Canstruct Pty Ltd v Project Sea Dragon Pty Ltd

The facts 9 The outcome of this matter turns substantially upon its facts. It is particularly important that the circumstances in which the DOCA was entered into are carefully identified, even though they were not ultimately disputed to any significant extent.

General background 10 Seafarms Group Limited is a publicly listed company and the apical entity of the corporate group known as the "Seafarms Group". Project Sea Dragon is a member of that group, having been incorporated in March 2015 as a wholly owned subsidiary of Seafarms Group Limited. At all relevant times, the directors of the two companies were identical, save for a small number of immaterial exceptions. It was not doubted that the corporate will of each entity was controlled by substantially the same group of individuals. Much of the evidence given in these proceedings on behalf of Project Sea Dragon and Seafarms Group Limited came from Mr Rodney Dyer, who is presently a director of the former company and a director and the CEO of the latter. 11 The overall business of the Seafarms Group involves the construction of prawn aquaculture facilities for the growing and harvesting of prawns, and the intended sale of the resulting produce in Australia and overseas. The individual prawn aquaculture operations are conducted from various locations, including certain sites in Western Australia, the Northern Territory and Queensland. 12 Project Sea Dragon is referred to in the first and third defendants' written material in these proceedings as a "special purpose vehicle". It was incorporated to develop and operate a major prawn aquaculture project, known as "Project Sea Dragon", for the Seafarms Group. It is the sole shareholder in several subsidiary companies, which are seemingly involved in the same enterprise. 13 The project is a substantial undertaking, and there can be no doubt that its progression to this point has required the Seafarms Group to invest a great deal of time, effort and money. It has been described as a large-scale, integrated, land-based prawn aquaculture business, which is designed to produce a high-quality, reliable supply of black tiger prawns on a year-round basis for domestic and export markets. It involves, amongst other things, the development of prawn aquaculture facilities in five separate locations - three in the Northern Territory and two in Western Australia. The only operational site at present is in Exmouth, Western Australia, where a founder stock facility has been established and Project Sea Dragon has employed a number of personnel. The other sites remain in various stages of development. The dispute between Canstruct and Project Sea Dragon underlying these proceedings concerns the construction of facilities at Legune Station, a large cattle station in the Northern Territory, approximately 120 kilometres north-east of Kununurra, over an area of which Project Sea Dragon holds a sublease for which it pays rent of approximately $2 million per annum.

Financial operations of Project Sea Dragon 14 As a special purpose vehicle incorporated to develop and operate a specific prawn aquaculture project, Project Sea Dragon has had no income of its own with which to meet the costs that it has incurred. Whilst that, in and of itself, is perhaps unsurprising, it also had no substantial assets and no financial facilities on which to draw in order to meet those costs. Mr Dyer gave evidence that Project Sea Dragon was wholly reliant on Seafarms Group Limited, as well as other entities in the Seafarms Group, for both financial and operational assistance. Despite that apparent reliance, there has been no formal loan agreement in place by which Seafarms Group Limited or any other company in the corporate group has assumed an obligation to provide funding. Nor has there been any letter of commitment from Seafarms Group Limited or any other company to a similar effect. In fact, there has been no agreement or arrangement at all between Project Sea Dragon on the one hand, and Seafarms Group Limited and the other companies in the Seafarms Group on the other, by which the latter has offered to, has been obliged to, or has committed to provide funding to the former on any occasion. 15 Project Sea Dragon was effectively funded by third party investment in Seafarms Group Limited, which was procured by the issuing of new shares in Seafarms Group Limited. The evidence indicated that the financial ties between the two companies were especially close in this respect. When Seafarms Group Limited raised capital via a share placement in June 2021, its announcements to the Australian Securities Exchange (ASX) made clear that the funds were to be directed specifically to the project - that is, the work of Project Sea Dragon. 16 Mr Dyer gave evidence that Project Sea Dragon obtained funds from Seafarms Group Limited to meet its debts by a particular process, as part of which it would "call" for Seafarms Group Limited to transfer funds into its account to pay invoices and other obligations shortly before they fell due. Accounts staff would assemble the necessary supporting documents, including copies of invoices, payroll amounts, PAYG calculations and the like, and would send them by email to certain persons within Seafarms Group Limited with a request that they authorise the payments. The "approvers" with authority to authorise payments were Mr Dyer, Mr Harley Whitcombe (another director of Seafarms Group Limited), and Mr Ian Leijer (the CFO of Seafarms Group Limited). Payments generally required authorisation from any two of those persons, whilst transfers from Seafarms Group Limited to Project Sea Dragon required authorisation from only one. Calls to transfer funds from the parent to the subsidiary were made only if further funds were required to make certain payments. 17 In the context of these proceedings, Project Sea Dragon and Seafarms Group Limited emphasised that the process included a weekly "payment run" for invoices relating to the former company to be raised to the latter, the fortnightly payment of wages for Exmouth employees, the monthly payment of a salary to the manager of the Exmouth facility, and the payment of payroll tax as well as PAYG and superannuation. Whilst the obligation to make these payments fell on Project Sea Dragon, Seafarms Group Limited consistently put its subsidiary in funds by way of this established process in order to allow the necessary payments to be made. 18 As a consequence of the implementation of this process, however, the amount of Project Sea Dragon's indebtedness to Seafarms Group Limited steadily increased. It was not in doubt that Seafarms Group Limited was entitled to demand repayment of its debt at any time, but Mr Dyer asserted that such a demand would never be made. He explained as follows in his affidavit evidence: Any amounts owed by PSD to SFG would technically be payable on demand but that demand will never be made. In my capacity as director of SFG I would never move to or cause the board to move to call up SFG's loans to PSD while the project was ongoing. It is commercially illogical and against commercial reality for SFG to do so because that would expose me to significant complaint and inevitably legal action by shareholders for breaching my duty as a director. The sole use of the funds raised was to develop and operate PSD. The very purpose of raising the funds and the reason for investors to invest is that there would be a significant incremental value in their share value as the project was developed. That is the commercial reality regarding the use of those funds. It is simply not open to the directors of SFG to abandon the project and call up the loan funds in circumstances where the very purpose for which the funds were raised would fail. The commercial reality is that SFG could not call up the funds in circumstances where by doing so the Project would immediately fail. 19 Ultimately, the only conclusion that can properly be drawn in this case is that the funding of Project Sea Dragon continued entirely at the discretion of Seafarms Group Limited, and the decision to advance funds was made only as and when the need for additional funding arose. That conclusion is not especially controversial. However, as discussed in more detail below, a finding to this effect makes it necessary to assess the extent to which Seafarms Group Limited was willing to continue funding Project Sea Dragon, and that assessment is a somewhat intricate task.

The works at Legune Station 20 As at the time these proceedings were commenced, Project Sea Dragon had undertaken a great deal of preparatory work on the project - including by negotiating leases, entering into agreements with native title holders, securing environmental approvals and licences, producing feasibility studies, and establishing the founder stock facility at Exmouth. However, it was not entirely clear how substantially the development at Legune Station, specifically, had progressed. 21 Canstruct was engaged by Project Sea Dragon to carry out certain construction work at Legune Station pursuant to a "Framework Agreement", which was entered into on 10 May 2021. Pursuant to the terms of the Framework Agreement, "Work Orders" could be issued by Project Sea Dragon to Canstruct, after negotiations between them, which would then constitute separate and legally binding agreements for the carrying out of certain work. In this way, the Framework Agreement was effectively, in the words of Mr Dyer, an "umbrella agreement". The Framework Agreement also required Canstruct to provide security for the performance of its obligations in the form of an unconditional undertaking issued by an Australian bank in the amount of $12 million. That security was duly given in the form of two $6 million bank guarantees. 22 In September and October 2021, Project Sea Dragon issued three Work Orders. It was not seriously in doubt that Canstruct undertook a substantial amount of work pursuant to those Work Orders, though the precise extent of the work that was completed and its value became a point of contention between the parties. According to Canstruct, the work included: (a) the construction of ponds and dams, which required significant earthworks; (b) the construction of access roads; (c) the creation of seawater intake and discharge channels; (d) the construction of accommodation quarters for temporary and permanent workers; (e) the development of a quarry, and the manufacture of gravels and aggregates from the quarry for use in the project; and (f) the creation of other roads, embankments, concrete drainage structures and other structures required in order to perform its contractual arrangements with Project Sea Dragon. 23 Pursuant to the terms of the Framework Agreement, Project Sea Dragon was entitled unilaterally to suspend works at the site. It was also entitled to terminate the three Work Orders for convenience. 24 On 24 December 2021, Project Sea Dragon unilaterally suspended all works at the site. Mr Dyer deposed in the context of these proceedings that, in about January 2022, a dispute then arose between Canstruct and Project Sea Dragon in relation to the money owed following the suspension of the works. On 27 April 2022, Project Sea Dragon terminated each of the three Work Orders for convenience. 25 On 15 September 2022, Canstruct submitted payment claims in relation to the Work Orders to both Project Sea Dragon and the Superintendent on the project. It sought payment of approximately $27.83 million. On 30 September 2022, the Superintendent (on behalf of Project Sea Dragon) issued payment certificates to Canstruct in response to the payment claims, pursuant to which Canstruct was paid approximately $780,000 in connection with the first and third Work Orders. The Superintendent certified that the amount payable by Project Sea Dragon in respect of the second Work Order was approximately -$270,000, but this amount does not seem to have been paid by Canstruct. 26 Clearly, the disparity between the amount sought by Canstruct and the amount paid to it by Project Sea Dragon was vast. The evidence and submissions of Project Sea Dragon and Seafarms Group Limited in these proceedings make plain the fact that those companies strongly disputed Canstruct's entitlement to the sum that it sought. However, it is unnecessary for the present purposes to consider that material in detail.

The cause of the termination of the Work Orders 27 The termination of the Work Orders was not, as one might have expected, the result of any disputation between Project Sea Dragon and Canstruct in connection with the work at Legune Station. Instead, it was the result of growing financial difficulties and internal corporate issues within the Seafarms Group. 28 In the "Directors' report" section of the Annual Report for Seafarms Group Limited for the financial year ended 30 June 2022, it was stated that the year had been a "turbulent" one. It was further identified that there had been a "renewal of the board" in the first half of the year, with the appointment of two new directors and the resignation of three others. There was also a change in the chairmanship of the board, and the appointment of a new CEO and CFO. Although it was noted that construction on the project had commenced early in the year, it was explained that: In November [2021] the new board announced a review of Project Sea Dragon. Decisions taken during this time included the curtailment of all debt funding activity, and the termination of Project Sea Dragon contracts and most of the Project Sea Dragon construction team. This effectively placed the majority of Project Sea Dragon on hold which was announced to the market in March 2022. … In June 2022 Seafarms announced it was conducting a thorough assessment of the key challenges, development path and opportunities for Project Sea Dragon. The assessment is re-examining a number of matters raised about the viability of Project Sea Dragon announced by previous management in March 2022. 29 In connection with these events, a major shareholder moved to have the then-new CEO removed. The CEO subsequently resigned from his position, and from the board, along with the Company Secretary. In late May 2022, Mr Dyer was appointed as CEO, Mr Leijer as CFO and Mr Whitcombe as Company Secretary. Mr Dyer and Mr Whitcombe were also appointed to the board. 30 Later in the Directors' report, it was noted that: Following the statements made by the Company in March of 2022 the Company terminated contracts with most vendors, and the construction contracts with Canstruct were terminated for convenience in late April 2022. By the end of September 2022 the demobilisation of construction plant & equipment had largely been completed. The Company also placed further work on hold at Bynoe and Kununurra while progressing a reduced scope of work at the Exmouth facility. The Company continues to undertake works to maintain all permits and approvals. 31 In the section of the Annual Report containing the notes to the financial statements of the Seafarms Group, beneath the heading "Summary of significant accounting policies", it was explained that: The Group commenced construction on Project Sea Dragon in August 2021, which was suspended in December 2021 due to the wet season. In the same month, the Group terminated negotiations on debt funding, which were at an advanced stage, due to the cessation of negotiations by the previous management. In April 2022 the major construction contracts for the construction of ponds and other infrastructure at Legune Station were terminated to preserve cash as the future of the project is re-assessed. … [F]ollowing the termination of the construction contracts, the Group received a number of claims from the construction company and after assessment of the currently available information, recorded a provision for general contractual liabilities of $8,730,094. 32 The Seafarms Group also produced a financial report for the half-year ended 31 December 2022. In the section of that report containing the notes to the condensed consolidated financial statements, beneath the heading "Summary of significant accounting policies", it was stated that: At 31 December 2022, the Group had net current assets of $18,796,286, including $20,426,850 cash and cash equivalents. The Directors note material uncertainties relating to the decision to continue with Project Sea Dragon, if so whether adequate funding will be obtained to fund the continuance, if not whether the remaining Project Sea Dragon related expenses will be successfully reduced and ceased, as to the final amount payable to meet Project Sea Dragon contractual liabilities, and as to the future profitability and cash flow from improvements at Queensland Farms and the ability of these to cover corporate expenditure. 33 Mr Dyer confirmed in his evidence that the statements made in the reports were accurate. The conclusion most readily to be drawn, then, is that the Work Orders issued from Project Sea Dragon to Canstruct were terminated because the viability of the project had become less certain on account of financial concerns that were emerging at that time.

The adjudication of Canstruct's claims 34 Unsurprisingly, Canstruct was dissatisfied with the significant disparity between the quantum of its payment claims and the Superintendent's subsequent assessments of the value of the work. On 7 November 2022, it filed four adjudication applications pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT). Three of the applications related to the work performed under each of the Work Orders. By those applications, Canstruct sought determinations that, amongst other things, Project Sea Dragon was liable to pay to it the full amount of its payment claims. By its fourth application, Canstruct sought the return of one of its bank guarantees in the amount of $6 million, which had been provided by way of security under the Framework Agreement. 35 On 3 February 2023, three determinations were made in favour of Canstruct in respect of the three Work Orders in the total amount of $13,581,592.21, excluding GST and interest. That figure was subsequently adjusted to $12,473,810.14, excluding GST and interest, or $13,994,955.32, including GST and interest. The adjudicator also made a fourth determination, in relation to the Framework Agreement, that the outstanding bank guarantee was to be returned to Canstruct. 36 For the sake of convenience, the four determinations are referred to cumulatively throughout the remainder of these reasons as the "adjudicator's decision".

