GREENWOOD J:
1 These proceedings are concerned with a range of orders sought by Mr Christopher Hill and Mr Philip Carter as joint and several administrators of Flow Systems Pty Ltd ("Flow Systems") and 15 other companies, recited in the application together described as the Flow Systems Group of Companies or the Flow Systems Group. The administrators were appointed, under s 436A of the Corporations Act 2001 (Cth) (the "Act"), to each recited entity in the Flow Systems Group on 20 December 2018 pursuant to resolutions of the boards of directors of each company that day. One wholly owned subsidiary within the Flow Systems Group, Meter 2 Cash Solutions Pty Ltd ("Meter2"), is not in voluntary administration.
2 The application was filed on 30 December 2018 and brought before the Court urgently on the afternoon of 31 December 2018.
3 I will explain the urgency of the matter in the course of these reasons.
4 Orders were made on 31 December 2018 having regard to the affidavit evidence given by Mr Hill by his affidavit sworn 30 December 2018.
5 These reasons are the reasons explanatory of the making of the orders that day.
6 By the application, the administrators sought, in substance, these orders: that Exhibit CCH 2 to Mr Hill's affidavit be made confidential due to the commercial sensitivity of particular documents in that exhibit not in the public domain; that the administrators are justified in causing Flow Systems to borrow monies (not exceeding $5 million) from EAWH Pty Ltd pursuant to a "Facility Agreement" dated 24 December 2018 (which is subject to an important condition subsequent mentioned later in these reasons); that Pt 5.3A of the Act is to operate as if s 443A(1) of the Act provides that the liabilities of Mr Hill and Mr Carter under the Facility Agreement (including debt obligations and interest) are obligations incurred by them in the performance and exercise of their functions as administrators of each of the relevant 16 cited Flow Group entities: s 447A(1); that Pt 5.3A of the Act is to operate in respect of the 16 entities as if s 443A(1) provides that if the property of the 16 entities is insufficient to satisfy the debts and liabilities incurred by the administrators in the exercise of their role incurred under the terms of the Facility Agreement (for which they enjoy a right of indemnity under s 443D of the Act), the administrators will not be personally liable to repay such debts and liabilities to the extent of the insufficiency (that is, the non-recourse order): s 447A; that Pt 5.3A is to operate as if the administrators have no liability for the loans by Flow Systems to any of the third to seventeenth entities (that is, the relevant 15 recited entities), or advances as between Flow Systems and any of the other recited Flow Systems Group entities: s 447A; that in respect of any security interests created in connection with a document described as the "General Security Deed" dated 24 December 2018 (forming part of CCH 2), the registration time for the collateral is fixed to be 21 January 2019 for the purposes of s 588FL(2)(b)(iv) of the Act: s 588FM; orders in relation to costs; and, that liberty be reserved to any party affected by any of the orders (including unsecured creditors) to apply to the Court to modify or discharge the orders on no less than 48 hours' notice to the administrators and the Court.
7 EAWH Pty Ltd is a company formerly called Brookfield Water Holdings Pty Limited ("Brookfield"). Brookfield holds 56% of the issued shares in Flow Systems which in turn holds 100% of the shares in the relevant Flow Systems Group entities. Brookfield also holds 56% of the shares in Flow Systems Constructors Pty Ltd (Administrators Appointed) ("Flow Systems Constructors"). The subsidiary entities of Flow Systems operate a range of water, energy and multi-utility schemes which are either completed or, alternatively, in various stages of development. The Flow Systems Group operates as a water utility and energy solutions provider in Australia providing sustainable water delivery systems to developers, government and communities along with energy solutions to multi-unit or mixed residential communities.
8 Flow Systems is the retailer within the Flow Group as well as being the corporate services entity. It holds a retail supplier's licence under the Water Industry Competition Act 2006 (NSW) (the "WICA") and it is an authorised retailer under the National Energy Retail Law.
9 Flow Systems Constructors was established for the purposes of establishing and managing the scheme implementation team. That team is responsible for scheme infrastructure design, construction and associated workflows.
10 Flow Systems Operations Pty Ltd (Administrators Appointed) was established for the purposes of holding all future network operating licences for future schemes.
11 Loxford Development Holdings Pty Ltd (Administrators Appointed) and subsidiaries of that entity were established in June 2018 as special purpose companies in relation to the acquisition of particular land in New South Wales. All remaining subsidiaries of Flow Systems (apart from Meter2) are scheme-specific special purpose companies established in respect of each scheme so as to deliver water and multi-utility solutions in the relevant scheme.
