or having gone into liquidation. Amongst other things, the Court noted (but did not need to decide) that in the first kind of case an order reinstating the administration may well be inconsistent with rights created in the intervening period which could create insuperable discretionary obstacles to its making. In the second kind of case there would be no inconsistency between the varied operation of Part 5.3A and the rights that have accrued in the intervening period if the order gave legal validity to the premise for the parties' conduct. This case is akin to the second kind of case posited in Australasian Memory, in that steps were taken by members or officers of the Company and third parties which were predicated upon the administrators having been validly appointed. In Australasian Memory, there were no rights which may have accrued to third parties within the intervening period which were adversely affected by the relevant order and therefore no discretionary obstacles were created. 25 In the present case, there is a clear discrepancy between the minutes of the directors' meeting of 5 March 2014 and Mr Baghaei's belief about what transpired at the meeting so far as concerns the appointment of the original administrators. The plaintiffs do not advance the copy of the minutes in evidence as having any particular evidential significance. They place no reliance on s 1305 of the Act. Further, there are no provisions in Oceanlinx's constitution which assist in this regard. The plaintiffs have not sought to adduce evidence from the directors present at the meeting as to what, if any, resolutions were proposed and passed. 26 I accept the general thrust of the plaintiffs' submissions that their position as administrators should not be left in doubt. The simple fact is that the creditors at their first meeting accepted that the company was in administration, that the original administrators had been validly appointed, and that they should be replaced as administrators by the plaintiffs. The only person raising any question about whether the original administrators had been validly appointed - and no other person has come forward to support this position - has raised no objection to the company being in administration, and actively supports the continuation in office of the plaintiffs as administrators. I simply cannot tell from the evidence whether the resolutions were or were not passed. But no substantial injustice would arise by taking steps to validate the appointment of the plaintiffs as administrators, assuming Mr Baghaei's belief to be correct. 27 I am satisfied that the power under s 447A(1) of the Act should be exercised so that Pt 5.3A of the Act operates in relation to the company as if, on 5 March 2014, the directors resolved that the company was likely to become insolvent in the future and that it should appoint an administrator under s 436A of the Act, with effect from 20 March 2014. 28 The plaintiffs seek, alternatively, relief under s 1322(4) and s 447D of the Act. It is not necessary to consider the possible operation of those provisions in this case.

Extension of the convening period 29 Pursuant to s 439A(5) of the Act, the convening period is due to end on 30 April 2014. The present evidence is that the company will remain in receivership until the anticipated tax rebate is received. As I have noted, it is expected that the rebate will be sufficient to discharge the company's debt to Macquarie Bank. If so, this will leave the company's intellectual property unencumbered or largely unencumbered and enhance the prospect of the proposal of a deed of company arrangement. Realisatically, no deed of company arrangement can be proposed until the anticipated tax rebate is received. As mentioned, it is expected that the company's tax return will not be lodged until July 2014 and that the tax rebate will not be received before the end of September 2014. 30 At the present time and under the present circumstances, the plaintiffs cannot realistically form an opinion, as required by s 438A of the Act, about: whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement; whether it would be in the creditors' interests for the administration to end; or whether it would be in the creditors' interests for the company to be wound-up. 31 Further, if successful, the company's insurance claim could be sufficient to restore it to a position of solvency, or to provide it with funds to fix the generator, or build and commission another generator. 32 Additionally, the receivers have indicated that placing the company into liquidation at the present time may jeopardise the payment of the anticipated tax rebate. Similarly, the liquidation of the company is likely to impair its ability to obtain further ARENA funding. 33 As I have noted, Mr Baghaei has foreshadowed that he will propose a deed of company arrangement. His solicitors have written to the plaintiffs advising them that Mr Baghaei is in the process of working with a number of parties, including existing investors, to formulate a proposal which will aim to preserve the company's business and to provide a larger and more accelerated return to creditors than would be achieved through liquidation. The receivers have also expressed the view that a deed of company arrangement may result in a better return for creditors, particularly as such a proposal will likely facilitate a better realisation of value from the technology developed by the company prior to its administration. 34 In considering applications of this nature, the Court is involved in a balancing exercise. A balance needs to be struck between the expectation that an administration under Pt 5.3A of the Act will be conducted with relative speed, to which the relevant provisions of the Act give due recognition, and the requirement that "speed not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders": Collective Olive Groves Limited, in the matter of Collective Olive Groves Limited; Application by Reidy [2009] FCA 177 at [18]; Diamond Press Australia Pty Limited [2001] NSW SC 313 at [10]; Farnsworth in his capacity as voluntary administrator, in the matter of Monorant Pty Limited (administrator appointed) [2013] FCA 949 at [25]. 35 The plaintiffs seek an extension of the convening period of 180 days. This is, undeniably, a very lengthy extension. However, the circumstances are exceptional. The future course of the company is dependent on receipt of the anticipated tax rebate. The receipt of the tax rebate in the expected amount will open the way for the proposal of a deed of company arrangement. But until the tax rebate is received, the likely position of the company will simply not be known. As I have indicated, liquidation of the company now may well jeopardise its ability to obtain the tax rebate. It seems to me that, inevitably, a lengthy extension of the convening period is required. Realistically, an extension of less than 180 days would be of no utility. 36 Importantly, the extension sought has been well-supported. Each of the company's employees has signed a common letter indicating consent to the extension that has been sought. The committee of creditors has voted unanimously in favour of an extension of the convening period for between 90 and 180 days. Macquarie Bank, through the receivers, supports the extension. Convertible note holders of the company have, through their nominee, Caroline Chen, indicated support for the extension. The lessor of the company's business premises has been informed of the application for an extension and has raised no objection. I also note in this regard, that the lessor is currently being paid rent and that this position will continue while the company is occupying the premises. 37 There is evidence of extensive notice having been given to all known creditors of the present application. No creditor has come forward to oppose the extension sought. There is no evidence of any apparent prejudice being suffered by any person who might be affected by the extension being granted. Further, the Australian Securities and Investments Commission has been given notice of this application and has stated in correspondence that it does not intend to appear in the proceeding. This plainly indicates that it advances no objection to the extension sought. 38 Given that the plaintiffs have articulated a clear basis for the necessity for the extension sought, and given the absence of any specific or apparent countervailing prejudice to any likely affected party, I am satisfied that the extension, as sought, should be granted.

Disposition 39 Relief, substantially as sought by the plaintiffs, should be granted. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.