The response to the adjudicator's decision 37 On 3 February 2023, the same date as the adjudicator's decision, Seafarms Group Limited released an announcement to the ASX, indicating that, whilst it had provisioned an amount of $8.7 million for a settlement of the dispute with Canstruct in its 2022 accounts, it was "extremely disappointed" with the adjudicator's decision and "believe[d] the determination to be excessive". 38 On 8 February 2023, Herbert Smith Freehills (Freehills), who were the solicitors for Project Sea Dragon at that time, wrote to Canstruct's solicitors, Thomson Geer, advising that their client rejected the adjudicator's decision. The letter asserted, amongst other things, that the decision was affected by a number of jurisdictional errors. It added that Project Sea Dragon intended to commence proceedings in the Supreme Court of the Northern Territory to obtain relief in the nature of certiorari in respect of the adjudicator's decision. Freehills sought confirmation that Thomson Geer had authority to accept service of those proceedings. 39 The following day, on 9 February 2023, Freehills wrote to the adjudicator to inform him that Project Sea Dragon was considering "the imminent commencement of proceedings … in respect of the purported determinations dated 3 February 2023". 40 Mr Dyer gave evidence in these proceedings that he was extremely disappointed with the adjudicator's decision, as were the other directors of Project Sea Dragon and Seafarms Group Limited. Accordingly, the directors explored the legal options available to them at the time. He said that they felt that there were jurisdictional errors affecting the decision, though he could not elaborate upon them. He added that the directors had discussed the possibility of litigation to challenge the adjudicator's decision, but they did not get to the point of instructing Freehills to commence proceedings. 41 In connection with these same matters, Mr Dyer gave evidence that he spoke to Mr Tim Cox of Mills Oakley, the current solicitors for Project Sea Dragon and Seafarms Group Limited. Following this discussion, contact was made with Mr Shaun McKinnon of BDO (who is now one of the second defendants in these proceedings) in order to determine whether he was prepared to act as voluntary administrator of Project Sea Dragon. Mr McKinnon deposed that the prospect of a voluntary administration was first raised with him in a telephone discussion with Mr Cox on or about 8 February 2023, being the day on which the aforementioned letter was sent from Freehills to Thomson Geer, and the day before Freehills gave notice to the adjudicator of the possible commencement of proceedings. 42 Under cross-examination, Mr Dyer acknowledged that the directors had considered whether the voluntary administration of Project Sea Dragon would be a preferable course for the Seafarms Group to take over the commencement of court proceedings. In doing so, they discussed several matters, including whether making payment to Canstruct in accordance with the adjudicator's decision would undermine the group's ability to pursue the project, and whether it would result in the termination of employees. Ultimately, they concluded that making the payment to Canstruct would compromise the business of the group. The directors also considered that, if they were to pursue the option of litigation, they would be required to pay the money into court, or to Canstruct, which would cause Project Sea Dragon to be "in trouble". It was thought that the litigation might remain on foot for over two years. According to Mr Dyer, the directors understood at the same time that, if the option of voluntary administration was pursued, then Canstruct would be precluded from enforcing payment of the adjudicator's decision as soon as the process commenced. They also understood that, if a DOCA was approved by the creditors of Project Sea Dragon, then Canstruct's ability to recover the amount awarded to it by the adjudicator would be limited to whatever the DOCA provided for it to be paid, and the liability arising out of the adjudicator's decision could be discharged. 43 It emerged from Mr Dyer's cross-examination that, during their deliberations, the directors took into account the fact that a DOCA could only pass in the context of a voluntary administration if it was approved by a majority of creditors in both number and value. They discussed the fact that Seafarms Group Limited would have to make a financial contribution under the DOCA in order to ensure that the creditors, or most of them, would do better under the deed than in a liquidation scenario. The $3.5 million sum that was ultimately put up was apparently calculated by working out the allowance that would need to be made for: (a) the fees of the administrators and the other costs of the administration to be paid; (b) all of the unrelated creditors of Project Sea Dragon, other than Canstruct, to be paid 100 cents in the dollar; and (c) Canstruct to receive a return on its adjudication debt of about 10 cents in the dollar. 44 Mr Dyer explained that the directors' decision to pay Canstruct about 10 cents in the dollar was made because the amount that Canstruct would stand to receive under the DOCA as a result was equivalent to the amount that the directors thought that it was properly owed. 45 As for the unrelated creditors, Mr Dyer initially asserted that the decision to pay them 100 cents in the dollar had not been made in order to encourage them to vote in favour of the DOCA. However, he conceded that the directors had discussed "how the voting might balance out" - that is, "the values and the numbers of all of the creditors and how that might fall out". In this connection, the directors had recognised that the majority of the creditors by value were related entities, which would vote in favour of the DOCA. They had then discussed whether they could get a majority by number of creditors to approve the DOCA and, in doing so, discussed the likelihood that offering 100 cents in the dollar to the unrelated creditors would entice them to vote in favour of the deed. According to Mr Dyer, the discussion went no further: while it was acknowledged that offering the unrelated creditors a full return was "likely" to encourage them to vote for the DOCA, that was apparently not the reason that a full return was offered. 46 All in all, there were approximately 50 unrelated creditors of Project Sea Dragon, other than Canstruct and the company's employees. Those unrelated creditors were owed about $420,000. It should be noted that the group of unrelated creditors affected by the DOCA also excluded the landlords with whom Project Sea Dragon was engaged in respect of its various leases, whose entitlements remained unaffected. In his affidavit evidence, Mr Dyer set out a list of trade creditors who had lodged proofs of debt at the eventual second meeting of creditors of Project Sea Dragon and asserted that each of those creditors was a "critical supplier or provider to the operations of Project Sea Dragon". He was cross-examined in some detail on this assertion, particularly insofar as it seemed to suggest that there was some basis for the different treatment of those creditors relative to Canstruct. 47 Before turning to consider what was revealed in the course of that cross-examination, it bears repeating that the development of the project at Legune Station had effectively been put on hold from about April 2022. As at the time of the hearing of this matter, that was approximately 16 months in the past. Accordingly, to test the aforementioned assertion in Mr Dyer's affidavit evidence, Mr O'Donnell KC, counsel for Canstruct, conducted an exercise in cross-examination whereby he proceeded one by one through the list of trade creditors of Project Sea Dragon and asked Mr Dyer what service each creditor had provided to the company and when that service had last been provided. The assumption underlying this exercise seemed to be that, if a creditor had provided a service of a particular importance to Project Sea Dragon - especially during the period in which the project was on hold - then that creditor could perhaps be accepted to be a "critical supplier or provider to the operations of Project Sea Dragon". That might then justify some difference in treatment under the DOCA between the creditor in question and Canstruct. 48 This exercise ultimately worked to reveal some important points. As it was carried out, it became apparent that many of the unrelated creditors who were to be paid in full under the DOCA had indeed provided services of some importance to Project Sea Dragon during the time that the project had been on hold. These creditors supplied services that were necessary for the ongoing maintenance of the facilities established by Project Sea Dragon, and for the maintenance of the status quo on the project more generally, given the prospect that it might recommence. However, not all of the creditors who were to be paid in full were providing ongoing services to Project Sea Dragon. Mr Dyer accepted that the DOCA was not structured so as to tie payment in full to the ongoing provision of a service, as follows: [MR O'DONNELL KC]: But the structure of the DOCA doesn't provide for 100 per cent return to those creditors who continue to provide a service to Project Sea Dragon. It provides for 100 per cent - 100 cents in a dollar to all unrelated creditors other than Canstruct, doesn't it? [MR DYER]: Yes. 49 Indeed, the cross-examination revealed that there were certain creditors of Project Sea Dragon who could not, on any reasonable view, be said to be critical suppliers or providers. Specifically, the DOCA made provision for the payment of Project Sea Dragon's former solicitors, Freehills, and a supplier of indoor plants, Darwin Indoor Plant Hire - neither of whom could be said to be vital to the continuation of the project. This belied Mr Dyer's justification for paying all of the arm's-length creditors in full, save for Canstruct. 50 As cross-examination progressed, Mr Dyer confirmed that the directors of Seafarms Group Limited well understood that, if the company ceased to fund Project Sea Dragon, then the directors of Project Sea Dragon would place it into voluntary administration. The subsidiary would then be in the hands of administrators, who would continue the operations of the company (and retain its employees) with funds provided by Seafarms Group Limited. Mr Dyer also confirmed that the directors' intention was that, once Project Sea Dragon was in administration, Seafarms Group Limited would propose a DOCA for the purposes of which it would make a financial contribution in order to ensure that the deed offered the creditors a better return than they would receive in a liquidation. When asked by Mr O'Donnell KC whether the directors had discussed "that the plan would be to structure the … deed of company arrangement so that all of the unrelated creditors, apart from the landlord and apart from Canstruct, would get 100 cents in the dollar", he answered in the affirmative. However, he denied that the directors had discussed whether this was likely to entice a vote in favour of the DOCA. On the other hand, he admitted that the amount paid to Canstruct was calculated to afford it a better return than it would receive in a liquidation - describing it as a "subjective amount". 51 Mr Dyer also acknowledged that the directors had discussed that, once the DOCA was executed, control of Project Sea Dragon would return to its directors and Seafarms Group Limited would resume funding of the subsidiary to continue its operations. He ultimately accepted the proposition put to him that the only substantial difference in Project Sea Dragon before and after its administration was that it would be released from its liability to Canstruct in connection with the adjudication and would therefore retain the money that it would otherwise have been obliged to pay. Mr Dyer quite candidly acknowledged that the object of the VA and DOCA process was to achieve a situation where the funds did not have to leave the Seafarms Group to go to Canstruct, as per the adjudicator's decision. The relevant exchange proceeded as follows: [MR O'DONNELL KC]: So the object of the administration and the deed was to achieve a situation where the funds don't have to leave the Seafarm Group to go to Canstruct as per the adjudication determination. Correct so far? [MR DYER]: Correct. [MR O'DONNELL KC]: And Project Sea Dragon gets a release from all liability to Canstruct through the deed; correct? [MR DYER]: Correct. [MR O'DONNELL KC]: They were the only two real objects achieved by the voluntary administration in the deed; correct? [MR DYER]: Incorrect. [MR O'DONNELL KC]: What else was achieved? [MR DYER]: Project Sea Dragon would survive, and Seafarms Group would survive. [MR O'DONNELL KC]: And that's because the money doesn't go out of the Seafarm Group to Canstruct and because - - -? [MR DYER]: Seafarms Group to Project Sea Dragon to Canstruct, yes. [MR O'DONNELL KC]: And because Project Sea Dragon gets a release from all liability of Canstruct; correct? [MR DYER]: Correct. [MR O'DONNELL KC]: So they're consequences of those two things being achieved; correct? [MR DYER]: Correct. 52 This evidence assists in understanding why, on 13 February 2023, the directors of Seafarms Group Limited resolved to withdraw funding to Project Sea Dragon. A meeting of the board of directors of Project Sea Dragon was held on the same day, the minutes of which note (inter alia) that: 4. the financial position of the Company is such that the Company does not, by itself, have the ability or the means to pay the Adjudicated Amount; 5. the Company has received notice from its ultimate holding, namely Seafarms Group Limited ACN 009 317 846 (ASX:SFG) (SFG) that SFG is withdrawing funding support to the Company and specifically that they will not pay the Adjudicated Amount; 6. further the Company cannot give any assurance to SFG that Canstruct will be capable of repaying the funds in the event that it is ultimately determined that the Adjudicated Amount was not in fact due and payable; 7. the board has formed the view that without the financial support of SFG, the Company will likely become insolvent in the near future; and 8. Shaun McKinnon and Andrew Fielding of BDO Business Restructuring Pty Ltd should be appointed as Joint & Several Administrators of the Company pursuant to Section 436A of the Corporations Act 2001 (Cth) (Emphasis in original). 53 On 14 February 2023, Mr McKinnon and Mr Andrew Fielding, the second defendants in these proceedings, were appointed as joint and several administrators of Project Sea Dragon. 54 On 15 February 2023, Seafarms Group Limited released an announcement to the ASX, which included the following statement: As a result of the decision made by the adjudicator on 3 February 2023 regarding a construction dispute, the voluntary administration became a necessary step for Project Sea Dragon. 55 On 17 February 2023, Seafarms Group Limited entered into a "Funding Agreement" with the administrators, pursuant to which it agreed to provide a working capital facility of $1.65 million for the administrators' use. Those funds were intended to cover the administrators' fees and expenses, as well as all expenses involved in continuing to operate the business of Project Sea Dragon. That included the cost of continuing the employment of Project Sea Dragon's existing employees, paying all lease payments that fell due, and meeting supplier payments and other operational costs. 56 On 23 February 2023, the same date as the first meeting of the creditors of Project Sea Dragon, Canstruct lodged with the administrators a formal proof of debt in the amount of $13,994,955.30. The proof of debt form cited the three determinations of the adjudicator on 3 February 2023, relating to each of the Work Orders.

The proposal of the DOCA 57 Mr McKinnon deposed that, on 13 February 2023, he attended a meeting with certain other representatives of BDO and some of the directors of Project Sea Dragon. At that meeting, it was allegedly communicated by the directors that their intention was to keep the company and the project alive, and that they intended to propose a DOCA - though they had to confirm their position and consider financial models before doing so. 58 On 13 March 2023, Seafarms Group Limited, as the deed proponent, proposed a DOCA to the administrators of Project Sea Dragon. The terms of the DOCA were in line with what is now known to have been the intention of the directors of Seafarms Group Limited prior to the cessation of its funding of Project Sea Dragon. 59 The purpose was identified in the following terms: The proposed DOCA for the Company is intended to satisfy the objectives of Part 5.3A of the Act, including to maximise the chances of the Company, or as much as possible of its operations, continuing in existence, or to achieve better outcomes for the Company, compared to the expected outcome were the Company to be immediately wound up and assets liquidated. 60 It ought to be noted, in passing, that this passage seems to have been intended to encapsulate or reflect the object of Pt 5.3A identified in s 435A of the Corporations Act. If this is so, then it contained a significant error which, as it transpires, might well have been Freudian in nature: instead of the DOCA seeking to achieve "a better return for the company's creditors and members than would result from an immediate winding up of the company", to use the words of s 435A(b), it apparently seeks to achieve "better outcomes for the Company, compared to the expected outcome were the Company to be immediately wound up and assets liquidated". 61 The key elements of the DOCA were as follows: (a) Seafarms Group Limited would contribute $3.5 million (described as the "Seafarms Contribution") to a "Deed Fund", which would first be used to repay the working capital facility provided by Seafarms Group Limited for the administrators' expenses, after which an amount of $1.9 million to $2.03 million would be available for creditors. (b) The remainder of the Deed Fund would be distributed according to a priority arrangement so as to: (i) meet the claims of employees and "Small Claim Creditors" (presenting claims of $300,000 or less) such that they received 100 cents in the dollar; and (ii) thereafter, pay the "Balance Creditors" - that is, Canstruct - an estimated amount of 10.11 cents to 11.12 cents in the dollar, equating to approximately $1.4 to $1.55 million. (c) Other than the repayment of the interim funding, neither Seafarms Group Limited nor any of the other related companies in the Seafarms Group would receive anything from the Deed Fund. (d) Upon the effectuation of the DOCA, all claims against Project Sea Dragon would be released and extinguished in full, save for any claims by any landlord in respect of premises occupied by Project Sea Dragon. 62 The following day, on 14 March 2023, the administrators sent to the creditors of Project Sea Dragon a report entitled "Report to Creditors by Voluntary Administrators pursuant to section 75-225 of the Insolvency Practice Rules (Corp) 2016 & Section 439A of the Corporations Act 2001" (hereinafter, the "14 March 2023 Report"). The 14 March 2023 Report contained, amongst other things, information regarding the second meeting of creditors to be held on 21 March 2023. In the executive summary at the outset of the document, the administrators recommended that the company execute a DOCA, as the DOCA proposal before it would "result in a higher and more certain return to all unsecured creditors". In a later subsection of the executive summary entitled "Frequently Asked Questions", it was stated that "[t]he DOCA proposal results in all classes of creditors receiving more than is estimated to be returned in a liquidation scenario". 63 Later in the 14 March 2023 Report, the administrators gave more detailed commentary in respect of the DOCA proposal. That commentary included the following points, amongst others: • The DOCA effectively repays all creditors in full, other than Canstruct Group Pty Ltd. Other than related party creditors, Canstruct is the largest creditor by a significant value. Canstruct is estimated to receive more under the DOCA proposal than they would in a Liquidation scenario. • The DOCA proposal would result in: The Company's operations to be continued; The ongoing employment for all thirteen staff members, and the avoidance of the crystallisation of the associated employee entitlements, including termination entitlements; These employee entitlements would be honoured by the Company post DOCA The avoidance of the crystallisation of various contractual and contractual related damages clauses for future lease payments and remediation works associated with teases and other agreements, that would be required to be completed at various sites; A single upfront lump-sum payment and is therefore not subject to the uncertainty of recoveries associated with a Liquidation; Under the DOCA related party creditors of circa. $65m would not claim; and A better financial return for all creditors than a liquidation. 64 In the next section of the Report, the administrators purported to estimate the return to creditors in two possible scenarios. It was suggested that, under the DOCA, all creditors would receive 100 cents in the dollar except for the one "Non-Small Claim Creditor", which was Canstruct. By contrast, it was suggested that, in a liquidation, all creditors would receive zero cents in the dollar. 65 Notably, the administrators stated that they had "not identified any potential claims that would provide any return to creditors of the Company in a liquidation scenario". At least part of the basis for this conclusion seemed to be the following series of points: • Based on our investigations, the Company was insolvent from 13 February 2023 being the date SFG resolved to no longer provide financial support. • Prior to this date, the access to Capital and ongoing financial support of the parent allowed the Company to meet their debts as and when they fell due. Once this support was withdrawn, the Company became insolvent. • A claim for insolvent trading is generally calculated by reference to the increase in liabilities in the period of insolvency. As the period in question is for the day prior to the Administrators [sic] appointment, we consider that this balance is nil. 66 There is no need at this juncture to set out in detail any other parts of the 14 March 2023 Report. It suffices to observe that the document effectively assumed as its foundation, and expressed throughout, certain views with which Canstruct vehemently disagreed.

The ability of Seafarms Group Limited to pay the debt owed to Canstruct 67 It is an uncontroversial fact that, at the time that Seafarms Group Limited proposed the DOCA, it had the ability to fund the payment of the debt owed by Project Sea Dragon to Canstruct. So much had been asserted by Seafarms Group Limited in its announcement to the ASX on 3 February 2023, which stated relevantly as follows: Seafarms provisioned $8.7m for a settlement of this dispute in its 2022 accounts, and has the capacity to cover the balance. 68 This was also confirmed by Mr Dyer in the course of his evidence in these proceedings. 69 Nevertheless, Seafarms Group Limited declined to fund the payment of that debt. The reason that it gave was that it did not believe that the amount was properly due and owing.

The second meeting of the creditors of Project Sea Dragon and the entry into the DOCA 70 The second meeting of the creditors of Project Sea Dragon was held on 21 March 2023. As at that date, the creditors of Project Sea Dragon included: (a) 13 employees, who were to be paid $11,133 if the DOCA was approved; (b) 50 trade creditors (apart from Canstruct), which were owed approximately $420,000; (c) Canstruct, which was owed approximately $14 million; and (d) related party creditors, who were owed a total of approximately $64.85 million. 71 Amongst those related party creditors, Seafarms Group Limited was owed $62.36 million. 72 Additionally, Project Sea Dragon had continuing commitments under certain lease arrangements, although those liabilities were to be met by the administrators as part of the continuation of the business and were not dealt with in the DOCA. 73 The minutes of the second meeting of the creditors recorded that 25 proofs of debt were received by the administrators, totalling approximately $128.15 million. Of that, approximately $80.37 million was admitted for voting purposes. 74 Voting at the second meeting occurred by poll. Pursuant to s 75-115 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPR), for the DOCA to be passed by resolution at the meeting, there needed to be a vote in favour of the resolution by both a majority in number of the creditors voting and a majority in value of the creditors voting. 75 When the resolution to enter into the DOCA was put, 19 creditors (including four related party creditors) voted in its favour. Only Canstruct voted against it. There was accordingly a vote in favour of the resolution by a majority in number of the creditors voting. The value of the debts of those voting in favour was $65,364,096.15, of which $64,853,676.65 was attributable to related parties - including Seafarms Group Limited, which contributed the overwhelming majority of the total amount. Canstruct's debt was entered as $13,994,955.25, and this was the value of the only vote cast against the resolution. The resolution therefore attracted votes in favour by a majority in value of the creditors voting. 76 The DOCA was entered into on 23 March 2023. In accordance with its terms, control of Project Sea Dragon was immediately returned to its directors. 77 In an announcement released to the ASX by Seafarms Group Limited on 24 March 2023, it was stated (amongst other things) that: As a result of entry into the DOCA, control of Project Sea Dragon has now returned to the directors. As previously announced no jobs were lost and the operations at Exmouth continued successfully throughout the Administration period. The directors expect that SFG operations will now return to normal and they will continue to assess advancing Project Sea Dragon including interim funding. Further funding to advance the project is being sought from third party funders. SFG has been advised that the DOCA discharges the claims against Project Sea Dragon by Canstruct (including the claim and claim amount announced by SFG on 3 February 2023).

The commencement of proceedings and the payment of creditors 78 Canstruct commenced the present proceedings by filing an originating process on 5 April 2023. By an interlocutory application filed 24 April 2023, it sought to restrain the deed administrators (that is, the second defendants) from finalising the distribution of the Deed Fund to creditors. 79 The application was heard on 3 May 2023, and the orders sought by Canstruct were ultimately made on the same day. The second defendants were thereby restrained, in effect, from finalising the DOCA until the determination of this matter or further order: see Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) [2023] FCA 637. 80 Despite this interlocutory injunction having been granted, Seafarms Group Limited paid the debts owed to nearly all of the arm's-length creditors of Project Sea Dragon. As at the time of the final hearing, the only unrelated creditors who had not been paid in full were Canstruct and Freehills. 81 The entirety of Canstruct's debt remains unpaid.

Canstruct's claims in relation to the VA and DOCA process 82 Canstruct claims that the DOCA should be terminated pursuant to s 447A and/or s 445D of the Corporations Act on several grounds, including that: (a) as contemplated by s 447A(2)(b), and within the ambit of s 445D(1)(g), entry into the DOCA constituted an abuse of the provisions of Pt 5.3A; (b) as contemplated by s 445D(1)(f), it was unfairly prejudicial to, or unfairly discriminatory against, Canstruct; (c) as contemplated by s 445D(1)(e), effect could not be given to the DOCA without injustice; (d) as contemplated by s 445D(1)(b), misleading information was provided to the creditors voting on the DOCA; and (e) as contemplated by s 445D(1)(c), there were material omissions from the information given to those creditors. 83 As noted at the outset of these reasons, those grounds overlap both factually and, to some extent, legally. 84 Canstruct also seeks a number of ancillary orders, including that: (a) pursuant to s 447A of the Corporations Act, the administration of Project Sea Dragon be brought to an end; (b) pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act) (IPS), the resolution of creditors on 21 March 2023 that Project Sea Dragon execute the DOCA be set aside; (c) Project Sea Dragon be wound up in insolvency; and (d) Mr Robert William Hutson and Mr David Martin Johnstone be appointed as joint and several liquidators of Project Sea Dragon. 85 The various aspects of the relief sought by Canstruct may be addressed in turn.