12 One important aspect of the present application concerns an understanding of the way in which the operations of the Flow Systems Group have been financed. From February 2013, the elements of the financial arrangements have been these.
13 First, a "Security Holders Agreement" for an Incorporated Joint Venture was entered into between Flow Systems, Brookfield, Water Lifestyle Network Pty Ltd as trustee of the Bluesky Family Trust, Saddlehill Investments Pty Ltd ("Saddlehill") as trustee of the Saddlehill Trust, David Langley, Katrina Langley, St Jorioz Pty Ltd as trustee of the St Jorioz Family Trust and BFT Capital Pty Ltd as trustee of the Brinker Family Trust, dated on or about 27 February 2013. This agreement is described as the "Security Holders Agreement" and it is part of Confidential Exhibit CCH 2.
14 Second, the financial arrangements involve a "Subscription Agreement" between Flow Systems and each entity listed as a subscriber being agreements on or about 27 February 2013 or on or about 24 September 2014 (as reflected in the documents forming part of Confidential Exhibit CCH 2). These agreements are described as the "Subscription Agreements".
15 The third element of the financial arrangements involve a "Convertible Notes Deed Poll" executed by Flow Systems in favour of each of Brookfield, David Langley, Katrina Langley, Saddlehill as trustee of the Saddlehill Trust, dated on or about 27 February 2013 (as amended) and includes an Amendment and Restatement Deed dated 24 September 2014 (all of which are described as the "Convertible Notes Deed Poll". A copy of the Convertible Notes Deed Poll forms part of Confidential Exhibit CCH 2.
16 The fourth element of the financial arrangements involves a "Flow Systems Security Trust Deed" between Brookfield Infrastructure Group (Australia) Pty Ltd as trustee of the Water Factory Company Security Trust (as "Security Trustee"), Flow Systems and Wyee Water Pty Limited ("Wyee Water") (as "Obligors"), and Brookfield, David Langley, Katrina Langley and Saddlehill as trustee of the Saddlehill Trust (as "Beneficiaries"). The Flow Systems Security Trust Deed is dated on or about 23 February 2013 (as amended) and forms part of Confidential Exhibit CCH 2. It is generally described as the "Security Trust Deed".
17 The fifth element involves a "General Security Deed" between particular parties entered into on or about 23 February 2013 described as the "Flow Systems GSD" as Flow Systems is a party to it and a further "General Security Deed" between other parties described as the "Wyee Water GSD" dated on or about 23 February 2013. Wyee Water is a party to that Deed.
18 By operation of the Security Trust Deed, the Flow Systems GSD and the Wyee Water GSD, security was provided in favour of the Security Trustee for the obligations of each of Flow Systems and Wyee Water in connection with the Subscription Agreements, and that security was held on behalf of the Security Trustee and the Beneficiaries as security for the secured obligations of the Obligors arising out of the various documents described above relating to the financial arrangements.
19 Brookfield is the majority beneficiary under the Security Trust Deed and as such it is entitled to instruct the Security Trustee to take enforcement action under the Security Trust Deed and the Flow Systems GSD and to take any enforcement action available to it under any of the instruments comprising the financial arrangements as described above.
20 In his affidavit, Mr Hill sets out an historical consolidated statement of financial position for the Flow Systems Group of Companies extracted from the most recent statement of financial position for the Group for the financial year ending 31 December 2017. The total current assets amount to $13.1 million with non-current assets valued in this way: property, plant and equipment - $29.3 million; goodwill - $6.9 million; intangible assets - $3.9 million; financial assets - $1.1 million; and a deferred tax assessment of $3.6 million. Total non-current assets amount to $44 million and total assets amount to $58.2 million. Total current liabilities amount to $28.1 million and total liabilities (including non-current liabilities) amount to $42.8 million. Net assets are said to have a value of $15.3 million. The non-current assets are significant in that analysis. Mr Hill's affidavit also sets out an historical consolidated statement of cash flows for the Flow Systems Group for the financial year ending 31 December 2017.
