By Second Amended Interlocutory Process filed today, by leave, Messrs Darin and Lucan ("Receivers") in their capacity as receivers of Metal Storm Ltd (in liq) (Receivers Appointed) ("Company") seek, relevantly, an order under s 424 of the Corporations Act 2001 (Cth) that approval be given to them to complete the sale agreement with a particular party dated 1 April 2015 in respect of certain of the Company's assets. Section 424 of the Corporations Act relevantly provides that a controller of property of a corporation may apply to the Court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller's functions and powers as a controller. The Receivers also seek an order, nunc pro tunc, granting approval for them to complete the sale of particular items referred to in exhibit AL1 to Mr Lucan's affidavit sworn 26 June 2015.
It is desirable to say something as to the circumstances in which the application for directions is made by the Receivers, which is somewhat out of the ordinary. The Receivers were appointed as a result of a judgment delivered by the Court in these proceedings on 19 June 2014 ("Judgment"), which involved several complex issues, arising as between the liquidator of the Company, a trustee for second note holders of the Company and a substantial holder of secured notes. It was ultimately common ground in that matter that a receiver should be appointed to assist in the sale of the Company's assets, and that appointment was made under s 283HB of the Corporations Act which provides that, on the application of the trustee for debenture holders, the Court may make specified orders, including any other order that the Court considers appropriate to protect the interests of existing or prospective debenture holders.
It was common ground in the proceedings that led to the Judgment that, when a receiver was appointed, the receiver should seek directions before completing the sale of the assets, so that any residual concerns by the trustee for secured noteholders or other noteholders could be raised at that point. I noted, in paragraph 95 of the Judgment that the Court could then make orders on terms that contemplated that the receiver would seek further directions in respect of a sale under s 424 of the Corporations Act. Such an order was made on 23 July 2014, which appointed the Receivers, set out the powers conferred on them, and contemplated that they should apply to the Court for directions in relation to the sale of the Company's assets.
I pause to note these matters because they indicate that this is not an application where the Receivers are merely seeking a direction of the Court as to a commercial decision, namely the terms of the sale of the Company's assets. The direction is sought as an inherent part of the process for realisation of the Company's assets, which was contemplated by the Judgment, and the orders made on 23 July 2014, as a necessary step in protecting the interests of the Company's noteholders to the extent that the proceeds ultimately available to them might be affected by what was realised by a sale process.
I have had the benefit of detailed submissions from Mr Karam, who appears for the Receivers and I will draw on those submissions in this judgment. The Company's liquidator has been represented by Mr Ryckmans, who has indicated that the liquidator does not oppose the directions sought by the Receivers. The trustee for noteholders has also been represented by Mr Krochmalik, who similarly indicates that the trustee for noteholders does not oppose the directions sought. I will refer briefly below to several submissions made by Mr Krochmalik in that respect.
I should first refer briefly to the Court's jurisdiction to make the relevant direction, before turning to the evidence which is led in support of them. Section 424 of the Corporations Act is similar to provisions which provide for directions to liquidators under s 479 and 511 of the Corporations Act, and similar principles apply in respect of the making of directions under that section: Re One.Tel Network Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83. As I noted above, the Court will not generally give directions as to a matter which relates to the making and implementation of a business or commercial decision, if no particular legal issue is raised, but may do so where legal issues or a challenge to the proprietary of the decision is raised. For example, there are several cases where the Courts have given directions to liquidators, in respect of decisions made in the compromise of litigation, where those decisions either involved legal issues, or would be open to third party challenge. In the present case, I am satisfied that the Receivers are not simply seeking the Court's decision as to a commercial matter which faces them, but are instead seeking approval because that approval is a necessary step in the process for realisation of the Company's assets contemplated by the Court's earlier judgment. It is plain that the realisation of those assets involves complex legal issues, and at least potentially might have been open to challenge, although it is not in this case because it appears that all parties are in fact satisfied, on the evidence led in this application, as to the adequacy of the sale process undertaken. It seems to me that the Court therefore has jurisdiction to grant the directions sought.