Legal principles concerning ss 447A(2)(b) and 445D(1)(g) of the Corporations Act 86 Canstruct applies under each of s 447A and s 445D(1)(g) of the Corporations Act for an order that the DOCA be terminated on the basis that the entry into it constituted an abuse of the provisions of Pt 5.3A. It also applies under the former provision for an order that the administration of Project Sea Dragon be brought to an end. 87 The concept of an abuse of Pt 5.3A of the Corporations Act requires some attention to be directed to the purpose of that part. Conveniently, this is set out expressly in s 435A, as follows: 435A Object of Part The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 88 With this in mind, s 447A(1) - (2) relevantly provides: 447A General power to make orders (1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. 89 In Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) 110 ACSR 203 (ASIC v Midland Hwy), Beach J identified (at 222 [64] - [67]) that s 447A provides the Court with power to terminate an administration and to order a winding up in the public interest. His Honour also identified in the same case (at 223 [69]) that the Court has power under the section to set aside a resolution to enter into a DOCA. It is otherwise well established that s 447A also provides the Court with power to terminate a DOCA and, accordingly, it is not uncommon for an application under the section to be coupled with an application under s 445D: see Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846 [819], [1221]. 90 The concept of "abuse" in s 447A(2)(b) was said by Barrett J in Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) (2003) 47 ACSR 391, 396 [17] (Blacktown City Council) to be that involved in an abuse of process. His Honour went on to state, in the same paragraph, that: The specific aspect of the very wide s 447A jurisdiction described in s 447A(2)(b) is therefore akin, as to its content and purpose, to the court's inherent jurisdiction to stay proceedings permanently for abuse of process. As the decision of the High Court in Williams v Spautz (1992) 174 CLR 509; 107 ALR 635; 61 A Crim R 431 confirms, the use of a procedure or process for a purpose essentially foreign to the purpose it is designed to serve is the principal determinant of abuse. Resort to the procedure or process to effectuate some collateral purpose makes the use of the procedure or process improper. In the present context, this leads in the first instance to a consideration of what the proper purposes of the provisions of Pt 5.3 may be said to be. 91 This passage and the reference to Williams v Spautz (1992) 174 CLR 509 (Williams) therein were discussed by Sackville AJA in Re New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd (2015) 107 ACSR 504 (New Bounty). His Honour remarked (at 544 [196]) that: Williams, to which frequent reference is made in proceedings brought under s 447A(1) of the Corporations Act, was concerned with abuse of the court's process, not with abuse of the process available under Pt 5.3A of the Corporations Act. (Footnotes omitted). 92 He then went on (at 545 [198]) to make the following observation: In my view some care must be taken in applying the principles governing the process of a court to the different question of whether a party has improperly invoked the process available under Pt 5.3A of the Corporations Act. The issues may be similar in each situation, but they are not necessarily identical. It may be difficult, for example, to apply concepts such as procedural fairness to actions taken by a company or its officers. When the question of abuse of process arises in a statutory context, attention has to be directed primarily to the terms of the legislation. 93 Whilst there is perhaps some tension between these statements and what was said in Blacktown City Council, there is no necessary inconsistency between the judgments. Justice Barrett referred to the jurisdiction described in s 447A(2)(b) as one that is "akin" to the inherent jurisdiction to stay proceedings for abuse of process. His Honour's remarks do not clearly suggest, and should not be taken to suggest, that the jurisdiction in both instances is the same - and it was specifically that equating of the statutory and inherent jurisdictions that Sackville AJA cautioned against: see Dr Paulina Fishman, "Corporate Rescue in Danger: Pt 5.3A Abuse and Inappropriate Relief" (2023) 39 Australian Journal of Corporate Law 135, 138. 94 It is also worth pointing out what was said by Sackville AJA in New Bounty (at 544 [197]) after his Honour set out a passage from the majority judgment in Williams regarding the abuse involved in the commencement of proceedings for a collateral purpose, as follows: The important point that emerges from this passage is that a person who intends to use a process for the purpose for which it is designed, does not abuse that process by having an "ultimate purpose" that is outside the scope of the proceedings. 95 To similar effect is the statement of White J in Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd (2007) 213 FLR 450, where his Honour described the conclusion drawn in Williams as follows at 460 [37]: There, it was held that it is an abuse of process to institute proceedings for the predominant purpose of obtaining a collateral advantage outside the proper purpose for which the proceedings are designed. However, it is not an abuse of process to bring proceedings for the purpose of pursuing them to a conclusion to obtain whatever entitlement or benefit the law provides if the proceedings terminate in the plaintiff's favour. 96 The idea that, in order for there to be an abuse of process, the improper or collateral purpose must be the "predominant" purpose emerges in clear terms from the judgment of the majority in Williams at 529. It has been repeated in other more recent cases in the context of s 447A: see, for example, Foti v P & S Investments Pty Ltd [2009] FCA 1409 [27], [34]. 97 Several scenarios in which the jurisdiction described in s 447A(2)(b) has been relied upon to terminate a DOCA and voluntary administration were recently listed by Hill J in Chalmsbury Nominees Pty Ltd v Alita Resources Ltd (receivers and managers appointed) (subject to deed of company arrangement) [2023] WASC 97 [49] (Chalmsbury Nominees v Alita). They include: (a) where it would bar particular claims already being litigated against the company (citing Blacktown City Council); (b) where the winding up may serve the public interest as investigations and recovery proceedings are likely to be funded and could realistically lead to persons who engaged in suspect transactions being brought to account (citing Public Trustee (Qld) v Octaviar Ltd (subject to deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139, 194 [182]); (c) if the provisions of the Corporations Act are being abused (citing Re Sales Express Pty Ltd (admins apptd) [2014] NSWSC 460 [19] (Sales Express)); or (d) where there is an ulterior element or purpose in using the provisions of Pt 5.3A (citing Workers Compensation Nominal Insurer v Perfume Empire Proprietary Ltd [2011] NSWSC 379 [22]). 98 In the last of those cited decisions, Barrett J pointed out (at [22]) that the cases in which courts have intervened to terminate a voluntary administration are all cases in which there has existed what might be termed some "ulterior element". This observation has been referred to without disapproval in subsequent decisions: see, for example, Sales Express [19]; Re Condor Blanco Mines Ltd [2016] NSWSC 1196 [19]; Shaoyong (David) Guo v Xinwei Song; In the matter of SG Capricorn Investments Pty Ltd (subject to deed of company arrangement); Dameng Developments Pty Ltd (subject to deed of company arrangement); and New Mangrove Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12 [124] (Guo v Song). 99 The power in s 447A is necessarily broad, though it is not entirely without limit: Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270, 280 [20]. Although it will usually be exercised having regard to the interests of the creditors as a whole and the public interest, the former factor may be overcome by the latter in a particular case, such that liquidation is the more favourable result: ASIC v Midland Hwy at 222 [67]. As Beach J observed in that last mentioned decision (at 223 [68]), the public interest "includes considerations of commercial morality and the interests of the public at large" (citing Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510, 565 [287]). His Honour further held, in the same paragraph, that: Where there has been misconduct in the affairs of a company requiring appropriate investigation by a liquidator and appropriate recovery proceedings being considered and undertaken, it is detrimental to commercial morality to prevent or hinder such steps through the device of a DOCA propounded by entities and individuals who ought be the subject of investigation and the target of such proceedings. A winding up will be beneficial from a public interest perspective where investigations and recovery proceedings are likely to be funded and the investigations and appropriate recovery proceedings could realistically lead to the relevant persons who have engaged in the suspect transactions being brought to account: Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139; [2009] QSC 202 at [182] per McMurdo J. 100 Relevantly for present purposes, his Honour also held (at 223 [69]) that, in exercising its power under s 447A to set aside a resolution to enter into a DOCA and to order a winding up, the Court could apply by analogy any one or more of the principles applicable to s 445D. In that respect, the observations of Gordon J in TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789 [58] (TiVo) are relevant. There, her Honour held that s 445D(1)(g) may be available where (inter alia) the proposal for the DOCA has a fraudulent or wrongful purpose, or the DOCA offers an unconscionable premium as a bribe to creditors to support an arrangement the consequence of which is that the directors' conduct will not be investigated (citing Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) (2005) 228 ALR 598, 609 [63]; Young v Sherman (2002) 170 FLR 86, 104 [67], 109 [92]). A conclusion that the DOCA process is being used to forestall an investigation into the directors' conduct will be a significant factor to weigh in the assessment as to whether the DOCA is in the interests of the creditors as whole. Her Honour added (at [59]) that the circumstances in which a DOCA will be terminated are not closed, and each case will depend upon its own facts and combination of circumstances. 101 By itself, s 445D confers power on the Court to terminate a DOCA in a broad range of circumstances. In particular, s 445D(1)(g) provides: 445D When Court may terminate deed (1) The Court may make an order terminating a deed of company arrangement if satisfied that: … (g) the deed should be terminated for some other reason. 102 The authorities concerning the application of this provision reveal that it may be used by the Court: (a) where there has been an abuse of the provisions of Pt 5.3A: Mighty River International Ltd v Hughes (2018) 265 CLR 480, 490 - 491 [13]; Chalmsbury Nominees v Alita [47]; (b) where the DOCA is contrary to the "public interest", which involves considerations of commercial morality and the interests of the public at large: Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd (subject to deed of company arrangement) (2020) 149 ACSR 1, 54 - 56 [409] - [410]; (c) where, as in the case of s 447A, the termination of a DOCA can be justified in the public interest even if it is not also in the interests of the creditors as a whole: ASIC v Midland Hwy at 222 - 223 [67] - [69], [73]; Guo v Song [150]; and (d) where the DOCA has the consequence of preventing an effective investigation into the company's affairs and the opportunity for a greater return in a liquidation scenario, as in such circumstances the DOCA is contrary to the creditors' interests overall and the public interest at large: ASIC v Midland Hwy at 224 [74], citing Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783 [37].

Should the DOCA and the administration be terminated under either s 447A or s 445D(1)(g)? 103 Canstruct submitted that the real object of Project Sea Dragon and/or Seafarms Group Limited in putting the former company into administration and proposing the DOCA was "to avoid having to fund payment of the adjudicator's decision that went against [Project Sea Dragon], while at the same time avoiding the scrutiny of [Project Sea Dragon's] arguably insolvent trading over the previous two years that might occur in a liquidation". This, so it was submitted, amounted to a relevant abuse of Pt 5.3A. 104 It is convenient to divide Canstruct's case in relation to the application of ss 447A and 445D(1)(g) into two parts: (a) the first concerns the alleged abuse of Pt 5.3A involved in Project Sea Dragon and Seafarms Group Limited having used the VA and DOCA process to avoid most of the debt owed to Canstruct; and (b) the second concerns the alleged abuse of Pt 5.3A involved in Project Sea Dragon and Seafarms Group Limited having used the VA and DOCA process to avoid scrutiny into possible insolvent trading on the part of the former company.

Avoiding the debt owed to Canstruct 105 For the reasons that follow, the first part of Canstruct's case in relation to the application of ss 447A and 445D(1)(g) of the Corporations Act should be accepted. The utilisation of the VA and DOCA process for the predominant purpose of expunging a particular trade creditor's debt may suffice to enliven the power under either of those provisions. Part 5.3A was not enacted to provide an avenue by which a corporate group might rearrange its affairs in order to wipe the unwanted debts of an operating company before returning it to business as usual.

Identifying the predominant purpose 106 The evidence in this case established, rather unequivocally, that the predominant purpose of Project Sea Dragon and Seafarms Group Limited in entering into the VA and DOCA process was to disencumber the former company of its liability to pay the adjudication debt to Canstruct. 107 From the point of view of the companies' directors, the process effectively permitted the debt to be discharged by the payment of a substantially smaller sum while the position of Project Sea Dragon remained otherwise the same. Mr Dyer explicitly acknowledged as much during his evidence, albeit with some initial resistance: [MR O'DONNELL KC]: The substantial difference before the administration and after the administration was that PSD would be released from its liability to Canstruct for the adjudication determination; correct? [MR DYER]: Part - in part. [MR O'DONNELL KC]: That was the only practical difference, wasn't it? [MR DYER]: No, there would be more cash in our bank to be able to enable Project Sea Dragon and Seafarms to survive. [MR O'DONNELL KC]: Because it hasn't been paid to Canstruct? [MR DYER]: Correct, or court. [MR O'DONNELL KC]: So you're keeping the cash rather than paying it to Canstruct, but you're also getting a release from all liability of Canstruct by the deed; correct? [MR DYER]: Yes. [MR O'DONNELL KC]: In terms of looking at the situation before the voluntary administration and after, that's the big difference, isn't it, in Project Sea Dragon's position? [MR DYER]: Yes. [MR O'DONNELL KC]: Indeed, it's the only difference, isn't it? [MR DYER]: Yes. 108 To be more specific, upon the execution of the DOCA the following events occurred: control of Project Sea Dragon was immediately returned to the company's directors; Seafarms Group Limited signalled its intention to recommence its funding of the project; Project Sea Dragon continued its commercial relationships with several trade creditors whose debts were paid, or were to be paid, in full; arrangements between Project Sea Dragon and its lessors and employees remained in place; and Project Sea Dragon effectively resumed its pursuit of the project. The only real difference in the company's position after the VA and DOCA process was that, as acknowledged by Mr Dyer, the liability to Canstruct had now been discharged. 109 In their written submissions in these proceedings, Project Sea Dragon and Seafarms Group Limited pointed out what they described as the "fallacy" in focusing on the outcome of the VA and DOCA process, which was to result in Canstruct being paid less than the full amount of its debt, and using that as a basis to infer an actual intention on the part of Project Sea Dragon's directors as to the purpose of that process. However, whilst it can be accepted that the outcome alone may not, in every case, suffice to reveal the intention underlying a voluntary administration and DOCA, it will in many cases be relevant to the task of ascertaining that intention. There is nothing inherently erroneous in reasoning that the outcome of a process might, to some extent, reflect the purpose behind it. In this case, the outcome whereby all arm's-length creditors were to be paid in full except for Canstruct, and Project Sea Dragon otherwise continued to operate as it had prior to the administration, minus the debt owed to Canstruct, gave at least a prima facie indication that the purpose of the process was simply to avoid paying the full amount of that debt to Canstruct. 110 It could hardly be said that this prima facie indication of the purpose behind the VA and DOCA process was dispelled by the evidence as these proceedings progressed. For instance, the following exchange took place in the cross-examination of Mr Dyer: [MR O'DONNELL KC]: But you recognise that if you put PSD into voluntary administration and propose the DOCA, then Canstruct could not enforce payment, and Canstruct would be - its debt would be discharged by the deed; correct? [MR DYER]: That's correct. [MR O'DONNELL KC]: And was it for that reason that the directors chose voluntary administration in proposing a deed of company administration rather than litigation? [MR DYER]: It was to save - to give Project Sea Dragon the best chance of success and to give Seafarms the best chance of success. [MR O'DONNELL KC]: And that was because the voluntary administration and the deed of company arrangement carried with it that the company wouldn't have to pay the 13.9 million to Canstruct; correct? [MR DYER]: Correct. 111 Mr Dyer's attempt to frame the purpose of the arrangement as giving Project Sea Dragon and Seafarms Group Limited the "best chance of success" was an admirable effort to align the VA and DOCA process with the object of Pt 5.3A expressed in s 435A(a) of the Corporations Act. However, it could not realistically be accepted as an accurate characterisation of the purpose of the VA and DOCA process in circumstances where, as noted above, Seafarms Group Limited already had the means to meet the full amount of the debt due to Canstruct. The evidence does not establish clearly that the debt due to Canstruct as a result of the adjudicator's decision jeopardised the entire Seafarms Group. What remains is a distinct impression that the purpose of the process was simply to avoid paying that debt in full. 112 Even if it is accepted, as a general proposition, that the outcome of a process is not necessarily a reliable indication of the intention underlying it, the evidence that might be used to elucidate the purpose of the VA and DOCA process in this case did not consist solely of its perceptible outcome. The purpose of the process was addressed quite squarely by Mr Dyer in his cross-examination. It was apparent from the evidence that he gave - particularly in relation to the discussions that took place between the directors of Project Sea Dragon and Seafarms Group Limited - that the persons in control of the companies were, from a relatively early stage, entirely cognisant of the consequences that the VA and DOCA process would have. They considered the appropriate form for the DOCA to take as an instrument that would, in effect, ensure the continued viability of the project by avoiding payment of the debt owed to Canstruct. To that end, they apprehended that the DOCA would ensure payment in full to all arm's-length trade creditors of Project Sea Dragon, with the explicit exception of Canstruct, which would be paid only what they thought it was owed. Ultimately, Mr Dyer gave direct evidence as to the purpose of the VA and DOCA process as follows (repeating part of an extract already set out above): [MR O'DONNELL KC]: So the object of the administration and the deed was to achieve a situation where the funds don't have to leave the Seafarm Group to go to Canstruct as per the adjudication determination. Correct so far? [MR DYER]: Correct. [MR O'DONNELL KC]: And Project Sea Dragon gets a release from all liability to Canstruct through the deed; correct? [MR DYER]: Correct. [MR O'DONNELL KC]: They were the only two real objects achieved by the voluntary administration in the deed; correct? [MR DYER]: Incorrect. [MR O'DONNELL KC]: What else was achieved? [MR DYER]: Project Sea Dragon would survive, and Seafarms Group would survive. 113 In effect, then, Mr Dyer considered there to be three purposes to the VA and DOCA process: first, to avoid paying Canstruct in accordance with the adjudicator's decision; secondly, to release Project Sea Dragon from its liability to Canstruct; and, thirdly, to ensure the survival of the Seafarms Group. 114 As set out above, the case law regarding the concept of an "abuse" under the Corporations Act and in the context of the Court's inherent jurisdiction directs attention to the predominant purpose of the impugned conduct. In the present case, it may not be especially difficult to identify a predominant purpose from those three identified objects. Referring to the above extract from his cross-examination, the second object that he identified is clearly a component part of the first, since achieving a release from all liability to Canstruct was a necessary part of ensuring that the funds did not have to leave the Seafarms Group to go to Canstruct as per the adjudicator's decision. The third object, meanwhile, is somewhat difficult to accept as legitimate for the reason identified above - that is, that the Seafarms Group could not obviously be said to be in jeopardy in circumstances where Seafarms Group Limited was, by its own admission, capable of paying the debt due to Canstruct. This leaves the first object as the predominant purpose of the VA and DOCA process: in effect, the object of the process was to avoid paying Canstruct in accordance with the adjudicator's decision. 115 If it was necessary to go further to identify the predominant purpose of the VA and DOCA process, then an appropriate step would be to investigate why Canstruct was paid a different amount to the other arm's-length trade creditors. One might ask, relatedly, why the directors insisted upon payment in full to those other creditors. Mr Dyer's evidence as to these matters was not entirely consistent, and certain aspects of it were somewhat difficult to accept. It is convenient to note a number of particular points, drawn from the more detailed summary of the evidence that appears earlier in these reasons. 116 First, although Mr Dyer sought in his evidence to establish that the arm's-length creditors other than Canstruct ought to have received payment in full because each of them was a "critical supplier or provider to the operations of Project Sea Dragon", that proposition was not made good. Some of the creditors who were to receive payment in full were clearly not critical to the project. There must, accordingly, be some other explanation for the decision to pay them in full - and for the decision to pay that group of creditors as a whole a different amount than would be paid to Canstruct. 117 Secondly, the context in which the VA and DOCA process was implemented included the winding down of the project due to financial difficulties and the disputation with Canstruct in respect of the amount owing to it. Prior to the adjudicator's decision, Seafarms Group Limited had made provision to fund a payment to Canstruct in the amount of approximately $8.7 million and had stated as much in its 2022 Annual Report. However, the adjudicator's decision was for a substantially larger amount and Seafarms Group Limited publicly expressed its "extreme disappointment" in that result. Although it had the capacity to fund Project Sea Dragon to pay the amount in issue, it did not wish to do so. Mr Dyer said that Project Sea Dragon considered challenging the adjudicator's decision in court and, indeed, it made statements that it would do so. That intention, if it existed, changed abruptly shortly before 13 February 2023. Part of the reason for that change of heart was, as Mr Dyer seemingly admitted, the fact that such a course would require Seafarms Group Limited and Project Sea Dragon to pay the full debt to Canstruct or into court. At the same time, as the directors of the companies well knew, the consequence of the adoption of the VA and DOCA process would be that Canstruct's ability to recover anything would be limited in accordance with the terms of the DOCA. It was in that context that Seafarms Group Limited withdrew funding of Project Sea Dragon "as a result of the adjudication dispute". It apparently did so for the further, related purpose of pursing the VA and DOCA process, which it had calculated would permit it to discharge any indebtedness arising from the adjudicator's decision for a fraction of the amount assessed and, otherwise, would allow the project to proceed unimpeded. 118 Thirdly, Mr Dyer denied that there was any discussion amongst the directors as to whether payment in full would encourage the arm's-length creditors to vote in favour of the DOCA. However, he conceded that there had been discussion about what result the voting process might produce, and discussion as to the likelihood that offering 100 cents in the dollar to those creditors would entice them to vote in favour of the DOCA. Ultimately, while he tried to clarify that this discussion as to the "likely" enticing effect of payment in full never progressed to the point where it motivated the decision to offer payment in full in the final DOCA proposal, that clarification is difficult to accept in circumstances where his alternative justification for payment in full seemed to be defective for the reason explained above in respect of the first point. The conclusion more readily drawn is that the payment in full to the other arm's-length creditors was intended to encourage them to vote in favour of the DOCA. 119 Indeed, it must have been obvious to the directors that the critical obstacle to the passage of the DOCA and the discharge of the debt owed to Canstruct was the requirement that entry into the DOCA be favoured by a majority of the creditors of Project Sea Dragon by number. Clearly, the requirement that it be favoured by a majority of the creditors by value could readily be met, since the vast majority of the value came in the form of the debt owed to Seafarms Group Limited, the parent company, which would undoubtedly vote in favour of the DOCA for which it was the proponent. It is difficult to believe Mr Dyer's evidence that, in these circumstances, the directors discussed the fact that payment in full was likely to entice arm's-length creditors to vote in favour of the DOCA, but did not consider that to be a motivating factor at all in their decision to offer payment in full (even as a factor additional to their desire to maintain a commercial relationship with those creditors). 120 It is relevant to note, at this juncture, that the related party creditors voted in favour of the DOCA even though they were to receive nothing under it and their debts would be released. As creditors, they had an interest in recovering the debts that they were owed. Had they acted as creditors, then acting prudently they would have assessed whether they would receive more under the DOCA or in a winding up scenario. Given that the former pathway explicitly offered them no return, the latter pathway was perhaps the obvious choice. Their votes in favour of the DOCA therefore belied the suggestion that they were acting truly as creditors. It is, with respect, obvious that they voted as they did for the purpose of obtaining some collateral advantage. That advantage was, it seems, the benefit to the Seafarms Group in not having Project Sea Dragon pay the adjudication debt or be placed into liquidation. Accordingly, the execution of the DOCA was seemingly assured by the related party creditors voting against their own interests as creditors and by the arm's-length creditors (other than Canstruct) being promised a full return. 121 Ultimately, the result that the VA and DOCA process produced was not some fortuitous outcome, arising as a consequence of necessary action taken in the face of the adjudicator's decision. Rather, it was the intended product of a strategy put in place because paying the amount determined as payable by the adjudicator was not in the interests of the Seafarms Group. The predominant purpose of the VA and DOCA process was to avoid paying the debt owed to Canstruct. No other purpose can properly be discerned when the evidence is considered in its totality. 122 Project Sea Dragon and Seafarms Group Limited submitted that this line of reasoning blurs the distinction between the two companies as separate corporate entities. It says that only Project Sea Dragon was liable to Canstruct, not Seafarms Group Limited. Once the latter company decided to cease funding the former, the decisions thereafter made by the former company had nothing to do with the adjudicator's decision and were solely concerned with rescuing its operations. 123 This submission denies the reality of the situation. As explained above, the directors of the two companies were essentially the same and the financial ties between the companies were especially close. The artifice of alleged solvency in Project Sea Dragon (which is addressed in greater detail below) was created and at all times maintained by Seafarms Group Limited. In the "usual" operation of Project Sea Dragon's business, Canstruct's debt was capable of being paid with funds from Seafarms Group Limited. The submission as to the distinction between the companies effectively amounts to a contention that a single group of people representing both a parent company and its subsidiary might, for a particular reason, embark on the first steps of a strategy in their former capacity but then must be taken to be acting for a different reason when taking subsequent steps of the same strategy in their latter capacity. The VA and DOCA process in this case spanned the whole of the Seafarms Group. It is artificial in the extreme to see the same group of directors as acting in accordance with that process for different reasons merely because, at one time, they happened to be representing Seafarms Group Limited while, at another time, they happened to be representing Project Sea Dragon.