21 Mr Hill says that at the date of appointment of the administrators, the companies comprising the Flow Systems Group together had $1,490,416.45 in cash at bank. Mr Hill says that since the date of appointment of the administrators, staff of the administrators have been liaising with Australia and New Zealand Banking Group Limited ("ANZ") to transfer funds from the Flow Systems Group pre-appointment bank accounts, to bank accounts the administrators have opened in each of the Flow Systems Group Company names. Mr Hill says that on 21 December 2018, the administrators were advised by ANZ that its standard processing time for transfer of funds is 10 days. Mr Hill says that without taking into account the holiday period and public holidays during late December and early January, the transfer of the funds would take up until 4 January 2019. The difficulty with that timeframe is that wages fall due for payment to employees on 2 January 2019. Mr Hill says that although staff of the administrators have sought to escalate the issue of the transfer of cash balances (including following up with ANZ representatives each day), as at 30 December 2018, the administrators have only received approximately $554,000 and are still without funds from the pre-appointment accounts of each company at the date of swearing the affidavit.
22 The consequence of these events is that the administrators intend to draw on funds available under the Facility Agreement and related agreements described earlier to ensure that funding is available to process payments to critical suppliers. The administrators hope that these payments can be made by the end of December 2018 although more likely, they will be paid in the first week of January 2019 along with the wages due to be paid on 2 January 2019.
23 Mr Hill says that with wages of approximately $565,000 and supplier payments of $400,000, the administrators will need additional funding to continue operations in the immediate future. Mr Hill says that he understands that two further withdrawals have been made from the account on 24 December 2018 and that some credit cards continue to be operational giving rise to particular liabilities. Mr Hill says that investigations about the withdrawals are continuing.
24 As to the key assets, Mr Hill says this. The Flow Systems Group's key assets comprise plant, property and equipment and work-in-progress which relate to capitalised scheme assets valued at approximately $56 million as at July 2018. Other assets consist of: receivables from developers, retail customers, consulting receivables and a developer loan; land in New South Wales; vehicles; other plant and equipment; and certain intangible assets (described as "primarily including water and energy rights granted to [Flow Systems] by developers") all of which have a total value of approximately $27 million as at July 2018. Flow Systems Group companies are also parties to approximately 10 service contracts with major construction companies providing water utility and energy services to property development projects in New South Wales. Mr Hill says that operating revenue generated from these energy and water divisions was approximately $7.5 million for the financial year ending 31 December 2017.
25 As to the position in relation to creditors, Mr Hill says that the Flow Systems Group's credit profile as at December 2018 can be summarised in this way.
26 First, the Security Trustee, the principal secured creditor of Flow Systems, is owed approximately $40 million under the financial arrangements documents described earlier in these reasons.
27 Second, other secured creditors and other contractors and suppliers with retention of title arrangements and lessors who hold registered interests are owed monies although Mr Hill cannot presently say what the quantum of that amount is.
28 Third, approximately 126 trade creditors are owed $2.6 million.
29 Fourth, accrued employee entitlements amount to $583,182.55.
30 Fifth, the Australian Taxation Office ("ATO") may potentially be owed a debt relating to a superannuation guarantee charge although Mr Hill is not able to say how much may be owing as to that matter.
31 Mr Hill says that according to the books and records for the Flow Systems Group, the total amount of unsecured debts is $2,633,472.10 as at the date of appointment of the administrators (but excluding the potential debt owed to the ATO). The particular liabilities are set out in Exhibit CCH 1 to Mr Hill's affidavit.
32 Mr Hill says that the entities in the Flow Systems Group together employ 35 employees. Most of those employees undertake work for Flow Systems and Flow Systems Constructors so as to provide services to customers under the various service contracts. All employees are paid monthly. Mr Hill says that the next tranche of wages ($565,542.31 inclusive of superannuation and tax) is due to be paid on Wednesday, 2 January 2019. Mr Hill forecasts that a total amount of $1,452,000 will be payable to employees over the next 12 weeks.
33 Mr Hill says that in the limited time available to the administrators since their appointment, Mr Hill has been able to form the view that there are advantages for the Flow Systems Group of companies continuing to trade as a going concern so as to allow the administrators to explore a sale and recapitalisation of the group assets and business. He says that to that end, he anticipates that the administrators will need to undertake a number of activities which include continuing to perform the service contracts; continuing the operational aspects of the business; undertaking valuations of the assets and business so as to facilitate a potential sale of the whole, or substantially the whole, of the business as a going concern; running a sale and recapitalisation campaign for the group assets and business; and assessing any purchase or recapitalisation offers or possibly any proposal concerning a Deed of Company Arrangement ("DOCA") should any such proposal emerge.