Mr Karam draws attention, in submissions, to legal principles applicable to the duties of court appointed receivers, the duties applicable to receivers when exercising a power of sale, and the criteria that might be applied by the Court in approving the exercise of a power of sale. It is not necessary to outline the duties of court appointed receivers in any detail, and I note that they have recently been summarised in Re Anglican Development Fund Diocese of Bathurst Board (recs and mgrs apptd) [2015] NSWSC 6 at [45]. Mr Karam also draws attention to the scope of a controller's duty of care in exercising a power of sale under s 420A of the Act, which requires that a controller take all reasonable care to sell the property for not less than market value, if it has a market value, or the best price that is reasonably obtainable, having regard to the circumstances existing when the property is sold. It is not always easy to determine whether a particular property has a market value and, in this case, Mr Karam placed primary reliance on s 420A(1)(b) of the Act, whereas Mr Krochmalik noted the possibility that the property had a market value, albeit a market value in a special market. I should interpolate that the question arises in circumstances where, as I noted in the Judgment, the Company's primary business was the development of specialist defence technologies for government agencies and the defence industry, and its business was both highly specialised and highly regulated. It seems to me ultimately not necessary to determine whether the relevant property had a market value because, on the evidence led by the Receivers to which I refer below, the Court may readily be satisfied that the Receivers have in fact taken reasonable care to sell the property for not less than its market value, to the extent that they have sought out purchasers within the relevant specialist market, and taken steps to maximise the proceeds which could be recovered, or alternatively the best price that is reasonably obtainable. Given the specialist nature of the assets, and the particular challenges involved in the sale process, it is likely that the steps which would constitute reasonable care to sell the property would not differ, whichever test were applied. The authorities indicate, in any event, that the Court must focus on the process adopted by a controller when determining whether such reasonable steps have been taken, and the evidence led by the Receivers in this matter is directed to that process.
I turn now to the evidentiary basis for the application, which is set out in affidavits of Mr Lucan sworn 26 June 2015, and supplementary affidavits sworn 6 July and 21 July 2015. It will not be necessary to refer to those affidavits in substantial detail, and it is preferable that I do not do so in circumstances that there is at least a degree of commercial sensitivity involved in respect of the sale proceeds, the terms of the sale, and the assets involved. It is sufficient to note that Mr Lucan's three affidavits set out the steps which were taken to first identify the assets which were sold, and to take steps to ensure that assets were properly dealt with, both of which involved matters that required the Receivers' attention. The receivers adopted a sale process which had regard to the unusual character of the assets, and the particular market to which they were likely to be relevant, including collating a list of interested parties, utilising work that had previously been undertaken by the liquidator and making further inquiries to expand that list, communicating with interested parties in respect of the sale process, advertising in specialist defence publications, and then adopting a process for binding offers, which was intended to ensure that the Receivers would have an alternative position available to them if the highest bidder was unable to obtain regulatory approval to complete the sale.
In the event, the Receivers received several offers, and have accepted the highest of those offers, although there have been subsequent variations in that offer, which do not give rise to any concern, as a result of developments in the nature of the Company's assets, including issues as to the maintenance of particular patents. The conditional sale agreement is in evidence, and there is evidence that conditions precedent to that sale agreement have been satisfied, or at least substantially satisfied, such that it is anticipated that the sale agreement could be completed shortly after Court approval being granted.
Mr Karam draws attention to a number of factors which may be relevant to the adequacy of the sale process adopted, including the nature of the property to be sold, which was here property having a specialist, and possibly unique, character; whether a valuation of the property was obtained, which was here not undertaken, understandably, where the assets were of a character that it is unlikely that any valuer could have provided sensible information, by contrast with the information that would be available from marketing them; whether prospective purchasers of the property had been identified, which here took place by the adopting of a sensible course to identify those persons who might be interested; the method by which the property was sold, which here appears to have been well suited to the particular property, and to mitigating the risks of the sale process, including the risk that regulatory approval would not be obtained for a particular purchaser; and an overall assessment of the process adopted by the Receivers.