The application of ss 447A and 445D(1)(g) in relation to the avoidance of Canstruct's debt 124 By the conclusion of the trial, it was not seriously in doubt that the predominant purpose of the VA and DOCA process was to allow Project Sea Dragon to avoid paying the full amount owed to Canstruct as a result of the adjudicator's decision. That purpose was improper, and alien to that for which Pt 5.3A is to be used. The process was not a bona fide attempt to use Pt 5.3A to achieve an arrangement by which Project Sea Dragon could continue in existence and provide a better outcome for creditors than a liquidation. Accordingly, the VA and DOCA process constituted an abuse of the provisions of Pt 5.3A, enlivening the powers in ss 447A and 445D(1)(g) to set aside both the administration and the DOCA.

Avoiding scrutiny into Project Sea Dragon's insolvent trading 125 Canstruct sought to fortify the above conclusion by drawing attention to the fact that Seafarms Group Limited, conspicuously, did not pursue the option of putting Project Sea Dragon into liquidation. The VA and DOCA process was not an inexpensive undertaking for Seafarms Group Limited, costing it between approximately $2 million and $3.5 million. Liquidation, by contrast, would not have involved any such costs and might have been a similarly effective means of avoiding payment of the amount awarded by the adjudicator. As was submitted on behalf of Canstruct, Seafarms Group Limited could have used another company to acquire Project Sea Dragon's business (including its leasing rights and the like) from the liquidator in order to continue the pursuit of the project. 126 This suggestion was said by Project Sea Dragon and Seafarms Group Limited to be "fanciful". They pointed out that the former company had negotiated and entered into agreements with native title holders regarding the use of the Legune Station land that could not be guaranteed to carry over to a new entity. In the same way, they suggested that the lessor of that land might be unwilling to contract on commercially acceptable terms with another company. 127 While the tenor of these submissions can be accepted, it is not entirely unreasonable to suppose that the native title holders and the lessor would have been willing to contract with a new entity in the Seafarms Group, represented by the same individuals, that was merely picking up where Project Sea Dragon left off, on essentially the same terms. At the same time, it is certainly unlikely that any third party would have sought to acquire the business of Project Sea Dragon or any of its constituent parts, and there was no evidence that an external purchaser of this kind might exist. A purchaser from within the Seafarms Group could therefore have enjoyed immediate exclusivity in attempting to acquire the business. It might also be supposed that this purchaser company could have paid some of Project Sea Dragon's debts, as Seafarms Group Limited ultimately did, in order to maintain good relations with local suppliers. It follows that, on the evidence, a fair inference arises that the liquidation of Project Sea Dragon was not an entirely unreasonable pathway for the Seafarms Group to follow in order to avoid satisfying the adjudication debt owed to Canstruct. 128 Mr O'Donnell KC for Canstruct submitted that, rather than pursuing that pathway, Seafarms Group Limited was prepared to outlay between $2 million and $3.5 million in order to secure the benefits of the VA and DOCA process, and it must have done so because that process avoided any scrutiny being applied to Project Sea Dragon's finances in the period since the 2020 financial year, when the company began to incur significant debts. It was submitted that this scrutiny, if applied, would reveal that Project Sea Dragon had been engaged in insolvent trading throughout that period. This would be something for which the directors would be personally liable pursuant to ss 588G and 588M of the Corporations Act.

The solvency of Project Sea Dragon since the 2020 financial year 129 The critical issue to be determined in connection with Canstruct's submission is whether Project Sea Dragon was insolvent prior to the date on which Seafarms Group Limited decided to cease funding it. Canstruct contended that the company had in fact been insolvent since the 2020 financial year because it had no income stream or substantial assets of its own, and it continued to accrue substantial debts that it was unable to discharge of its own accord. In response, Project Sea Dragon and Seafarms Group Limited contended that, whilst Project Sea Dragon had no income stream or substantial assets of its own, it was able to rely to a sufficient extent upon Seafarms Group Limited to provide the funding that it required in order to pay its debts, such that it was not insolvent at law. 130 There was no dispute that Project Sea Dragon's indebtedness grew substantially over the years. The 14 March 2023 Report indicated that its net liabilities increased as follows: Excess of total current liabilities over total current assets Excess of total liabilities over total assets 30 June 2020 $6.72 million $2.38 million 30 June 2021 $10.7 million $4.83 million 30 June 2022 $67 million $67.39 million 14 February 2023 $73.28 million $73.53 million