34 As to the immediate payment needs, Mr Hill says that the payments which are due, or forecast to be payable, by the Flow Systems Group companies over the next three months can be summarised in this way: approximately $1.4 million is payable over the next 12 weeks in relation to wage payments; approximately $500,000 will be payable over the following 12 weeks in relation to internal contractors; approximately $455,000 will be payable over the coming weeks in relation to supplier payments; and a further amount of approximately $2.5 million will be payable over the coming months in relation to supplier payments. Mr Hill says that of the $4.8 million that is forecast to be payable over the next three months, approximately $1.4 million represents wage payments; $500,000 represents payments to internal contractors; and $2.9 million represents ongoing supplier payments. Mr Hill says that he estimates that the valuation exercise which is necessary if potential sales of the business and assets are to occur, will cost approximately $150,000 to $200,000.
35 The question then is how might these obligations and immediate payments be met?
36 Mr Hill says that the Flow Systems Group has insufficient liquidity to make the payments as and when they fall due. He says that the failure to make the necessary payments will likely cause the Flow Systems Group to fail to comply with regulatory obligations relating to financial capacity and may cause a loss of licences held under the WICA, and authorised retailer status under the National Energy Retail Law. He says that a particular concern is that if wages are not paid on time, it is "very likely" that the employees of the Flow Systems Group will cease to perform the work required to complete, or otherwise comply with, the service contracts the Group companies hold. Moreover, non-compliance with these obligations "will trigger events of default and the likely termination of those contracts by the relevant customers". Mr Hill says that this will, in turn, preclude or complicate recovery of existing debts owing to the Flow Systems Group companies under the service contracts and thus remove the key sources of future income for the Flow Systems Group.
37 Mr Hill says that so as to avoid the real risk of adverse consequences from the failure to make the relevant payments as and when they fall due (and thereby maintain the day-to-day trading of the Flow Systems Group companies), the administrators have negotiated an interim funding arrangement with Brookfield which is an entity associated with the Security Trustee and also Enwave Australia Pty Ltd ("Enwave") each being existing secured creditors, as the secured lender. That is, Brookfield will stand in the position as a secured lender. This arrangement is documented by the Facility Agreement and the General Security Deed dated 24 December 2018. Each document was executed by the relevant parties and exchanged on 24 December 2018. Mr Hill says that on drawing down the new funding from Brookfield, Flow Systems will provide, by way of intercompany loans, the necessary funding to each of the other companies in the Flow Systems Group in order to allow those companies to meet their obligations including employee entitlements and obligations in the form of supplier payments as earlier described.
38 As earlier mentioned, Mr Hill says that it is the intention of the administrators to continue to operate the business of the Flow Systems Group in a way which, "to the greatest extent possible", preserves the value of the assets and the business of the Flow Systems Group. He says that without immediate funds from an alternative source, there is a real risk that there may be an event of default under the service contracts leading to their termination and the value of the Group business "will thereby dissipate or be materially reduced". Importantly, Mr Hill says that the effect of this would be to "significantly devalue the Flow Systems Group companies' assets with a corresponding reduction in the likely return to creditors".
39 Equally importantly, Mr Hill says that he considers that the Facility Agreement and the General Security Deed is the "only viable option immediately available to preserve the assets of the Flow Systems Group". Mr Hill also says that the funding provided under the Facility Agreement and the General Security Deed "will maximise the chances" of the Flow Systems Group companies continuing to trade as a going concern, the effect of which will be to: preserve the value of the Group companies assets and business "for the benefit of their creditors"; maximise the potential proceeds of a sale and recapitalisation process; and conversely, avoid the potential "discount" of the amount that the Flow Systems Group companies might receive on a sale of the business or a sale of the assets of the companies after the business has been closed, in a liquidation scenario.
40 Mr Hill says that since the appointment of the administrators, he has not investigated whether there is any workable funding alternative to the Facility Agreement and the General Security Deed. He says, however, that in his experience as an insolvency practitioner over the past 20 years, he considers it "improbable" that there would be such a workable alternative. He says that that follows because any other financier would most likely require security for the advance which would require the consent and co-operation of Brookfield as the major beneficiary under the Security Trust Deed (the current majority secured lender) and it is unlikely that such consent would be forthcoming in circumstances where Brookfield has been minded to provide further funding itself. Additionally, Mr Hill observes that during approximately a six month period prior to the appointment of the administrators, the Flow Systems Group failed to obtain new funding from any alternative source. Mr Hill says that he understands the position to be that the Flow Systems Group conducted a confidential sales and recapitalisation process in which numerous potential bidders conducted due diligence on the Flow Systems Group's business and assets through a data room but no recapitalisation ultimately occurred.