It seems to me that, having regard to the evidence of Mr Lucan, to which I have referred, the process adopted was a prudent and careful one, and one that was likely to maximise the sale proceeds that were obtained, in respect of assets that had an unusual character, and where there was a significant level of complexity involved. In this case, it seems to me that I can also give considerable weight to the fact that the trustee for noteholders, although it fairly notes that it has not had visibility of all steps involved in the sale process, has acknowledged that it is satisfied, based on the evidence led, that a proper sale process has been adopted and that reasonable steps have been taken to sell the Company's property, and that the liquidator has not raised any concerns as to the adequacy of the sale process in the circumstances.
It seems to me that there is also considerable weight in the proposition put by Mr Karam that, in the circumstances, it is inconceivable that a refusal to approve the present sale agreement, and putting the Company, its creditors or the Receivers to the costs of an additional sale process, and to the further uncertainties of that sale process, would be in the interests of the Company or its creditors. As Mr Karam points out, there is no reason to think that any higher offer would be received from any further sale process, and there is every reason to think that the proceeds of a further sale process would be less, given the risk that assets would not be maintained, because of the costs of maintaining intellectual property assets on a continuing basis. In these circumstances, it is legitimate to have regard to the comparison between the result of implementing the existing sale agreement, and the uncertainties that would be involved in any recommencement of the sale process, and those matters also support an approval of the sale: compare Chan v Four C Realty Pty Ltd (in liq) (No2) [2013] FCA 959; (2013) 95 ACSR 666 at [51].
Accordingly, I am satisfied that approval should be given to the applicants to complete the agreement for sale of assets with the proposed purchaser dated 2 April 2015. I should briefly note one other matter, for completeness. My attention was drawn to the fact that Equity Trustees, the trustee for noteholders, had provided funding to the Receivers in respect of an aspect of the sale process, in particular, assisting with the maintenance of intellectual property rights pending the sale process. That matter may well have facilitated the sale process, so far as such rights were part of the sale process, but it is not necessary to make any specific direction in that regard, in circumstances that the arrangements between Equity Trustees and the Receivers are governed by the terms of the agreement between them. I should also note, for completeness, that the Judgment previously made for the Court had provided, in order 6, that if and when the Receivers were appointed, as has occurred, the trustee for noteholders would be entitled to release its charge, notwithstanding cl 6.1(c) of the Security Trust Deed, to permit the sale of the Company's assets pursuant to a sale transaction entered into by the Receivers and the subject of directions from the Court in accordance with order 7 then made by the Court, which was the provision for approval of a sale to which I referred above. The effect of this judgment will be to provide such directions, triggering the security trustee's entitlement to release the charge to permit that sale process to be completed. The trustee for noteholders submits, and I accept, that no further direction is required in that regard, so far as order 6 previously made by the Court will operate of its own force, when directions are made in respect of the sale process.
The Receivers had also completed the sale of plant and equipment which had been held in a storage unit in Queensland, which was equipment that did not have particular value within the Company's business, but was largely incidental equipment to that business. That course seems to me to have been taken sensibly, in circumstances that ongoing costs were being incurred in respect of the storage of that equipment, which was of limited value. The Receivers fairly acknowledge that, at the time that sale took place, they overlooked the requirement for approval of a sale process in the Court's earlier orders, although, in fairness to the Receivers, the intent of that order was not really directed to the sale of incidental equipment of the kind which they undertook, but was rather directed to the substantial sale of assets for which they have now sought and obtained approval.
In the circumstances, the Receivers seek approval, nunc pro tunc, for the sale of those incidental assets. It seems to me that the case for making such an order is straightforward, and the Court may grant such approval nunc pro tunc, in circumstances that it could have granted approval, had it been sought, prior to the sale of the assets. Again, none of the parties to the proceedings, including the trustee for noteholders or the liquidator, oppose the making of such an order. Accordingly, I will grant approval for the sale of those assets, nunc pro tunc, on that basis.
Finally, I should note that the trustee for noteholders sought an order that its costs of this application be costs in the winding up. It does not seem to me that I should make that order today, where the liquidator had not been given notice that such an order would be sought, and where the interests of other parties with an interest in the liquidation may be affected by it. Whether such an order will ultimately have utility will, no doubt, depend upon the level of competing claims in the liquidation. The matter will be stood over for further directions, so far as there are several other remaining issues, and that question may be agitated at that point, if it becomes necessary to do so.
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Decision last updated: 17 November 2015