131 Earlier in the 14 March 2023 Report, Project Sea Dragon's total liability to lenders within the Seafarms Group was reported to be approximately $64.85 million. 132 The overall indebtedness of Project Sea Dragon grew in essentially two main ways. First, as the company commenced and then progressed the project, it entered into several contracts under which it incurred substantial liabilities. They included the Framework Agreement with Canstruct, pursuant to which the three Work Orders were issued in relation to approximately $57.5 million (excluding GST) worth of work. They also included subleases for the Legune Station site. Secondly, the process by which it acquired funds to support its operations meant that it continued to incur liabilities to Seafarms Group Limited and other companies in the Seafarms Group. 133 It was also not in dispute in these proceedings that Project Sea Dragon had not entered into an agreement with any entity for the provision of funding to allow it to meet the liabilities that it stood to incur during the development phase of the project. It also did not make arrangements with any entity pursuant to which it obtained a specific promise, commitment or assurance that funding would be provided. Although funds were advanced by Seafarms Group Limited from time to time when requested by Project Sea Dragon, in accordance with the process described earlier in these reasons and as explained in Mr Dyer's affidavit evidence, the amounts in question simply became debts of the company. There was no agreement as to when those debts were to be repaid to Seafarms Group Limited, or any agreement as to the terms on which the funds were provided. There was also no agreement that funding would continue at any time in the future. 134 Project Sea Dragon had no control over whether Seafarms Group Limited would continue to provide funds upon its request. Although, for the reasons addressed below, one might assume that the latter company would ordinarily be inclined to provide those funds, that ultimately depended in each instance upon whether or not it took a favourable view of such a course. It was at liberty to cease funding whenever it wished to do so. Indeed, it did cease funding quite abruptly on 13 February 2023, when it determined to terminate the flow of funds to Project Sea Dragon without notice. In doing so, it did not breach any agreement, commitment or understanding in place between the two companies. 135 Importantly, at all relevant times, there was nothing preventing Seafarms Group Limited from calling for the immediate repayment of the amounts owed to it by Project Sea Dragon. 136 In these circumstances, Canstruct submitted that Project Sea Dragon had remained insolvent since at least the 2020 financial year because, whatever state of affairs might have existed between it and Seafarms Group Limited, it could not be said that the company was able to pay its debts as and when they fell due. This was disputed by Project Sea Dragon and Seafarms Group Limited, which maintained that the former company was solvent at all times until the latter decided not to provide further funds. 137 In resolving these competing positions, it must be acknowledged at the outset that Project Sea Dragon was undeniably "balance sheet insolvent" from the 2020 financial year onwards, in that, having regard to its assets and liabilities, it was unable to pay all of its debts as and when they fell due. That is enough to justify a finding of insolvency at law unless it can be established that the company had sufficient access to resources not reflected in its balance sheet - specifically, in this case, through the provision of funding by Seafarms Group Limited. 138 The starting point is the definition of solvency and insolvency that appears in s 95A of the Corporations Act: 95A Meaning of solvent and insolvent (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. 139 As Palmer J observed in Lewis v Doran (2004) 208 ALR 385 (Lewis v Doran), the omission of the words "from its own monies" from this definition is significant. His Honour explained the following at 409 [111] - [113]: In my opinion, the omission of the words "from its own monies" from the definition of insolvency in s 95A now leaves the court free to determine the question of retrospective insolvency free of a qualification which might well be appropriate to determine only prospective insolvency. The omission leaves the court free to determine insolvency, whether retrospective or prospective, as a question of commercial reality having regard to the particular facts of the case. So, where retrospective insolvency is in issue, the court can take into account that as at and after the alleged date of insolvency the company actually paid all its debts as they fell due because a third party made funds available to it without security. The court can look at the arrangements which were actually made rather than artificially excluding them from consideration because the arrangements did not fall within the definition of payments from the debtor's "own monies". To look at what actually happened avoids the possibility that the court is forced to conclude that, as a matter of law, a company could not pay all its relevant debts when, as a matter of fact, the company clearly did pay those debts. On the other hand, where prospective insolvency is in issue the court, as a general rule, would be sceptical of an assertion that a third party is willing to advance funds unsecured on such terms as would not, in any event, bring about insolvency. Such willingness on the part of a third party would have to be cogently demonstrated, if not as a matter of legal obligation, then as a matter of commercial reality. 140 These observations were quoted by Barrett J in Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148, 175 - 176 [97] - [98] (ASIC v Edwards), where his Honour noted that the reference to the debtor's "own moneys" had appeared in Barwick CJ's formulation of insolvency in Sandell v Porter (1966) 115 CLR 666, 670. His Honour went on (at 176 [99]) to accept that "funds which, on a realistic commercial assessment, are capable of being raised from outside sources are relevant to the question whether a company is solvent". However, he then stated, in the same paragraph, that: [T]he availability of such funds in the form of a loan will not enhance solvency (or have the potential to avoid a finding of insolvency) unless the loan terms are such as to exclude the loan liability from consideration in its own right as part of the debts due or near due. In other words, availability of loan funds for a very short term or payable on demand, as a source from which debts overdue may be paid, does not enhance solvency: it merely substitutes one form of immediate (or near immediate) obligation for another. There is also the point (emphasised by the Court of Appeal in Expile Pty Ltd v Jabb's Excavations Pty Ltd (2003) 45 ACSR 711; [2003] NSWCA 163) that the capacity to raise funds from external sources must be judged in a practical and businesslike way by reference to the commercial realities of the case, not by way of some theoretical textbook exercise. Possibilities are not enough. Genuine and realistic availability, as a matter of commercial reality, must be seen. 141 His Honour's opinion that funds borrowed only "for a very short term or payable on demand" did not enhance solvency was upheld on appeal: Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723, 753 - 754 [163] (Edwards v ASIC). See also Treloar Constructions Pty Ltd v McMillan (2017) 120 ACSR 130, 146 [79], 154 [125] (Treloar Constructions). 142 With respect, his Honour's observations are entirely correct and ought to be followed - as they have been already in numerous cases: see, for example, Hall v Ficema Pty Ltd (2022) 409 ALR 558, 626 - 627 [345]; Barboutis v The Kart Centre Pty Ltd (No 2) [2020] WASCA 41 [144] (Barboutis); Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302 [1056]. It is also relevant to note what was said, to similar effect, by Giles JA (with whom Hodgson and McColl JJA agreed) in Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555, 579 [109]: Particularly when the limiting words [referring to the debtor's "own moneys"] are no longer part of the test, there is no compelling reason to exclude from consideration funds which can be gained from borrowings secured on assets of third parties, or even unsecured borrowings. If the company can borrow without security, it will have funds to pay its debts as they fall due and will be solvent, provided of course that the borrowing is on deferred payment terms or otherwise such that the lender itself is not a creditor whose debt can not be repaid as and when it becomes due and payable. It comes down to a question of fact, in which the key concept is ability to pay the company's debts as and when they become due and payable. (Emphasis in original). 143 The second point made by Barrett J in ASIC v Edwards was that, where the alleged insolvency is denied by a claimed ability to raise funds from external sources, it is necessary to demonstrate that those funds are genuinely and realistically available as a matter of commercial reality. As was noted by the New South Wales Court of Appeal in Treloar Constructions at 146 - 147 [80], this "test" had been stated earlier by Palmer J in Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, 224 - 225 [54]. 144 The cases following ASIC v Edwards, and other authorities to similar effect, have emphasised that, whilst it is appropriate to take into account the company's ability to raise funds in the form of unsecured loans as part of assessing its ability to pay its debts as and when they become due, the availability of such loans needs to be appropriately considered. In this context, there is a real difference between the ability to borrow from an arm's-length commercial credit provider and the mere ability to borrow from related entities. That is particularly so when the question is concerned with prospective solvency: Lewis v Doran at 409 [113]. 145 When assessing solvency, there is nothing inherently objectionable about taking into account loans from related parties, such as directors or parent companies, where the evidence discloses that, as a matter of commercial reality, the related parties are likely to continue to provide finance. In Williams (as liquidator of Scholz Motor Group P/L (in liq)) v Scholz [2008] QCA 94 (Williams v Scholz), Muir JA noted (at [110]) that "[t]he most important consideration is the degree of commitment to the continuation of financial support". In that respect, in Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28 (Chan), Morrison JA (with whom Gotterson JA and Boddice J agreed) considered the degree of certainty that funds would be available that is required in order to establish solvency. His Honour observed (at [43]) that, where the provision of funds cannot be compelled by legal arrangement (such as in the case of an enforceable finance facility, for instance), there must be a degree of assuredness that the financial support will be forthcoming and at such a level that one could say that the company was able to pay its debts as and when they fell due, rather than being possibly able to do so. Although the financial support does not have to be absolutely certain in order to establish solvency, it is not necessary for it to be absolutely uncertain in order for it to be insufficient to do so. His Honour went on to hold at [44]: [I]n my view there is no benefit in attempting to achieve some precise formula as to likelihood, by reference to which the financial support qualifies or does not. To say that the likelihood of it being provided is "probable" or "improbable" adds no more to what has been said in the authorities to which I have referred. Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due. (Footnote omitted). 146 As the inquiry is concerned with commercial realities, the funds that are said to be sufficient to maintain solvency must be genuinely and realistically available, when judged in a practical and businesslike way. As was said by the Court of Appeal (comprising Buss P, Mitchell and Vaughan JJA) in Barboutis at [141], "[p]ossibilities are not enough; there must be genuine and realistic availability as a matter of commercial reality". Their Honours went on to identify instances of the availability of finance and their relevance to a company's solvency at [143] - [144]: Offers of credit by the company's shareholders or directors may have to be rejected as an available resource unless the court can be satisfied that the credit will continue. Such offers may prompt a question as to why the shareholders do not inject the money as share capital. Nor will access to unsecured borrowings be sufficient unless the borrowing is on deferred repayment terms. It cannot be enough if the potential to borrow simply provides for payment of one debt by another which itself cannot be repaid. To substitute one immediate obligation for another does not enhance solvency. (Footnotes omitted). 147 In the present case, there was limited evidence from the directors of Seafarms Group Limited that the company was committed to providing the financial support for Project Sea Dragon into the future, and that it would not demand immediate repayment of a debt. Clearly, no director was able to give such evidence in the circumstances that prevailed as at the time of the hearing, when Seafarms Group Limited had ceased providing financial support and had submitted a proof of debt to the administrators. Although, as set out above, Mr Dyer deposed that a demand for payment would "never be made" by Seafarms Group Limited, and that it was "commercially illogical and against commercial reality" for the company to call up its loans to Project Sea Dragon while the project was ongoing, the facts as they stand diminish the force of this evidence quite substantially. On the first and third defendants' own view of the events that transpired, Seafarms Group Limited did cause Project Sea Dragon to become insolvent. 148 It is useful, at this juncture, to articulate the key difficulty that Project Sea Dragon and Seafarms Group Limited face in making out their case as to the solvency of the former company. On their characterisation of the facts, funding from Seafarms Group Limited was assured and Project Sea Dragon was therefore solvent until, upon the emergence of a particular debt that the Seafarms Group found intolerable, that was suddenly no longer the case. The natural question to be asked is whether the funding was ever truly assured, and whether Project Sea Dragon was ever truly solvent, in circumstances where the state of affairs between it and its parent company could (and did) change instantly at the parent's whim. Though it is true that, in the past, Project Sea Dragon had been able to meet its debts consistently with funds from Seafarms Group Limited, which might have seemed to have little incentive to call upon the growing debt that was owed to it, one is left to wonder whether that situation existed only by coincidence and as a matter of convenience. If, hypothetically, an intolerable debt had been incurred much earlier, and Seafarms Group Limited had proceeded to withdraw funding in the same way that it did in response to the adjudication debt, then it would have no scope to say that it had historically provided funding on a number of occasions to meet the liabilities of its subsidiaries. Would it still try to maintain that Project Sea Dragon was solvent if it had only provided funding to it on a few occasions before it resolved to cease doing so? What if it had only provided funding once? Asking whether a history of funding is sufficiently lengthy as to demonstrate solvency in circumstances where there only exists a "history" to speak of because, by chance, the problem that ultimately arose did not arise sooner, seems rather unsatisfying. 149 Project Sea Dragon and Seafarms Group Limited placed reliance for their contentions as to the assuredness of funding and solvency on International Cat Manufacturing Pty Ltd (in liq) v Rodrick (2013) 97 ACSR 200. That decision concerned a commercial boat manufacturing company that had encountered financial difficulties, and which was thereafter supported by third parties which were closely involved in its business operations. A charge to secure repayment of the mounting indebtedness was granted, and the issue became whether the company was solvent when the charge was granted. The answer turned on the level of assuredness that the third parties would continue to provide finance at the relevant time. The Court found that there was a sufficient degree of commitment to continue providing finance, as there was, among other things, an acceptable agreement that the funding would continue into the future and so some definition as to the duration of the finance. The arrangements between the parties also provided some definition as to the extent of the finance which would be provided; namely which creditors would be paid. 150 It was also concluded in that case that the debt which was generated by the third parties' provision of finance was not one where repayment was likely to be demanded ahead of the agreed time, even if it was legally possible. The person in control of the provision of funding made it clear that he would not have made an immediate demand for repayment and that was not surprising as he regarded himself as a part owner of the business and desired to participate in its future growth. In those circumstances, the Court accepted (at 224 [106]) that the commercial realities supported the conclusion that the most important consideration, being that of the degree of commitment to the continuation of financial support, was satisfied. However, in that case there were many factors which bound the third party providers of finance to the company, and which raised the assuredness of further finance beyond a mere discretionary payment. None of those, nor anything similar, existed in the present matter. 151 The analysis in that case demonstrates that to reach the required level of assuredness, there must be more than a mere discretion in the external funder to advance funds. In that context, where objective evidence of a degree of assuredness of the future provision of finance is required, the proof is more likely to be derived when the alleged third party funder is compelled to provide the financial support such as where it has provided a guarantee in respect of the company's obligations: Ross (Liquidator) in the matter of Print Mail Logistics (International) Pty Ltd (In Liq) v Elias [2021] FCAFC 203 [47]; Chan [43] - [44]. 152 It is useful to pause to consider why it is necessary, in the assessment of solvency, for a requirement that the funds sought to be relied upon as negating insolvency are genuinely and realistically available as a matter of commercial reality. The answer, so it seems, lies in the definition of solvency and the essentiality of the debtor, itself, being able to pay its debts when they fall due. Its ability to do so necessarily rests upon the coexistence of an indebtedness and the real availability of funds with which to discharge it, such that it is able to place itself the position of no longer having that indebtedness: Williams v Scholz. The ability does not exist in the absence of funds actually being available, though necessarily that concept is not rigid and there are degrees of certainty as to the "availability" of funds. For that reason, the line is drawn at a point where it can be objectively ascertained that a sufficient degree of assuredness exists that funds will be forthcoming to discharge the indebtedness. Conversely, the debtor has no ability to discharge their indebtedness where all they have is a hope or mere expectation that a third party will favourably exercise their unfettered discretion to make, or continue to make, funds available. 153 Seafarms Group Limited and Project Sea Dragon submitted that the fact that the company is a "special purpose vehicle" used for development purposes is a relevant consideration to be taken into account in determining solvency. Reference was made to the decision of the Queensland Court of Appeal in Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175, which concerned, in part, the solvency of a corporate vehicle through which construction work was being undertaken. Muir J (with whom McMurdo P agreed, and Jerrard JA substantially agreed) noted (at [115]) the recent recognition that in assessing solvency it is permissible to take into account the support of a company by directors or shareholders, through unsecured loans or otherwise, and that the possibility of such support may be a significant factor in assessing the solvency of a "development project vehicle", such as the one in question in that case. That factor was particularly relevant to the case before that Court because the development company's only ability to pay its debts on or before the conclusion of the project was dependent upon the sale of the developed real estate at a profit, and therefore dependent upon the continued support of financiers, directors and shareholders. Though it must be recognised that, in that case, the company's debts were relatively modest and it was shown that the directors had a real interest in continuing support for the company by reason of the guarantee which they had granted. 154 However, the question of the solvency of special purpose companies is not to be assessed differently because they are often used for speculative undertakings and have little in the way of assets of their own. Whilst the support of directors and shareholders without security may be more common with such companies, neither the applicable test for insolvency nor its application are different from that which is ordinarily applied. 155 At the hearing, Mr Martin KC, counsel for Project Sea Dragon and Seafarms Group Limited, submitted that the concept of a "special purpose vehicle" was not a foreign one, that the use of such companies was "how business is conducted", and that "most developments in this country" are conducted through such mediums. It was not entirely clear what point was there being made. If it amounted to a suggestion that it is an accepted practice that developments are conducted through effectively insolvent companies, it must be rejected. There is no evidence of that, and it is contrary to the intention of the Corporations Act that insolvent companies should not be engaged in business. 156 Reference was also made to the decision of Jackson J in Re Cube Footwear Pty Ltd [2013] 2 Qd R 501, which involved a contested winding up application where, in the light of the application, the two relevant debtors of the company entered into agreements to defer their debts for a period of time such that, at the date of the hearing of the winding up application, their debts were not due and payable. In response to this, the applicant amended its application to contend that the company was not solvent within the meaning of s 95A of the Corporations Act, despite the fact that, at that point in time, the company was trading profitably. It was observed that, in circumstances where the company's total liabilities exceeded its total assets, the debtor company may not be able to pay the two debts when they fell due in the future. However, his Honour regarded that as being irrelevant to the question of whether the company was then solvent. He held (at 511 [60] - [62]) that, as the company's two major creditors, who were related parties, had supported it over several years and would continue to support it by the provision of further financial support into the future, it remained solvent. 157 Whilst that case is illustrative of the Court taking into account the commercial realities of a company's financial circumstances, it emphasises that any such conclusion is largely fact dependent. Importantly, the two major creditors had not ceased their support for the debtor company and had provided financial comfort by deferring payment of their debts for an extended and certain period. The position in the present case is entirely different. When Project Sea Dragon incurred a liability with which Seafarms Group Limited was displeased, it determined to withhold funds and it made no commitment to continue funding in relation to any other debts or for any period of time. In addition, Project Sea Dragon's existing liability to Seafarms Group Limited was repayable on demand. Although Seafarms Group Limited's "loan" was not called up, neither had it been advanced on deferred terms. 158 In the context of the first and third defendants' submissions as to special purpose vehicles, it is appropriate to observe that it may well be in the interests of a corporate group to use one entity as a stalking horse for the carrying on of business. Such a company might assume the commercial risks of a venture but, having no assets of its own, shield the group from liability. However, to be an effective shield, it is necessary that any liquidator of the special purpose vehicle is not able to call upon any group member to provide funding which they may have promised. For that reason, the group companies will seek to avoid agreeing to any obligation or commitment, or providing any comfort to the special purpose vehicle in respect of its debts, lest that be relied upon by a liquidator. By distancing themselves from the special purpose company and its obligations, however, the other members of the group risk leaving the special purpose vehicle in a state of permanent insolvency because, as a matter of commercial reality, it will not have access to sufficient funds so as to be able to pay its debts as and when they fall due.

Did the availability of funds from Seafarms Group Limited prevent Project Sea Dragon's insolvency? 159 In light of the authorities, the question is whether the availability of funds from Seafarms Group Limited or other related companies was such that Project Sea Dragon was able to pay its debts as they fell due. The answer to that question involves two related issues. The first is whether the terms on which the funds were advanced deferred the existence of any indebtedness, in the sense that existing payable debts were not merely replaced with another. The second is whether there was an appropriate degree of assuredness that the funds would become available within sufficient time to meet the entity's liabilities. Though separate, these elements are often considered together.

The nature of the arrangements in place 160 Here, there was no agreement, commitment, assurance, or letter of comfort by Seafarms Group Limited pursuant to which it would provide funding. Although this was accepted as the position by both parties there was, curiously, no explanation as to why it was so. On any view, given that the development involved many millions of dollars and was a major undertaking which involved a number of operational companies within the Seafarms Group, it might be regarded as being unusual that no formal or even semi-formal arrangement was put in place to ensure that Project Sea Dragon would have a source of funds to meet its financial obligations. That is particularly so, given that it would seem from the arrangements which were put in place for Project Sea Dragon to acquire funds from Seafarms Group Limited, that the nature of their relationship was considered by them and was intended rather than accidental. As no party made any point of this it is not relevant to the consideration.

Were funds advanced on deferred terms? 161 Nevertheless, the arrangement between Project Sea Dragon and Seafarms Group Limited can be characterised as being one where, from time to time, Project Sea Dragon would indicate that it was indebted to a particular creditor and would produce to Seafarms Group Limited evidence of the same. Seafarms Group Limited, although being under no obligation, promise, agreement or commitment to do so, would then make an amount of funds available to Project Sea Dragon for it to pay the debt. There were no terms to the way the money was advanced, though it is apparent that the parties recognised that it was not a gift as is evidenced by the increasing indebtedness of Project Sea Dragon to Seafarms Group Limited as shown in the former's accounts. At best, and in the absence of any agreement to the contrary, the amounts advanced were repayable by Project Sea Dragon to Seafarms Group Limited on demand: Universal Greening Pty Ltd v Sabine (1999) 17 ACLC 880, 886; In the matter of Golden Robot Records International Pty Ltd [2021] NSWSC 1146 [39] - [40]; Ulithorne Wines Pty Ltd v Ulithorne Vineyard Pty Ltd [2020] SASC 32 [16]. So much was acknowledged in the first and third defendants' written submissions. The consequence of this is that, upon the provision of funds by Seafarms Group Limited, an immediate debt to it in the amounts advanced was created. 162 That mere substitution of one debt for a loan which is payable on demand will not enhance the borrower's solvency. So much was expressly made clear by Barrett J in ASIC v Edwards (at [99]) and, as mentioned above, his Honour's observations were affirmed by the New South Wales Court of Appeal in Edwards v ASIC (at [163]) and in Treloar Constructions (at 146 [79]): see also Flynn v Theobald [2008] WASC 263 [73]. 163 It was not suggested that the New South Wales Court of Appeal decisions were in error or should not be followed on this point, and nor could it be. That being so, by substituting its creditors' debts with other debt, Project Sea Dragon remained in a position where it was unable to pay its debts as they fell due within the meaning of s 95A of the Corporations Act. As such, the availability of funds from Seafarms Group Limited does not avoid a finding that Project Sea Dragon was insolvent from at least the time when it commenced accruing liability to Seafarms Group Limited.

Were funds genuinely and realistically available to Project Sea Dragon? 164 Even if it were assumed that the obtaining of financial support from Seafarms Group Limited did not fail to avoid a conclusion of insolvency, the circumstances of the present case also falter on the issue of whether there existed a sufficient assuredness of support from Seafarms Group Limited by the provision of further funds. Here, the question is whether it could be said that Project Sea Dragon was able to pay its debts because, as a matter of commercial reality, the required funds were, at the relevant times, genuinely and realistically available from Seafarms Group Limited. 165 The first and third defendants claimed that the assuredness of funding was established by Seafarms Group Limited having provided funds for the development since inception, combined with the assumption that it would continue to do so because it was in its commercial interest to ensure that the development was completed. The difficulty here is that the events proved that any such commitment by Seafarms Group Limited was illusory. Though it funded Project Sea Dragon for a period, when Project Sea Dragon incurred a debt for which it did not wish to assist Project Sea Dragon to discharge, it simply ceased providing funds. In that way, it only provided funding to the extent to which it thought, from time to time, that doing so was in the group's interests. As between it and Project Sea Dragon there was no suggestion in March 2023 that it had failed to comply with any assurance, commitment or expectation which it had generated. Rather, the absence of any such suggestion indicates that Seafarms Group Limited acted in the manner expected of it. On the authorities, that is not sufficient to enhance the solvency of Project Sea Dragon (nor does it have the potential to avoid a finding of insolvency). 166 Mr Martin KC relied upon the fact that up until 13 February 2023, Seafarms Group Limited had provided funding for all of Project Sea Dragon's debts as they arose and, on the evidence, that appears to be correct. He also submitted that it had invested some $62 million in the development and that reflected a significant commitment to it and, particularly, because that was its sole business. This, so he submitted, established that the commercial realities were that Seafarms Group Limited could be regarded as having committed itself to the future funding of the project. 167 The first and obvious difficulty with that submission is that Seafarms Group Limited was not committed to the project in the sense that it would continually meet Project Sea Dragon's liabilities. As soon as a debt arose which Seafarms Group Limited considered unfavourable, it simply ceased its provision of funding. Its ability to do so without breaching any prior agreement, understanding or promise reflects that it had not placed itself in the position of a company that could be said to have been committed to Project Sea Dragon. In addition, neither Seafarms Group Limited, nor any other member of the Seafarms Group, seems to have provided any financial support by the provision of security for Project Sea Dragon's debts and, in that way also, there was no real indication that it supported it. 168 The second difficulty is that the corporate structure, deliberately or otherwise, ensured the absence of any commitment by Seafarms Group Limited to discharge the debts of Project Sea Dragon. There was no formal or informal agreement to provide funding to Project Sea Dragon and, in a business sense, the company was dispensable because, despite the submissions to the contrary, it was not inevitable that its loss would substantially impact the continuation of the development. That is largely the purpose of such corporate vehicles, which assume the development risk without being possessed of assets which might be lost were any project risk to eventuate. Whilst it is true that, in this case, Project Sea Dragon held the leases over the development site, there is a reasonable inference that it would be in the interests of the lessors to renegotiate any leases with another entity in the Seafarms Group were Project Sea Dragon to fail. It is true that new leases would not be automatic, or that the renegotiation of them might involve some work and the overcoming of some difficulties, but, on the available material, it would be far from impossible. Further, the evidence did not suggest the existence of any third party who might be interested in pursuing the development itself. Indeed, the leases were particularly unique. They were in an extremely remote location, somewhat inaccessible, and apparently ill-suited to many types of business activity. The development on the leased area was directed to a specific activity and it is most doubtful that there existed any other business capable of utilising the developed facilities. 169 It was also submitted that new agreements would have to be struck with local indigenous groups which may involve some negotiation, but there is nothing to indicate that those groups, who no doubt benefit from such agreements, would be averse to entering to new ones and especially in the circumstances where they would be dealing with essentially the same persons. So, whilst there is no doubt about the existence of issues which would need to be overcome were Project Sea Dragon to be placed into liquidation, the benefit of that in this case would be the release of a debt of around $14 million. 170 Therefore, in both a financial and corporate manner, Project Sea Dragon was capable of being easily untethered from the corporate group, and that reflects an absence of any real commitment to it by the Seafarms Group. 171 The mere fact that Project Sea Dragon was indebted to Seafarms Group Limited in the amount of $62 million is not a significant factor. The value was in the development which had been undertaken which, as indicated above, could probably be secured in any event. 172 In terms of the test in Chan, there is insufficient evidence in this case to conclude: that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.

Project Sea Dragon was insolvent at the relevant times 173 The necessary conclusion is that Project Sea Dragon was insolvent from, at least, June 2020. From that time, it had substantial indebtedness, whether that was to its trade creditors or to entities in the Seafarms Group, and no funds which rendered it able to discharge it. Although it received funds from Seafarms Group Limited to meet its debts to trade creditors, it was simply replacing one existing liability with another. Additionally, there was no assuredness at any time, or at all, that the payment of any or all non-related party debts would be funded.