41 Mr Hill says that he is concerned that if funding is not able to be drawn down under the Facility Agreement (for example, because the Court declines to grant the orders currently sought having regard to the condition subsequent in the Facility Agreement), then the administrators will be forced to look for immediate alternative funding and the likelihood of obtaining that funding in the time required is "extremely low".
42 Mr Hill says that he has certain understandings which inform this application as to the operation of the Corporations Law. He understands that by reason of s 443A of the Act, the liabilities to be incurred under the Facility Agreement and any consequent inter-company loans will be personal liabilities of the administrators. He understands that by reason of s 443D of the Act, the administrators will have a right to be indemnified out of the Flow Systems Group companies' assets for those liabilities to the extent that assets are available to satisfy the right of indemnity. He understands that pursuant to s 443F of the Act, the administrators have a statutory lien over the property of the Flow Systems Group companies so as to secure the right of indemnity. In order to limit the liability of the administrators, the Facility Agreement provides for the limitation of the administrators' liability under it. However, Mr Hill is concerned that without the relief sought in this application, the contractual limitation afforded to the administrators may be ineffectual by reason of s 443A(2) of the Act with the result that the administrators would be personally liable for any shortfall between the assets of the Flow Systems Group companies and the liabilities incurred by the administrators in their capacity as administrators.
43 It is against this background that the Facility Agreement contains a condition subsequent concerning the obtaining of orders which have the effect of rendering the Facility Agreement a non-recourse loan beyond the extent of the administrators' indemnity out of the assets of the Flow Systems Group companies. In other words, the administrators seek to establish a regime under which they would have no personal liability beyond the extent to which they would enjoy an indemnity out of the assets of the Flow Systems Group companies. In the absence of the orders and thus satisfaction of, or with, the condition subsequent, the Facility Agreement will not be engaged and thus funds under it will not be available to the administrators.
44 Having had the benefit of considering all of the evidence of Mr Hill and the documents, I am satisfied that the best interests of the creditors are served by giving weight to the professional opinion of Mr Hill that the interests of the creditors are best protected by seeking to preserve the Group companies as a going concern so as to enable Mr Hill to take all of the steps he refers to and I have described in these reasons.
45 One of the real difficulties in evaluating the material in the timeframe determined by the imperatives confronting the administrators for the payment of immediate and short term obligations is that no comparison is available between the position the creditors would be in, in a liquidation scenario, and the position they would find themselves in by reason of these arrangements and the making of the orders. However, the following things should be noted from the perspective of the interests of the creditors.
46 Section 447A of the Act confers power on the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company. Orders made in exercise of the power may be made subject to conditions: s 447A(3). Section 447A confers power on the Court to do whatever the Court determines "is just" in all the circumstances having regard to the rights of the various groups or persons affected by the administration of the relevant entity including making orders altering what would otherwise be the operation of Part 5.3A: Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607. The principles governing the application of s 447A of the Act so as to enliven orders varying the liability of the administrators involve these principles.
47 First, relevantly here, the Court needs to be satisfied that the proposed arrangements are in the interests of the company's creditors. There is little to be gained by adding the emphatic words "best" in front of the word "interests" viewed from the perspective of the creditors. The question is whether the arrangements serve the interests of the creditors. It may be that in a particular case, experienced administrators are able to express an expert opinion about whether particular arrangements more obviously serve the interests of the creditors than would otherwise prevail in a liquidation of the entities should the arrangements not be put in place.
48 Second, normally arrangements of this kind proposed by the administrators are directed to enabling them to continue operating the company business and enabling them to continue to trade for the benefit of creditors. Normally, enabling the administrators to continue to operate the company undertaking is directed to enhancing the prospect of a sale of the assets and undertaking with a view to enhancing the interests of the creditors overall. Mr Hill says that this is the objective in relation to the Group companies.
49 Third, it is material to understand whether the evidence suggests that the creditors of the company will be prejudiced or disadvantaged by the orders sought by the administrators.
50 Fourth, it is relevant to consider whether notice has been given to those persons who may be affected by the order. As to these matters, see Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd (administrators appointed) (2010) 82 ACSR 142; [2010] FCA 1469 at [30], Gilmour J and the authorities there cited.
51 The evidence of Mr Hill makes it clear that orders are being sought to enable the Facility Agreement and related agreements to be engaged so as to enable the administrators to continue to operate the undertaking of the companies and continue trading with a view to securing the advantages for the creditors described by Mr Hill in his affidavit and set out in these reasons.
52 As to the question of whether the proposed arrangements are consistent with the objectives of Pt 5.3A of the Act, it should be noted that s 435A of the Act provides that the object of Pt 5.3A 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.
[emphasis added]
53 I accept that the evidence of Mr Hill is that but for the availability of the funds under the Facility Agreement and the capacity to draw down funds under that facility, the entities in the Flow Systems Group would not be able to trade and in all likelihood would not be able to continue in existence. Having regard to Mr Hill's evidence, enabling the Funding Agreement will have, I accept, the practical effect of maximising the chances of the company, or as much as possible of its business, continuing in existence.
54 An important further consideration derived from the affidavit of Mr Hill concerns the interest rates and borrowing costs arising under the facility arrangements. At para 73(d) of Mr Hill's affidavit, Mr Hill expresses the following opinion:
(d) in my view, the interest rates and other borrowing costs under the Facility Agreement (having regard to interest payable at the "Interest Rate" pursuant to clause 5 and interest payable on overdue amounts under clause 11.2 of the Facility Agreement, at pages 445 to 475 of Confidential Exhibit CCH 2) are no less favourable than under the previous borrowing arrangements with the Security Trustee pursuant to the Convertible Notes Deed Poll (having regard to the "Base Coupon Rate" and "Default Rate" specified in clause 1.2 and payable pursuant to Part A clause 4 and Part B clause 9 of the Convertible Notes Deed Poll, at pages 239 to 270 of Confidential Exhibit CCH 2). Further, the new funding arrangements are no less favourable notwithstanding that the assets the subject of the New Security [that is the proposed new financial arrangements] go beyond those the subject of the existing securities in favour of the Security Trustee because the New Security in favour of Brookfield takes a security interest over the assets of other companies in the Flow Systems Group in addition to the assets of Flow Systems (whereas previous funding arrangements only encumbered the assets of Flow Systems).
[emphasis added]
55 Having regard to the evidence of Mr Hill, there is an informed basis for believing that engaging with the arrangements under the Facility Agreement and the General Security Deed as a consequence of the making of the orders, is likely to result in a better return for the companies' creditors (and members) than would result from an immediate winding up of the company. I accept the submissions of the administrators that this is so notwithstanding that the assets of the companies outside of the Flow Systems entity itself, will be the subject of a security interest to EAWH under the General Security Deed.
56 As between secured creditors, I also accept the submissions of the administrators that because the grantor of any such security interest does not interrupt the priority position of other secured creditors who have already taken a security interest over certain property in the hands of those other entities, the taking of more extensive security under the Facility Agreement and related documents is no less favourable to secured creditors than the previous arrangements.
57 I also accept the concession of the administrators that the same proposition cannot necessarily be advanced for unsecured creditors of entities other than Flow Systems itself, who may be adversely affected by the further security being granted. The administrators put a proposition that where the position in respect of unsecured creditors is "simply not capable of being known because of the urgency within which the administrators have been forced to act", the Court is required to weigh that consideration against an inevitable liquidation scenario which is the "only other likely option", on the evidence, available to the administrators in the present circumstances. Thus, the dilemma is that the Court does not know the position unsecured creditors would find themselves in, in a liquidation scenario, should the funding arrangements not be available and the position unsecured creditors will be in once the new funding arrangements are engaged having regard to the terms of the documents and the proposed orders. Nevertheless, Mr Hill believes that the interests of creditors are served by preserving the operation of the companies so as to enable them to take the steps they need to take to preserve the licences, service contracts and the possibility of selling the undertaking as a going concern. In the context of this dilemma, Black J in In the matter of RCR Tomlinson Ltd (Administrators Appointed) & Ors [2018] NSWSC 1859 at [13] said this, having made orders under s 447A:
I have also had regard to the fact that, in the time available, notice has not been given of the application to creditors other than CBA. That is the inevitable consequence of the urgency of the application, and the question ultimately is whether it is preferable to make the order, in the absence of such notice, rather than leave the Companies to close their operations where the administrators would have no alternative to that course. I am satisfied that it is preferable to make the orders in these circumstances of urgency, and to reserve to creditors the ability to apply to vary or set aside those orders. I am conscious that, in such a future application, it may be difficult to set aside the orders to the extent that the administrators have already acted upon them, in drawing down at least some of the funds on the current basis, and I have had regard to that matter in making the proposed orders.