The consequences of Project Sea Dragon's insolvency 174 Canstruct submitted that it followed from the conclusion that Project Sea Dragon was insolvent from around mid-2020 that there are grounds on which a liquidator might pursue the directors for damages for contraventions of s 588G of the Corporations Act, being the provision prohibiting insolvent trading. In support of that it was also submitted that there were reasonable grounds for suspecting that the company was insolvent and that a reasonable person in the position of Project Sea Dragon's directors would have been aware, throughout the period from June 2020, that there were grounds for suspecting that Project Sea Dragon was insolvent. Those grounds were that Project Sea Dragon was incurring substantial liabilities to third parties which were met by incurring substitute liabilities to related entities with the absence of any assurance or indication that the funding would continue to the finalisation of the project. 175 Project Sea Dragon's directors were aware of the facts and circumstances identified above. This is not a case, at least on its face, where the directors were unaware of the company's precise financial position or the circumstances in which it incurred its liabilities or sought to meet them. That means they are at a real risk of liability at the suit of a liquidator were Project Sea Dragon to be wound up. Further, due to the interlocking directorships, there is a not insignificant risk that Seafarms Group Limited will be liable pursuant to ss 588V and 588W of the Corporations Act, as the holding company of Project Sea Dragon, for the losses sustained by Project Sea Dragon's insolvent trading. Moreover, the potential recoveries from Project Sea Dragon's directors or Seafarms Group Limited could be extensive and extend to all the liabilities which were incurred since June 2020, and which have not been satisfied. That would include the debt presently owed to Canstruct. 176 Based on the findings made, it should be accepted that entry into the DOCA had the benefit of preventing a liquidator from examining the conduct of Project Sea Dragon's directors and Seafarms Group Limited in relation to possible recovery actions for insolvent trading. That, combined with the improper purpose for which the VA and DOCA process was used, is sufficient to establish that the entry into the DOCA constituted an abuse of Pt 5.3A. 177 However, this can be taken further in that it is most unlikely that the directors of Seafarms Group Limited and Project Sea Dragon would not have been alive to the risk that the liquidation of Project Sea Dragon might expose them and Seafarms Group Limited to claims in respect of Project Sea Dragon's insolvent trading. They must have been aware, at least in a general sense, that their established corporate structure which permitted Project Sea Dragon to accumulate substantial liabilities whilst being bereft of any identifiable support, raised the likelihood that on Project Sea Dragon's insolvency, not insubstantial claims of insolvent trading might be levelled against them and Seafarms Group Limited. On this basis, a real advantage of entering into the DOCA was that it would prevent any investigation of these matters. It is, with respect, somewhat inconceivable that the added benefit that Project Sea Dragon's directors and Seafarms Group Limited would be spared the risk of recovery action by a liquidator of Project Sea Dragon did not play a part in the utilisation of the VA and DOCA process. There is sufficient evidence to infer that this was part of the intended purpose of the DOCA, and this provides an additional justification for terminating it under s 447A or s 445D(1)(g) of the Corporations Act.

The administrators' opinions on insolvent trading 178 Whilst it can be accepted that administrators have a very brief period in which to investigate the affairs of an insolvent company during a voluntary administration, in this case the question of solvency was not difficult. Absent real support from related companies, Project Sea Dragon was obviously insolvent. The essential question was whether the support was sufficient, in the sense that there was adequate degree of assuredness of future funds being made available to discharge future debts and that the support made available was on deferred terms such that Project Sea Dragon was not replacing one current liability for another. It is apparent from the administrators' 14 March 2023 Report that they made no inquiry into the nature of the financial arrangements between Seafarms Group Limited and Project Sea Dragon, save to observe that there were no formal arrangements in place regarding the indebtedness arising in favour of Seafarms Group Limited. It was said by the administrators that: Our investigations indicate the Company was able to call on funds as required and creditors were generally met within terms. 179 The source of that information is not cited and, as the evidence in the hearing indicated, there was no such ability. The arrangement was merely that Seafarms Group Limited would provide funds in its discretion. At the hearing, Mr Dyer was the source of the information about the manner in which funds were made available and there is no apparent reason why he would not have given the administrators that same information. There was also no analysis by the administrators of the degree of commitment on the part of Seafarms Group Limited to make funds available to Project Sea Dragon, despite that being an obvious pivotal issue in the assessment of insolvency. Similarly, the administrators made no assessment of whether the provision of funds by Seafarms Group Limited merely substituted one debt for another, despite that being an obvious investigation to make. 180 Though keeping in mind the short period of time available for the administrators to conduct their investigations and prepare their report, their apparent lack of investigations into the obvious key questions relating to Project Sea Dragon's insolvency reveals their view to be unreliable.

The application of ss 447A and 445D(1)(g) in relation to the avoidance of scrutiny into Project Sea Dragon's insolvent trading 181 From the above, it can be seen that the entry into the DOCA had the consequence of avoiding scrutiny of whether Project Sea Dragon had engaged in insolvent trading and had incurred debts in respect of which its directors and parent company might become liable. Though there is a real possibility that this was the intended outcome of the entry into the DOCA, it is unnecessary to go so far. The fact that the DOCA was entered into for an improper purpose and produced that consequence further enlivens the power to set it aside and provides an added justification for doing so.

The powers in ss 447A and 445D are enlivened 182 There is more than sufficient material available to support the conclusion that the DOCA was entered into for the purpose of the Seafarms Group relieving itself of the debt owed by Project Sea Dragon and to continue with the project as if that debt was never incurred. That was the effect of the VA and DOCA process and its purpose. It was asserted by Mr Dyer during his evidence that the desire was to keep the Project Sea Dragon business going and thus ensure the survival of the group. However, as Seafarms Group Limited had more than sufficient funds to meet Canstruct's debt and have working capital to spare, the reality is that in circumstances where the project had been placed on hold, the group did not wish to pay the large debt which had accrued. That was particularly so given that, prior to the dispute with Canstruct, Project Sea Dragon's development operations were effectively paused pending consideration of the project and the raising of additional capital. In that paused state, the ongoing costs of maintaining the status quo were small compared to those which would be incurred in continuing the development, and it is difficult to see that Canstruct's debt could not be paid. The evidence supports the conclusion that, rather than being a necessity for survival, the VA and DOCA process was used as method of defeating a significant debt which the group did not want to pay and thereby making a significant saving. 183 The avoidance of an unwanted indebtedness is not an appropriate purpose for a DOCA. No aspect of Pt 5.3A is designed to permit a company to use the DOCA process to rid itself of a liability, merely to restart operations in an almost identical position to the pre-DOCA state save for the existence of the erstwhile debt. In that sense, the DOCA in the present case was entered into to achieve a purpose which was alien to the objects of Pt 5.3A. That is more than sufficient to warrant setting both the administration and the DOCA aside. 184 The above conclusion necessarily involves an acceptance of the commercial reality that Project Sea Dragon acted as part of the Seafarms Group, and the purpose of the VA and DOCA process should be regarded in that light. That is, the Seafarms Group, or at least Seafarms Group Limited and Project Sea Dragon, acted in concert with the intention to orchestrate Project Sea Dragon's claimed insolvency from February 2023 in order to utilise the VA and DOCA process to extinguish Canstruct's debt, and then continue Project Sea Dragon's business as before. To a large extent, this was admitted by Mr Dyer in the course of his evidence where he acknowledged that the corporate desire was to not pay Canstruct in full because it was believed that it was not owed any other money. 185 The first and third defendants' submission that Project Sea Dragon had to be considered on its own and be regarded as a company which had lost the support of its parent such that the DOCA was the only option apart from liquidation must be rejected. That is artificial in the extreme. Indeed, they were at pains to point out that Project Sea Dragon was a special purpose vehicle, meaning that it had a single development role in the Seafarms Group's overall operations. Further, the evidence of Mr Dyer was that the common directors intended that the cessation of funding by Seafarms Group Limited would trigger the VA and DOCA process through which Project Sea Dragon would obtain a release of Canstruct's debt. Those directors had also intended to recommence funding from Seafarms Group Limited to Project Sea Dragon once the DOCA had been entered into and they resumed directorial control of Project Sea Dragon.

The discretion 186 The seriousness of the misuse to which Pt 5.3A has been put in this case is sufficient on its own to warrant the exercise of the Court's power to terminate the DOCA and the administration. On any view, the consequence of the misuse of s 436A, if it were permitted to stand, would be that Canstruct would be denied any possibility of a substantial recovery of its debt. It might also be seen as giving the Court's imprimatur to inappropriate commercial conduct. 187 Nevertheless, the parties referred to some factors which they submitted either supported or told against the making of such orders, and it is appropriate to address them.

The funding of any insolvent trading action 188 The first and third defendants submitted that a reason for not exercising the discretion to terminate the administration or the DOCA was that it was unlikely that there would be sufficient funding for the further investigation of any insolvent trading claims and their prosecution. They submitted that it appeared that Canstruct had relatively little in the way of liquid assets which it might use to fund any investigation by a liquidator and any subsequent proceedings. The evidence of Mr Damien Cavanagh, the CEO of Canstruct, was to the effect that, although Canstruct had several millions of dollars in a high interest account as at the end of May 2023, those funds had been transferred to the account of a different entity and that account was able to attract a different rate of interest. Despite that, it does appear that Canstruct has access to sufficient funds to fund any future litigation by a liquidator seeking to recover losses from Project Sea Dragon's directors and Seafarms Group Limited in relation to the former company's insolvent trading. Whilst Mr Cavanagh was cautious about the extent to which funding would be made available, that is not an indication that it would not be forthcoming. It was merely an indication that Canstruct desired a sufficient degree of certainty about the prospects of success in the litigation and the ability to recover any judgment, before promising to advance any large sums of money. That suggests business common sense, rather than any unwillingness or inability to provide funding if required. If there are sustainable causes of action for insolvent trading, as there appears to be, Canstruct has more than sufficient motivation to provide the funding necessary to see the litigation through to completion. 189 In this context, the parties provided evidence of the likely costs of the insolvent trading proceedings. Canstruct's solicitor, Mr Scott Guthrie, estimated that it would cost around $750,000 whilst Mr Dale Cliff, a solicitor for the first and third defendants, advanced an opinion that it would cost around $1,400,000. At this point it is only necessary to make a rough estimate of the likely costs, keeping in mind that the quantum will necessarily turn on the scope of the issues in the litigation. Any further determination would require more detailed evidence than was advanced at the hearing. However, the issues involved are not likely to be as complex as Mr Cliff anticipated. As identified by Mr Guthrie in his affidavit, the issue of insolvency is not likely to involve substantial cost. Indeed, it has already been determined in these proceedings as between Project Sea Dragon, Seafarms Group Limited and Canstruct. Even if that conclusion is not binding in any future litigation, the scope of the dispute will largely involve a question of law given that the evidence relevant to that question is already clear. Mr Cliff asserted that Seafarms Group Limited and Project Sea Dragon's directors will also contest the existence of Canstruct's debt as, indeed, they are entitled to do because the adjudication was not a final determination of their rights and liabilities. Nevertheless, as the question has already been the subject of adjudication and the production of evidence and submissions, the issues between the parties are likely to be fairly clear. Whilst there is no doubt that the defences raised by Seafarms Group Limited and the directors of Project Sea Dragon might make the litigation more complex than it might otherwise be, it is difficult to see the costs reaching anywhere near the heights suggested by Mr Cliff. 190 Canstruct has also made provision for the funding of public examinations during any liquidation in an amount of $150,000. That is a substantial amount given that which is already known of the circumstances of Project Sea Dragon trading over time and its financial arrangements. It is also an indication of the bona fides of Canstruct's intention to pursue recovery against Project Sea Dragon's directors and Seafarms Group Limited.

Recovery from the insolvent trading claim 191 The potential for recovery from any insolvent trading claim is also an issue relevant to the exercise of the discretion. On behalf of the first and third defendants, it was submitted that there was an insufficient likelihood of any substantial recovery from insolvent trading actions to justify the Court setting the DOCA aside. It was said that the larger debts owed by Project Sea Dragon would be around $62 million owed to Seafarms Group Limited, $14 million (or possibly $27 million) owed to Canstruct, and some millions owed to the lessors of the land to Project Sea Dragon in rent payments and reparations of the land. This, so it was said, might accumulate to an amount over $100 million. The available evidence suggested that the insurance policies held by Seafarms Group Limited and Project Sea Dragon total only $20 million, and that Seafarms Group Limited had just under $10 million in cash at the time of the hearing. On this basis, it was said that Canstruct would do better under the DOCA than it would obtain on a winding up in any event. As Mr Martin KC submitted, the DOCA is the preferred alternative because 10 cents in the dollar is better than no cents in the dollar. 192 There are, however, some difficulties with that last submission, particularly in relation to the debt owed to Seafarms Group Limited. It is to be kept in mind that the claims against it will be referable to the total of Project Sea Dragon's accumulated indebtedness since 2020. If the action is successful and judgment is obtained it will well exceed the amount owed to Seafarms Group Limited, and the liquidator would be entitled to set off any amount so owing and recover the rest. There is no need to ponder the question of whether the debt might be used as a set off in the action under s 588W: Metal Manufactures Pty Ltd v Morton (2023) 275 CLR 100. Where, for the purposes of ss 588V and 588W, the holding company is liable for the insolvent trading of its subsidiary in circumstances where the relevant debts include those to the holding company, those debts are effectively offset in the ultimate recovery. 193 In these circumstances, the amounts available to Project Sea Dragon for recovery from insurance policies and any other assets held by Seafarms Group Limited are likely to be unaffected by the amount owed to Seafarms Group Limited and there is a not unrealistic possibility that a liquidator will recover a substantial amount in any litigation.

The object of Pt 5.3A 194 A constant refrain of the first and third defendants' submissions was that the powers in s 447A and the other powers which might be used to set aside or terminate a DOCA, should be exercised in accordance with the object of Pt 5.3A as identified in s 435A of the Corporations Act and, in particular, that priority should be given to preservation of the company and its business over the rights or interests of particular creditors. To a degree, s 435A does stress the importance of the preservation of an insolvent company's business and it is apparent that Pt 5.3A generally vests control of the company's future in the hands of the majority of the company's creditors. Nevertheless, there is no acceptance of the absolute tyranny of the majority over the minority and, as was identified in Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509, 521 [30], the protection of individual creditors, or groups of creditors, is ensured by provisions such as s 445D of the Corporations Act, particularly s 445D(1)(f). The balance struck by the legislature appears from those shielding provisions and the limitations specified in them, and there is no need to read down those limitations to accord an additional amount of control to the majority of creditors. Hence, the provisions allow for a certain amount of detriment to be sustained by those creditors whose interests might diverge from the majority by, for instance, permitting discrimination or prejudice, but limiting it to such conduct so long as it does not become "unfair". Contrary to the first and third defendants' submissions, s 435A does not require any reading down of the concept of "unfair" to achieve its aims.

Project Sea Dragon will be a danger to other creditors if not wound up 195 An issue advanced by Canstruct in support of termination of the DOCA and the winding up of Project Sea Dragon was that, to allow the latter to remain in its current state would expose other creditors to similar behaviour in the future. The DOCA's effect would be to return Project Sea Dragon to the control of the directors in circumstances where it would be able to trade although not have any income or assets of its own with which to meet any debts it incurred. 196 There was little evidence as to how Seafarms Group Limited intended to fund Project Sea Dragon into the future. Mr Dyer said that Seafarms Group Limited would resume funding but, it appears, that is to be in the same manner as it previously had. No assurance has been given that Seafarms Group Limited will fund Project Sea Dragon for a specific period, or that it will fund all indebtedness incurred by it regardless of whether it agrees with particular debts. Nor is there any indication that the funds to be provided by Seafarms Group Limited will be on deferred terms. The necessary consequence is that it is likely that Project Sea Dragon will resume its insolvent trading behaviour into the future. This puts at risk creditors who might deal with it and to whom it becomes liable. If Seafarms Group Limited is not prepared to provide funding in relation to those creditors' debts, as it did in relation to Canstruct's debt, it is likely that they will be met with the same strategy adopted in this case. 197 In these circumstances, the protection of persons who might possibly deal with Project Sea Dragon is an additional reason for setting the DOCA aside and winding up Project Sea Dragon: see Re CSR Ltd (2010) 183 FCR 358, 381 [81] - [82]. 198 Additionally, the returning of a company to insolvent trading status by allowing the DOCA to be fulfilled, of itself, constitutes an abuse of process which would justify setting the DOCA aside and winding the company up in any event. 199 It can be added that, although the interests of creditors is a primary consideration, so is the protection of the public interest, which includes a consideration of whether the continuation of the DOCA is conducive or detrimental to commercial morality. The importance of that consideration was addressed in Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 [74] (Sino Group), where the Full Court referred to and adopted the observations of Gordon J in TiVo at [60] - [62]. It is pellucid from what has been said that the misuse of Pt 5.3A in this case falls well below what might regarded as an acceptable standard of commercial morality. 200 To the above can be added the considerations addressed below in relation to the exercise of the discretion in s 445D(1)(b), (c), (e) and (f).

Conclusion on the exercise of the discretion 201 The seriousness of the abuse of Pt 5.3A and the damage to Canstruct justifies the exercise of the Court's discretion to terminate the DOCA, bring the administration to an end, and to wind up Project Sea Dragon. Further, the matters raised in relation to the exercise of the discretion support that conclusion and none detract from it. Ultimately, nothing was advanced which supported the conclusion that the DOCA should proceed or that Project Sea Dragon should not be wound up. The applicant has, therefore, established an entitlement to the relief sought under s 447A and s 445D(1)(g) of the Corporations Act.