58 In this application, I too am satisfied that, in the context of the urgency, the question is whether it is preferable to make the order in the absence of notice to the unsecured creditors rather than leave the Flow Systems Group companies in peril of closure where the interests of the unsecured creditors are likely to be prejudiced. The protection to be afforded to unsecured creditors is to make orders giving them liberty to apply to vary or set aside the orders upon the relevant evidence. I too am conscious of the circumstance that once the orders have been made and drawdowns have occurred it may be difficult to adjust any relevant orders to accommodate fresh circumstances. However, the position here is that the administrators either obtain the orders thus complying with the condition subsequent which enables them to have access to the Facility Agreement funds or not. It is preferable that these funds are made available to the administrators having regard to the nature of the undertaking, the present circumstances, the views expressed by Mr Hill on behalf of the administrators, and the consequences or likely consequences for the unsecured creditors should no further funding be available.
59 I also recognise that there appears to be no identifiable present prejudice to the unsecured creditors should the administrators obtain the orders and engage with the funding arrangements.
60 It is now necessary to say some things in relation to that part of the application relating to s 588FM of the Act. That section provides that a company, or any person interested, may apply to the Court for an order fixing a "time" (for registration of the relevant "collateral") which, by order of the Court is the time later than that provided for by s 588FL(2)(b)(i), (ii) and (iii). The relevant time is that contemplated by s 588FL(2)(b)(iv). Section 588FL applies, relevantly, if administrators are appointed to a company under s 436A of the Act and a "PPSA security interest granted by the company in collateral is covered by subsection (2)". A PPSA security is a security interest for the purposes of the Personal Property Securities Act 2009 (Cth) ("PPSA"). Section 588FL(2) uses the phrase "critical time" which, by reason of s 588FL(7), is, in this case, the date of appointment of the administrators, namely, 20 December 2018. Section 588FL(2) "covers" a PPSA security interest if, when the security interest arises (in this case after the critical time of 20 December 2018), the security interest is enforceable against third parties and it is "perfected" by registration. The "registration time" for the collateral is after the latest of the following times:
(i) 6 months before the critical time;
(ii) the time that is the end of 20 business days after the security agreement that gave rise to the security interest came into force, or the time that is the critical time, whichever time is earlier;
(iii) if the security agreement giving rise to the security interest came into force under the law of a foreign jurisdiction, the security interest first became enforceable against third parties under the law of Australia after the time that is 6 months before the critical time - the time that is the end of 56 days after the security interest became so enforceable, or the time that is the critical time, whichever time is earlier;
(iv) a later time ordered by the Court under section 588FM.
61 Perfecting the security interest by operation of s 588FL(2) having regard to s 588FL(2)(b)(iv) displaces the operation of s 588FL(4).
62 As to the extension of time to register the relevant security interest, the Facility Agreement "support" is available until the earlier of two months after the date of the Facility Agreement itself; Flow Systems entering liquidation; and any other date as agreed between Brookfield and Flow Systems in writing (otherwise described as the "Funding Termination Date"). Mr Hill observes that given that liquidators have not been appointed to Flow Systems and assuming that Brookfield and Flow Systems do not agree on a later date than two months after the date of the Facility Agreement, the Funding Termination Date is 25 February 2019. Mr Hill says that he is authorised by the parties to disclose, by his affidavit, that under the Facility Agreement Brookfield has agreed to make available to Flow Systems (and the Flow Systems Group companies through inter-company loans from Flow Systems), a facility with a total amount of $5 million.
63 The Facility Agreement is guaranteed by each of the Flow Systems Group companies. The funding made available under the Facility Agreement is secured by a "security interest" granted by each of the Flow Systems Group companies to Brookfield (as the secured party) pursuant to the terms of the General Security Deed (otherwise described as the "New Security"). It is a condition of the New Security that the security interest created by it must be capable of being "perfected" within the meaning of the PPSA. Mr Hill observes that, in this respect, 20 December 2018 is the "critical time" for the purposes of s 588FL of the Act.