Should the DOCA be terminated under s 445D(1)(f)? 202 Canstruct also relied upon s 445D(1)(f) as a basis for terminating the DOCA. It provides that "[t]he Court may make an order terminating a deed of company arrangement if satisfied that": (f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be: (i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or (ii) contrary to the interests of the creditors of the company as a whole; 203 The reference to "such creditors" is a reference to the company creditors. 204 Here, Canstruct submitted that the Court's discretion is enlivened under s 445D(1)(f) because the DOCA discriminates between it and other trade creditors, it deprives Canstruct of the ability to have a liquidator appointed to investigate Project Sea Dragon's affairs, and it is contrary to the interests of the creditors as a whole. 205 There is a considerable amount of judicial discussion concerning the operation of s 445D(1)(f)(i) which is unnecessary to repeat here as the parties generally agreed upon the relevant principles. In addition, in the recent decision in Sino Group, the Full Court applied and approved the observations of McKerracher J in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 [202] - [203] in relation to this subsection. It said at [64] - [65]: The principles applicable to s 445D(1)(f)(i) were summarised by McKerracher J at first instance in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 at [202] to [203] (approved by the Full Court in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54 at [168]): 202 In respect of s 445D(1)(f)(i) of the Corporations Act, and whether the DOCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more creditors, the following propositions of law are applicable to the current circumstances: (a) Part 5.3A of the Corporations Act assumes that the creditors are best placed to judge their interests so a setting-aside will not be ordered lightly: University of Sydney v Australian Photonics Pty Ltd [2005] NSWSC 412; (2005) 53 ACSR 579 at [34]; (b) the mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed. The mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement: Fleet Broadband (at [57] and the authorities cited therein); (c) the test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice. Some degree of discrimination is not necessarily unfair. Thus, it is clear that a DOCA may provide for differential dividends among creditors: Hamilton v National Australia Bank Ltd (1996) 66 FCR 12 (at 38E). Part 5.3A does not require a pari passu distribution. What is required is a better return to creditors than an immediate winding up. That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up: Fleet Broadband (at [62]); and (d) when deciding whether a deed unfairly prejudices or discriminates against a creditor or group of creditors, consideration must be given to what those purportedly prejudiced creditors would receive, or would be likely to receive, on a winding up, and the reasonableness of any conclusions reached by the administrator on that question: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 (at 50); TNT Building (at [43]). 203 In respect of determining what is unfairly discriminatory: (a) there must be reasonable grounds for differentiation between creditors of an equal class (for example, ordinary unsecured creditors) that accord with the object and spirit of Pt 5.3A: Lam Soon (at 46-48). Circumstances may exist where certain creditors must be paid in full to ensure their continued support for the company to allow it to continue to trade: Employers' Mutual Indemnity (Workers' Compensation) Ltd v JST Transport Services Pty Ltd (1997) 72 FCR 450 per Branson J (at 464-465 applying Lam Soon); (b) there will be circumstances when ordinary commercial common sense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination: Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 per Finkelstein J (at [25]); (c) where a deed proposes to preserve the company to achieve the objects of Pt 5.3A of the Corporations Act, there should be no expectation of equal treatment of unsecured creditors where such treatment would defeat that purpose: Rocklea per Finkelstein J (at [30]). (d) ultimately, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination, and the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation, and indirect or collateral benefits from the survival of the company's business; and no worthwhile avenues for further recovery in liquidation are identified, a major creditor's curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole: Mediterranean Olives (at [195]). The question of whether the creditors bound by a DOCA will be "better off" in a winding up is significant to the question of whether the deed involves relevant unfairness: TNT Building Trades Pty Ltd v Benelong Developments Pty Ltd (administrators appointed) [2012] NSWSC 766 at [43]. The question of fairness requires the Court to consider the whole circumstances of a case and evaluate whether there is overall unfairness in the proposal: Hagenvale Pty Ltd v Depela Pty Ltd And Another (1995) 17 ACSR 139 at 151. (Emphasis omitted). 206 The Full Court in Sino Group also identified the principles applicable to the exercise of power based on s 445D(1)(f)(ii), where it said at [66] - [68]: Section 445D(1)(f)(ii) will be satisfied if the deed, or a provision of it, is contrary to the interests of the creditors of the company as a whole. Although there are two limbs to s 445D(1)(f), the subsection is often considered in combination as there are overlapping factors relevant to a consideration of each limb. In TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789, Gordon J, then a judge of this Court, said at [54]: 54 In deciding whether a DOCA is oppressive, unfairly prejudicial and/or unfairly discriminatory, and/or contrary to the interests of the creditors as a whole, the courts have regard to factors including: 1. the object of Pt 5.3A; 2. the interests of other creditors, the company and the public; 3. the comparable position of the creditor on a winding-up, compared with their position under the deed; and 4. other relevant facts such as the relative position of all creditors under the deed (ie whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the deed. … For the purpose of s 445D(1)(f)(ii), it is not necessary to establish, on the balance of probabilities, that if the company is placed in liquidation the creditors will receive a better return. It is sufficient that there is a not unrealistic prospect that there may be a better return to creditors on a winding up than under the deed - that there is a serious case for the recovery of assets in a liquidation that would result in a better return to creditors: Britax Childcare Pty Ltd v Infa Products Pty Ltd [2016] FCA 848; (2016) 115 ACSR 322 at [93] to [94]. The question of whether there is a "not unrealistic prospect" of a better recovery in a liquidation is relevant to the question of whether a deed is in "the best interests of the creditors of the company as a whole", assessed in light of all the circumstances: Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85 at [91]; Decon at [165]. There are numerous other factors that the Court may take into account in determining the extent to which a deed is or is not in the best interests of the creditors of the company as a whole: Shafston Avenue Construction at [91]. (Emphasis omitted). 207 Despite the preference, in the above statements, for maintenance of the determination of the second meeting of creditors, there remains room in the application of s 445D(1)(f) for, at least, some concern for the prejudiced creditor's position. As Black J said in Guo v Song at [148]: … Whether a deed of company arrangement is oppressive or unfairly prejudicial or discriminatory under s 445D(1)(f) will be determined by reference to the general principles underlying Pt 5.3A, including a creditor's right to be paid or wind up a company or have the company administered by the administrator in a way which will see the creditor paid from the company's property. (Citations omitted). 208 This passage was cited with approval in In the matter of SBL Solutions Pty Ltd (subject to a deed of company arrangement) [2021] NSWSC 1002 [80] and Pilot Advisory Pty Ltd v ACN 137 806 574 Pty Ltd (admins apptd) (formerly Cloud 9 Software Pty Ltd) (2019) 376 ALR 662, 691 [79]. 209 The DOCA discriminates against Canstruct in a number of ways. As an arms-length creditor, who might receive at most 10 cents in the dollar in respect of its debt, it is treated differently from others of that character, who are to receive 100 cents in the dollar. That constitutes significant differential treatment. In a bizarre statement in the 14 March 2023 Report, it was suggested that the basis for this difference was that it reflected the priorities for small creditors in a liquidation set out in the Corporations Act. The passage read: Employee and Small Claim Creditors (being claims of $300k or less) will be paid at 100c in the dollar in accordance with the priorities set out in sections 556, 560 and 561 of the Act as though those priorities were applied (in priority to Admitted Claims that are not Small Claim Creditors). Current Estimate of $420k. 210 No such differentiation exists in the Corporations Act, and the statement was misleading. The first and third defendants did not attempt to justify or defend this error and, although it appeared that the administrators were "in their camp", they did not call on them to explain it. It is telling that, in the above quoted passage it is said that creditors whose debts were $300,000 or less were identified as "Small Claim Creditors", though no such nomenclature appears in the Corporations Act, and nor is there any suggestion that such creditors are accorded the same priority as employees of insolvent companies. It is troubling that it is fairly apparent that the inaccuracies have not arisen consequent upon a typing or transcription error, or by some misunderstanding arising from the wording of ss 556, 560 and 561 of the Corporations Act. There is a fair inference that the erroneous statements are mere inventions and, rather more concerning, is the clear inference that they were invented to provide a justification for the differential treatment between Canstruct on the one hand and the other unrelated, unsecured creditors on the other. The necessary inference is that the inaccurate statements were made intentionally. Mr Martin KC, in the course of his oral submissions, sought to dismiss the misleading information by stating, "[i]t just was an error on behalf of the administrators …". On any view, that explanation was insufficient. Nevertheless, for the reasons discussed below, I do not make any finding as to whether the statements were deliberately misleading. 211 In any event, the proffered justification for the different treatment of unsecured creditors by Project Sea Dragon, Seafarms Group Limited and the administrators did not exist and that is suggestive of the existence of some other undisclosed purpose. In an affidavit of Mr McKinnon, one of the administrators, on which the first and third defendants relied, it was asserted that prior to the second meeting of creditors the administrators sought an explanation for the differential treatment of "small claim creditors", and Canstruct specifically, but were advised that the proponent of it was not offering any. No meaningful explanation has since been given by the first and third defendants in these proceedings. 212 Here, the facts indicate that those advancing the DOCA merely wished to seek the support of the other unsecured creditors in order to secure its passing. They could do nothing but vote for it given that it offered them full payment of their debts, as opposed to the possible recovery of some of their debts in the future on a winding up. It is difficult to conclude other than that the purpose was to provide an irresistible incentive to the other unsecured creditors to vote in favour of the DOCA so as to secure the majority by number of the creditors voting in favour of the resolution, as required by s 75-115(1)(a) of the IPR. Conversely, Seafarms Group Limited and Project Sea Dragon wished to limit the amount paid to Canstruct. 213 Neither can it be said that the discrimination against Canstruct is justifiable and, therefore, not unfair, on the basis that the DOCA sought to protect the relationship between Project Sea Dragon and creditors who were necessary to Project Sea Dragon's future operations. As the cases to which reference is made above show, it is not unfair for a DOCA to discriminate in favour of entities in respect of which the company in administration would likely engage in business with in the future. The preservation of commercial relationships can justify discrimination against creditors who are not relevant to the company's ongoing operations. Here, the discrimination against Canstruct was sought to be justified on that basis. However, the evidence did not support that contention. For instance, Freehills, which was owed approximately $291,000, was a creditor which was to be fully paid under the DOCA and, as it was Project Sea Dragon's former solicitor, it was not an entity with whom Project Sea Dragon would be required to, or would, do business with in the future. In this respect, it is relevant that the value of the unrelated unsecured creditors apart from Canstruct, was some $520,000, such that the debt to Freehills was in excess of 50% of the value of those creditors. 214 That is sufficient to reject the suggestion that the discrimination against Canstruct was for the purposes of securing the goodwill of important commercial creditors for future operations. Nevertheless, that conclusion can be supported by reference to a number of other creditors in respect of which, it became evident, were not necessary to Project Sea Dragon's ongoing business. They included Darwin Indoor Plant Hire. 215 It is important that there was no affidavit evidence from the directors of Project Sea Dragon and Seafarms Group Limited that this was the justification for the discrimination against Canstruct in the DOCA. The suggestion was raised for the first time in the first and second defendants' written submissions. Even so, it can be assumed that the submission was put on instructions and, in the light of what has been said, those instructions have been shown to be incorrect. Despite his assertion in an affidavit that each creditor who lodged proofs of debts at the second creditors' meeting was "critical" to the operations of Project Sea Dragon, Mr Dyer accepted that not all the creditors were so "critical" in the course of his oral evidence. 216 The fact that the dual justifications for the discrimination have been shown to be fictitious does not simply mean that such justifications did not exist. It demonstrates that the advancing of them was disingenuous and for the purpose of concealing the DOCA's true purpose, being to cause the release of Canstruct's debt. Not only is that purpose improper, it has the consequence that it is unfairly prejudicial to, or unfairly discriminatory against Canstruct within the meaning of s 445D(1)(f) so as to enliven the Court's discretion to set the DOCA aside. 217 In Paddington Gold Pty Ltd v Wave Pty Ltd (subject to a deed of company arrangement) [2023] WASC 263, the question of whether the terms of a DOCA rendered it unfairly prejudicial arose on an interlocutory application for an injunction. There, the DOCA provided for differential payments to several classes of creditors, though there was no apparent justification for the differential treatment and none was able to be provided by counsel for the defendants, or the proponent of the deed. In reaching the conclusion that a serious question arose that the DOCA was unfairly prejudicial, Lemonis J took into account the absence of any relevant justification for the difference in payment. At [48] of his Honour's reasons the following was observed: Absent such an explanation, an inference is open that the deed was structured in this way to entice other creditors to vote in favour of the resolution, and to allow for an argument to be put that the return to Paddington on the deed was better than on liquidation, being 0.3 cents, compared to 0.2 cents. While that might be a legitimate tactical approach to be taken by Karli as the proponent of the deed, it does not alter its affect on Paddington and its capacity to be unfairly prejudicial to, or unfairly discriminatory against, Paddington. 218 Though those reasons were given in relation to an interlocutory application, similar observations apply here where no valid justification has been provided for the differential treatment of creditors. In fact, they apply with more weight given that the first and third defendants have had an opportunity to provide a rationale, attempted to, and have failed. 219 It is not necessary to consider the additional submission that s 445D(1)(f) would be enlivened because the approach of Seafarms Group Limited and Project Sea Dragon could lead to the general misuse of the VA and DOCA process. It was said that if the current DOCA were allowed to stand it would give the Court's imprimatur to the "buying" of votes in the second creditors' meeting by the company canvassing the creditors and agreeing to pay in full certain creditors in order to entice them to vote in favour of the DOCA, and doing that until sufficient majorities are acquired. Other creditors and, particularly unwanted creditors, would then not be paid at all. Whilst there is much force in that submission it is not necessary to decide because the circumstances of the outcome of the DOCA and its identified purpose, as demonstrated above, reveal the discrimination inherent in it to be unfair. 220 Mr Martin KC submitted that the Court should take into account the fact that since the injunction was granted restraining the administrators from dealing with the Deed Fund, Seafarms Group Limited has paid the debts to all of the unrelated, unsecured creditors save for Freehills, which has received a partial payment. He further submitted that it could not be said that Project Sea Dragon would suffer any prejudice because it alone, or with Freehills, will be entitled to the whole of the Deed Fund. That should not be accepted. The question is whether the DOCA or any of its provisions would work to unfairly prejudice or unfairly discriminate against Canstruct. It is not relevant to the operation of s 445D(1)(f) that some third party might, after the DOCA is entered into, provide payment to other creditors or engage in some extraneous act that ameliorates the oppression, prejudice or discrimination. Further, if it is assumed that the DOCA proceeds, Freehills will nevertheless be paid 100 cents in the dollar of its remaining claim of $242,000, before anything is paid to Canstruct. In that sense it remains discriminatory in that there is no commercial justification for treating Canstruct and Freehills differently. 221 Further, the mere differential in the payments between creditors was not the only prejudicial or discriminatory factor. The DOCA also precludes the largest unrelated and unsecured creditor from having the opportunity to seek to recover more on a winding up than it was able to obtain under the DOCA. The conclusion has been reached above that Project Sea Dragon has been insolvent since, at least, June 2020 with the consequence that the amount of the indebtedness incurred since that date may be recoverable from the directors of Project Sea Dragon or from Seafarms Group Limited. The issue which thus arises is whether there is a not unrealistic prospect of Canstruct recovering more in a liquidation by a liquidator pursuing a claim for insolvent trading than it would receive if the DOCA were performed: Britax Childcare Pty Ltd v Infa Products Pty Ltd (2016) 115 ACSR 322, 342 [93]. In making this assessment, the Court is not required to prejudge the outcome of future proceedings: Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85 [91]. 222 In support of its claim that it has a real right to have a liquidator inquire into the conduct of Project Sea Dragon's directors and of Seafarms Group Limited, Canstruct has, as mentioned, deposited $150,000 into its solicitor's trust account to be made available to any liquidator, if appointed, to undertake the investigation. It also promises to provide additional funding for any recovery action, so long as it is satisfied that there is a reasonable prospect of recovery. This demonstrates a degree of purpose and bona fides in Canstruct to assist in the pursuit of the recovery of the amounts it claims is owed to it, though it is, perhaps, unsurprising given that it has a significant financial incentive to do so. 223 It should be mentioned that there are differences in the evidence as to the total cost of undertaking inquiries and any future litigation. Again, those come from the solicitors for the respective parties, Mr Cliff and Mr Guthrie. It is not, however, necessary to reach any conclusion as to that disagreement. It can be accepted that the litigation will be a costly exercise and, as Seafarms Group Limited and the directors of Project Sea Dragon have insurance, it may well be hard fought. Nevertheless, Canstruct is greatly prejudiced by the DOCA and the circumstances suggest that it should be permitted the opportunity for the claim against the Project Sea Dragon directors and Seafarms Group Limited to be pursued. That is especially so given that all of the unsecured creditors, save for Freehills and Canstruct, have been paid in full and will not suffer any detriment if the litigation is not as successful as Canstruct hopes.

Should the DOCA be terminated under s 445D(1)(e)? 224 Canstruct also relied upon s 445D(1)(e) of the Corporations Act as a basis to terminate the DOCA. Under that subsection, an order terminating a deed of company arrangement may be made if "effect cannot be given to the deed without injustice or undue delay". 225 Canstruct submitted that an injustice is established in the present case as the effect of the DOCA is to avoid a proper investigation of the relevant transactions of Project Sea Dragon: see Guo v Song [146]: and further, it will deny it the prospect, in a liquidation, of a much greater return than 10 cents in the dollar. 226 As set out above, the entry into the DOCA had the consequence of avoiding scrutiny into whether Project Sea Dragon had engaged in insolvent trading and had incurred debts in respect of which its directors and parent company might become liable. This avoidance of a proper investigation of the transactions of Project Sea Dragon is enough to establish the element of injustice under s 445D(1)(e), and further enliven the Court's discretion to terminate the DOCA. 227 Additionally, Canstruct's further submission that there is an injustice in the DOCA's effect of denying it the prospect of a greater return in a liquidation may also be accepted. For the reasons previously referred to, there are grounds on which a liquidator might pursue Project Sea Dragon's directors and Seafarms Group Limited for insolvent trading, and there is a not unrealistic prospect of Canstruct recovering more in a liquidation by a liquidator pursuing such a claim than it would receive if the DOCA were performed. 228 Each of these injustices are, as Canstruct submitted, aggravated by two factors. First, by the fact that the vote by the majority of creditors in value in favour of the DOCA was achieved by the votes of related party creditors. Secondly, by the fact that there is an inference open on the material that the votes by the majority of creditors in number may have been influenced by the discrimination in the DOCA to pay all creditors in full, save for Canstruct.

Should the DOCA be terminated under s 445D(1)(b)? 229 Canstruct also relied upon s 445D(1)(b) as a justification for terminating the DOCA. That subsection, together with subsections (a) and (c), relevantly provide: (1) The Court may make an order terminating a deed of company arrangement if satisfied that: (a) information about the company's business, property, affairs or financial circumstances that: (i) was false or misleading; and (ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed; was given to the administrator of the company or to such creditors; or (b) such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or (c) there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or 230 The application of this section does not require intention on the part of the person making the misrepresentation and that is important here where the misrepresentations are alleged to have been made in the administrators' report to creditors, namely the 14 March 2023 Report: see Sino Group [62]. Necessarily, in the preparation of the report and, in particular, the making of statements concerning any proposed DOCA, the administrators are, to a degree, reliant on information provided to them by the deed proponents and the company. It follows that misleading or false statements can be made in the administrators' report which were unintentional and for which the administrators might bear little responsibility. That said, for the most serious and egregious misrepresentation in this case, the administrators would appear to be solely at fault. 231 Canstruct relied upon the misstatement in the 14 March 2023 Report that purports to justify the distribution of the Deed Fund under the proposed DOCA. The passage is referred to above, but it is convenient to repeat it: Employee and Small Claim Creditors (being claims of $300k or less) will be paid at 100c in the dollar in accordance with the priorities set out in sections 556, 560 and 561 of the Act as though those priorities were applied (in priority to Admitted Claims that are not Small Claim Creditors). Current Estimate of $420k. 232 The erroneous part is the suggestion that creditors whose debts are $300,000 or less are referred to as Small Claim Creditors, and that payment to them of 100 cents in the dollar was in accordance with the priorities set out in ss 556, 560 and 561 of the Corporations Act. As identified above, there is no question that the statements were misleading and were intentionally made to provide some justification for the differential treatment of Canstruct and the other unsecured creditors. 233 It is necessary to record that the Court was informed that Canstruct had reached an agreement with the administrators to expressly say to the Court, "We do not submit there was any deliberate misleading by the administrators, or deliberate misrepresentation to the creditors." Be that as it may, the administrators were parties to the action and were entitled to defend themselves as they saw fit. Even if they did not fully participate in the hearing, they were entitled to make submissions about any issue. They chose not to participate in any manner. That leaves it open for the Court to make any findings against them as the evidence discloses. However, in light of Canstruct's submission, there is no reason to determine whether the statements were deliberately misleading. All that needs to be said has been articulated above. 234 In Sino Group, the Full Court dealt (at [62]) with the principles to be applied when determining whether an omission from a document given to creditors was false or misleading and can reasonably be expected to have been material to creditors deciding to vote in favour of a DOCA. Relevantly, the Court observed that it is the objective quality of the information that is to be assessed and not whether any person was, in fact, misled. Further, an omission (or in this case a misrepresentation) which can reasonably be expected to have been material to a creditor's decision to vote in favour of a DOCA, may justify termination. In this context, "material" means something that was relevant and did affect, or might have affected, the decision to vote in favour of the DOCA. 235 It is worthy of remark that the operative effect of s 445D(1)(a) - (b) should not be underestimated. Like other statutory provisions which turn on behaviour which is misleading, its scope is wide and not limited by the intention of the maker of a statement, or to misstatements which are untrue, or which actually cause creditors to vote in favour of a resolution to enter into a DOCA. Whilst the misleading statements must be of a quality that they can reasonably be expected to have been relevant and might have affected the outcome, that is the limit of any causality. Further, as was identified in Sino Group (at [62]) the test of what is material is also objective and the omission (or misleading information) does not need to be material to all creditors. There, the Court identified that, though the intention or conduct of the person who made the statement in question is not relevant to the inquiry, where it is apparent that the misleading statement was objectively intended to influence a decision to vote in favour of a DOCA, it is easier to draw the inference that it was material to the creditors' decision. 236 The fact that the information in this case was contained in the 14 March 2023 Report, being a report written by the administrators, is objectively likely to accord it greater weight. Whilst it is undoubted that the creditors were likely to vote in favour of the DOCA because they were offered a return of 100 cents in the dollar, the assertion that they would otherwise be entitled to that on a winding up was likely to give them comfort. Additionally, the erroneous statement that the differential payments were the same as found in the Corporations Act on a winding up, was likely to have provided succour to the creditors in the sense that they would perceive the existence of a justification or fairness for their favoured position. It can, and should be, concluded that the statements were material to the creditors' decisions to vote in favour of the DOCA. 237 Here, the elements of subsection (b) are satisfied. The information in the 14 March 2023 Report was false or misleading and it can be reasonably expected to have been material to creditors in deciding whether to vote in favour of the DOCA. It was in a document given to the creditors which accompanied the notice of the meeting at which the resolution was passed. On that basis, the discretion to terminate the DOCA arises under s 445D(1)(b) as well.