64 In other words, without any Court order relating to an extension of time, the secured party needed to have perfected its security interest prior to 20 December 2018 for the purposes of satisfying s 588FL of the Act. Mr Hill observes that this was simply not possible in circumstances where the interest did not exist at that time. It is a condition subsequent to the Facility Agreement that an application be made to the Court for orders under s 588FM(2)(a)(ii) of the Act to enable the New Security to be perfected by registration on the Personal Property Securities Register at a "later time" for the purposes of s 588FL(2)(b)(iv) of the Act. This condition is recited in clause 3(a) of the Facility Agreement. Mr Hill observes that should orders to this effect be made by the Court, the New Security will not have priority over any other security interests registered prior to the New Security. Mr Hill also observes that the New Security will have priority over any existing security interest granted in favour of the Security Trustee and Enwave by reason of contractual arrangements pursuant to which a deed of priority will give priority to the New Security over any existing security interest granted by Flow Systems to the Security Trustee and Enwave. The deed of priority (which at the date of Mr Hill's affidavit is yet to be entered into), forms part of Confidential Exhibit CCH 2. It should be noted, as a general matter, that on 28 December 2018, Enwave, the Security Trustee, and Brookfield, confirmed to the solicitors for the administrators that those entities had no objection to the orders sought by the administrators as earlier described.
65 As already mentioned, in the present case, the "critical time" for the purposes of s 588FL, is 20 December 2018 being the date the administrators were appointed to each of the Flow Systems Group companies. The administrators observe that a question arises as to whether s 588FL of the Act applies to post, external administration dealings, including security interests granted when the company is under the control of an external administrator. In KJ Renfrey Nominees Pty Ltd (Trustee), in the matter of OneSteel Manufacturing Pty Ltd v OneSteel Manufacturing Pty Ltd (2017) 120 ACSR 117, Davies J held that s 588FL does apply in such circumstances. The reasoning of Davies J at 126-127 [22], [24] was accepted by Markovic J in Re Korda, 10 Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 1144 at [60]-[64]. Having regard to the reasoning in those two authorities (which I accept), I accept that s 588FL(2)(b)(iv) is engaged and that s 588FM is also engaged. Importantly, s 588FM(2)(a)(ii) provides that on an application under s 588FM, the Court may make the orders sought if the Court is satisfied that "the failure to register the collateral earlier is not of such a nature as to prejudice the position of creditors or shareholders". Section 588FM(2)(b) provides that on application under the section, the Court may make the orders sought if it is satisfied that "it is just and equitable to grant relief". I accept the submissions of the administrators that on the question of prejudice, relevant prejudice in the context of s 588FM of the Act has been understood in these terms having regard to the observations of Brereton J in Re Appleyard Capital Pty Ltd (2014) 101 ACSR 629 at [30]:
The type of prejudice that is of particular relevance is prejudice attributable to the delay in registration, rather than prejudice from making the order (which is inevitable). This is the type of prejudice contemplated [by] the legislation (see s 588FM(2)(a)(ii), which refers to prejudice from the failure to register earlier, not from making the order), and referred to by Buckley J in Cardiff Workmen's Cottage Co; by Long Innes J in Limited Company (see also Flinders Trading Co at ACLR 225 per Bray CJ; at ACLR 234 per Mitchell J); and by McLelland J in Guardian Securities (at 98). The period of delay in effecting registration is relevant, because the shorter the delay the less likely that the failure to register within time will have had any impact. The significance of the passage of time is mainly related to the possibility of competing interests having arisen, in particular through others having dealt with the company on the footing that the collateral was unencumbered.
66 I accept the submission of the administrators that because the security interest taken by EAWH under the General Security Deed will only be perfected after the registrations made by other secured creditors of the companies, and relief under s 588FM of the Act does not affect the priority conferred on a security interest the subject of a particular registration, the making of the orders under s 588FM is not of a nature as to prejudice the position of creditors or shareholders. As the administrators also observe, in respect of the proposed deed of priority between Enwave and EAWH, it is open to the parties who hold a position of priority to elect to subordinate that position in favour of other creditors under the PPSA.
67 Independently of that which is advanced on behalf of the administrators in reliance upon s 588FM(2)(a)(ii), I am satisfied, having regard to all of the evidence of Mr Hill, that it is just and equitable to grant the relief, as contemplated by s 588FM(2)(b) on the footing that the proposed arrangements are more likely than not to serve the interests of the unsecured creditors.
68 For all of these reasons, I made Orders 1 to 11 as sought by the administrators on 31 December 2018.
I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.