Should the DOCA be terminated under s 445D(1)(c)? 238 Canstruct also relied upon the existence of a material omission from the 14 March 2023 Report as a ground for setting the DOCA aside pursuant to s 445D(1)(c). That subsection is set out above. 239 The first asserted omission was that of the real and intended purpose of the DOCA, being to circumvent the payment of the adjudicated amount to Canstruct, save for 10 cents in the dollar, whilst continuing with the maintenance of the project. On the basis of the findings made earlier in these reasons, that true purpose of the DOCA was omitted from the 14 March 2023 Report. Undoubtedly, that would be material to the creditors in deciding whether to vote in favour of the resolution to enter into the DOCA. If told of the true purpose, the creditors would have been likely to have questioned the propriety of entering into the DOCA, and may well have been concerned as to what adverse consequences might arise in the future, including that it might be set aside. The omission was in a document within the scope of subsection (c). Again, the discretion to terminate the DOCA arises in this way as well. 240 The second omission relied upon was the absence of a statement to the effect that there existed a real question as to whether Project Sea Dragon had been trading whilst insolvent for a number of years, that this was a matter which a liquidator might properly investigate, and that there were avenues of recovery from both Seafarms Group Limited and Project Sea Dragon's directors of the amount of the debts incurred whilst the company was insolvent and which have not been satisfied. The materiality of that alleged omission was said to be heightened by reason of the inclusion of statements in the 14 March 2023 Report which were to the effect that Project Sea Dragon was solvent until 13 February 2023 as a consequence of Seafarms Group Limited's ongoing financial support, that it was only when the support was withdrawn on 13 February 2023 that Project Sea Dragon became insolvent, and that nothing could be recovered if an insolvent trading claim was pursued. 241 Based on the findings above, there is no question that the matters identified existed and were not included in the 14 March 2023 Report. There are more than reasonable grounds to support the existence of a liquidator's claim to recover from Seafarms Group Limited and Project Sea Dragon's directors amounts equal to the debts incurred whilst Project Sea Dragon was insolvent, and those recoveries are possibly extensive. In this respect, the 14 March 2023 Report vastly understated the potential for recovery from insolvent trading claims and no qualifying statements were made by the administrators which could justify the absence of any reference to that potential. That is especially true in circumstances where the contrary information was advanced. 242 The third alleged omission was that the creditors were not told: that the real purpose of the discrimination in distribution to the arms-length trade creditors, was to bribe the majority in number of trade creditors to vote "yes", so as to achieve the majorities required to oppose [sic] the DOCA. 243 In broad terms and correcting the error in Canstruct's written submissions, this asserts that the 14 March 2023 Report did not identify that the reason for the substantial difference in the treatment between Canstruct and the other unrelated, unsecured creditors, was to provide an irresistible incentive or bribe for those other creditors to vote in favour of the DOCA. There is force in this and its materiality was increased by reason of the serious misstatements made in the 14 March 2023 Report which suggested that the discrimination was justifiable by reference to the priorities which arise in a liquidation. For similar reasons to those referred to above in relation to the failure to identify the true purpose of the DOCA, this omission was also misleading and material to the creditors' decision whether to vote in favour of the DOCA. It too, enlivens the discretion to terminate the DOCA in this case. 244 The fourth omission relied upon was that the creditors should have been told that if the DOCA was approved and Project Sea Dragon was returned to the directors' control, it would continue to incur debts and no arrangement was in place for meeting them. The evidence indicates that Seafarms Group Limited would resume its previous method of funding Project Sea Dragon, being one which did not require it to provide funding, to give any assurance of funding, or to make any commitment at all. In other words, Project Sea Dragon would continue with the financial arrangements which it had in place prior to the VA and DOCA process. It is correct that an omission was made in relation to Project Sea Dragon's future financial circumstances following the completion of the DOCA. 245 In this context it is relevant that, at the second meeting of creditors, Mr Guthrie from Thomson Geer, the solicitors for Canstruct, inquired of the administrators as to how Project Sea Dragon would be able to meet its ongoing debts if the DOCA were passed and what information about that funding would be available. There was no substantive response to that questioning and Mr Dyer on behalf of Seafarms Group Limited or Project Sea Dragon declined to provide any information. 246 Despite that omission, it was not material in the circumstances. It is true that the creditors were not told that, if Project Sea Dragon were returned to the control of the directors through the DOCA process, it would resume an insolvent position in the absence of any sufficient arrangement for meeting its future debts. However, it is unclear why that should be of concern to Project Sea Dragon creditors or why it would impact their decision to vote in favour of the DOCA. Those unrelated unsecured creditors, which were to receive more than 100 cents in the dollar, were not concerned to know how the company would operate into the future. Their concern would arise, if at all, if those creditors were to re-engage with Project Sea Dragon in the future. Indeed, even Canstruct had no apparent commercial interest as it was unlikely to be engaged in any further commerce with Project Sea Dragon. 247 Therefore, the omission to inform the creditors of Project Sea Dragon's future financial position was not material in the sense required by s 445D(1)(c). Despite that, the first three omissions relied upon are sufficient, either individually, collectively or in some combination, to further enliven the discretion to terminate the DOCA.

The exercise of the discretion 248 The manner in which s 445D operates is that the discretionary power is conditioned upon the satisfaction of a subjective fact, being the Court reaching the state of satisfaction required of any of the subsections. As indicated, that state of satisfaction has been reached in relation to subsections (b), (c), (e) and (f), and the discretion has been enlivened accordingly. However, that discretion is not to be exercised in a vacuum. In particular, it arises because the Court is satisfied that an event or events have occurred which have infected the DOCA process. That state of satisfaction is, of itself, a powerful consideration in the exercise of the discretion. For instance, the Court's satisfaction that the DOCA is unfairly prejudicial to a major creditor is necessarily a significant factor to weigh in determining whether it should be terminated. 249 In this case, each of the conclusions that s 445D(1)(b), (c), (e) and (f) are satisfied are weighty considerations in favour of terminating the DOCA. Indeed, each or any combination of them support the exercise of the discretion to terminate. 250 A second consideration is the protection of the public interest. As concluded above, the financial and corporate arrangements which Seafarms Group Limited and Project Sea Dragon put in place effectively permitted an insolvent company to continue to trade and incur substantial expenditure. Whether intentional or not, the structure allowed a continuously insolvent company to operate over an extended period and accumulate substantial indebtedness to its related entities, and to unrelated entities. It was, therefore, in a position whereby it might incur a large debt which it determined it should not pay and, with the overwhelming voting power in value and resources of its related entities, it could use the VA and DOCA process to cause that debt to be released, and then continue business as before. On the basis of the first and third defendants' submissions put to this Court, Project Sea Dragon might operate in this manner without risk of liability to its directors or holding company for insolvent trading. 251 On any view, Project Sea Dragon was, and is, essentially, a stalking horse for undertaking high risk business and one which presents a real risk to others who might deal with it. Were the Court not to terminate the DOCA and wind it up, it would be allowed to continue to trade whilst insolvent which is contrary to the public interest. 252 Further, as a result of the conclusion that Project Sea Dragon has been trading whilst insolvent since June 2020, several causes of action against its directors and Seafarms Group Limited might exist. There is a realistic possibility that they will provide a substantial return which will be available to be used to meet the claims of the two remaining creditors. As Canstruct submitted, it does not accord with the protection of the public interest or the proper administration of Pt 5.3A, to permit those whose conduct deserves to be investigated to use their voting power, via related entities, to avoid investigation. It is also correct that Seafarms Group Limited, which voted in favour of the DOCA, did not do so because it enhanced its recovery position as a creditor. On the information which was apparently before the meeting, it would receive nothing and its $62 million debt would be released. Self-evidently, it voted to advance the group's corporate interest rather than its interest as a creditor. The group's interest is likely to have included the avoidance of the investigations which might arise on liquidation, particularly the possibility of actions against Seafarms Group Limited and the directors of Project Sea Dragon. In this manner, the voting on the DOCA was influenced by entities who were potentially at risk if the DOCA was not passed. On this topic, the observations of Santow J in Bathurst City Council v Event Management Specialist Pty Ltd (2001) 36 ACSR 732 are relevant. There, his Honour acknowledged (at 734 [6]) that the law did not prevent creditors voting at the second meeting despite having a particular interest in the outcome. Nevertheless, a court is entitled to examine the manner in which interested creditors voted. His Honour observed at 735 [8] - [9]: Compare two examples. In the first, assume some creditors have an interest in promoting the DCA because they need money immediately. Whereas, others can more easily wait and would do so if this were more likely to produce a larger percentage in the dollar. That is a difference in interest. But it is ordinarily not of such degree as to cause the court to scrutinise the voting result more sceptically. The second case is where one group favours a DCA for truly extraneous reason - it wishes for example to resist recovery of preferential payments, or insolvent trading or, as is sometimes overlooked, breach of directorial duty where any criminal sanctions are not avoidable by a DCA. The other creditors are not potential defendants to recovery actions. They stand to benefit from such actions, if they are successful and there are assets to meet any judgment. Meantime those actions must be funded. The administrator will often know less about the legal case against those potential defendants than they do. Yet it is the administrator who must report to the meeting of creditors under tight time tables on the scope for successful recovery, at a meeting which may be stacked with such potential defendants who also claim as creditors. A good example was J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691. In the present case, there is material before me to indicate that the vote was significantly influenced by a group of creditors with just such an extraneous interest. This was first when the DCA was originally put to the vote and then when it was put again following institution of these proceedings. The vote appears to have been influenced by the votes of those potentially vulnerable to such recovery actions. On the plaintiff's calculation, if their votes were excluded (notionally as there is no warrant in the Corporations Law otherwise to do so) there would no longer be a majority of creditors in dollar amount in favour of the DCA. There would however still be a majority in number of creditors, many of whom had no such extraneous interest. That factor necessarily reduces the weight to be given to an affirmative vote in deciding how the court's discretion should be exercised, though not by itself decisive. 253 To similar effect are the observations of the Full Court in Sino Group, where it was said at [143]: In the circumstances of this case, where solvency is uncertain and taking into account the manner in which the company came to execute the DOCA against a background of an extant arbitration, where there had been a finding in relation to liability against Gymbaroo and the damages phase of the proceedings was pending, and where the trigger for placing the company into administration was the calling up of a debt to a Related Party Creditor, a debt which was very shortly thereafter subordinated and deferred, the public interest weighs in favour of terminating the DOCA to enable the affairs of the company to be investigated by a liquidator, including in relation to the dispute as to the quantum of the debt to the Sino Creditors. 254 Here, the votes of the debts by value were substantially increased by the related party creditors whose interests must have been influenced by the potential recovery actions which might occur in a winding up. If the votes of the related parties were notionally excluded, the value of the votes in favour of the DOCA was only $510,420 whereas the value of the vote against was $13.9 million. Indeed, even if only Seafarms Group Limited's vote was excluded, the vote on the DOCA would have failed. 255 There is, in this case, no need to be concerned with the claims of the smaller unrelated creditors in the exercise of the discretion. The Court was informed that, despite the current injunction in place preventing the administrators from using the Deed Fund to make payments under the Deed, those creditors have been paid by Seafarms Group Limited in any event. That does not apply to Freehills, whose debt has been paid down to some extent, though the sum of $242,000 remains outstanding. 256 Nevertheless, a significant consideration is that the result of the DOCA is that Project Sea Dragon would resume trading albeit that it is insolvent. That is an especially good reason to set the DOCA aside. Save in the most extreme case, if any, courts should not permit insolvent companies to continue to engage in business. The first and third defendants submitted that Project Sea Dragon would have a greater financial backing from Seafarms Group Limited in the future such that insolvency will be avoided. Reference was made to the minutes of a meeting of Seafarms Group Limited of 21 June 2023, where it was "noted" that, since the administration of Project Sea Dragon had been completed, Seafarms Group Limited had paid an amount of $4.54 million to Project Sea Dragon in respect of the project and the Deed Fund. It was also noted that Seafarms Group Limited was "committed to continue its efforts to secure a future for [Project Sea Dragon] and the Project" and that it "wishe[d] to continue to raise further funds for the purpose of progressing the Project". It was also "resolved" that Seafarms Group Limited "has sufficient reserves and will remain committed to the development and support of [Project Sea Dragon] and the Project" and that it would "continue its efforts of raising funds for the purpose of progressing the Project". None of that suggests that Seafarms Group Limited has adopted any stance in relation to this issue which is different to that which it had prior to the VA and DOCA process. In the course of cross-examination, Mr Dyer agreed that Seafarms Group Limited's intention was to resume funding after the DOCA and he did not suggest that those resumed funding arrangements would be any different to those which previously existed. He gave the following evidence: All right. And was it discussed that, upon that occurring, then Seafarm, the parent, would resume funding of the subsidiary?---To continue operations, yes. So it was a cessation of funding to tip the subsidiary into administration but with the expectation that, upon the DOCA being signed, the parent would resume funding?---Yes. 257 Therefore, the intention to fund into the future carried no greater assuredness than was the position prior to entry into the DOCA. That reinforces the conclusion that winding up Project Sea Dragon would be in the public interest. 258 Another matter relied upon was that, if the DOCA is terminated, then Project Sea Dragon will proceed to liquidation as if it was placed in voluntary liquidation under s 491 of the Corporations Act, without the directors having made a declaration of solvency under s 494: see s 446AA of the Corporations Act. In that situation it does not necessarily follow that that the only option for the liquidators is to cease the business and sell it. The liquidators are at liberty to appoint an administrator with a view to Seafarms Group Limited making a further DOCA proposal. Any further DOCA might be fair and not contravene the provisions of Pt 5.3A as does the present. Alternatively, the liquidation might be stayed if Project Sea Dragon is able to establish that it is solvent after rearranging its financial structures. In this way, the termination of the DOCA does not ineluctably lead to the cessation of Project Sea Dragon's business. Whilst it may be true that a future liquidator might seek to appoint an administrator rather than pursue the winding up, any such decision would necessarily need to consider the issues raised in these reasons. They would include the apparent availability of substantial claims against Seafarms Group Limited and Project Sea Dragon's directors. Whether a liquidator would seek the appointment in those circumstances may be questionable, but if that step is taken it must follow a proper analysis of all of the circumstances. The mere possibility is not a reason for not exercising the discretion to wind up Project Sea Dragon in this case. 259 A further and not insignificant factor in this regard is that the only two remaining unrelated creditors are Canstruct and Freehills. Canstruct wishes to have the DOCA set aside and Freehills, which has been notified of the proceedings but did not attend or make submissions, has not opposed that order. That has the result that the only known desire of the remaining unrelated creditors is for the DOCA to be set aside. 260 Given the foregoing, the relevant considerations weigh heavily in favour of terminating the DOCA and winding up Project Sea Dragon. In this case, the findings that the DOCA was an abuse of Pt 5.3A, that it was unfairly prejudicial to Canstruct, was entered into after false or misleading information was given to the creditors, and after relevant information was not given to them, show that the whole process was flawed. The setting aside of the DOCA is likely to lead to recovery actions against Seafarms Group Limited and Project Sea Dragon which have reasonable chances of success and, importantly, it will prevent Seafarms Group Limited and the Seafarms Group from using insolvent companies to assume the risks of its business to the potential wider prejudice of future creditors. 261 Canstruct is entitled to orders that the DOCA entered into on 13 March 2023 be set aside and that Project Sea Dragon be wound up.

The relief 262 On any of the bases for relief relied upon, Canstruct is entitled to relief which it seeks. In the first instance, pursuant to either s 447A or s 445D of the Corporations Act, the DOCA dated 23 March 2023 should be set aside and the administration which commenced on 14 February 2023 should be terminated. 263 Canstruct also applied pursuant to s 75-41 of the IPS for an order setting aside the resolution of creditors on 21 March 2023 that Project Sea Dragon execute the DOCA. There is a significant overlap between the considerations under that section and the earlier answered question of whether the DOCA should be set aside under s 445D(1)(f) of the Corporations Act. For the reasons which are given above, Canstruct is also entitled to the order it seeks under s 75-41 of the IPS. 264 Further, as Project Sea Dragon was and is insolvent, it ought now be wound up in insolvency. In that respect, Mr Robert William Hutson and Mr David Martin Johnstone have both consented to act as liquidators and it is appropriate that they be appointed joint and several liquidators of Project Sea Dragon. 265 Canstruct also seeks to be released from the undertaking given to the Court on 3 May 2023 in which it undertook to pay damages for any loss occasioned by the granting of the injunction restraining the administrators from completing the DOCA. In the circumstances of Canstruct's success, there is no reason why it should not be released.

Stay 266 In the course of the hearing, it was accepted that, regardless of the outcome, it would be appropriate to grant an interim stay so that the unsuccessful party might consider their position in relation to an appeal. That is appropriate in these particular circumstances where the position of whichever party that was unsuccessful at first instance, would be irrevocably damaged were a stay not granted. In those circumstances, the orders which are made are to be stayed until the expiry of the appeal period, unless extended. I certify that the preceding two hundred and sixty-six (266) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.