Cook, in the matter of The Natural Grocery Company Pty Ltd (administrator appointed) [2020] FCA 433

DIRECTION WITH RESPECT TO CONVERSION RIGHTS UNDER THE NOTES 44 The interlocutory process sought orders under s 447A with respect to the rights of holders of Notes issued by the Company, but that plea was not pressed. Instead, Mr Cook sought judicial advice that the Deed Administrator and Company are justified in treating all and any Claims a Noteholder has by reason of a Note, including any Claim to an entitlement to the allotment and issue of any share in the Company, as wholly extinguished on the first to occur of that Noteholder's receipt of any distribution from the Deed Fund or Effectuation and treating the Company as fully and finally released from all of its obligations to that Noteholder by reason of the Note. 45 Sections 90-15 and 19-20 of the Insolvency Practice Schedule (Corporations) relevantly provide as follows: 90-15 Court may make orders in relation to external administration Court may make orders (1) The Court may make such orders as it thinks fit in relation to the external administration of a company. Orders on own initiative or on application (2) The Court may exercise the power under subsection (1): (a) on its own initiative, during proceedings before the Court; or (b) on application under section 90-20. (3) Without limiting subsection (1), those orders may include any one or more of the following: (a) an order determining any question arising in the external administration of the company; … (d) an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company; … (7) This section does not limit the Court's powers under any other provision of this Act, or under any other law. 90-20 Application for Court order (1) Each of the following persons may apply for an order under section 90-15: … (d) an officer of the company; … (2) Paragraph (1)(d) has effect despite section 198G. Note: Section 198G deals with powers of officers etc. while a company is under external administration. … 46 Relevantly to s 90-15(1), s 5-15(b) of the Insolvency Practice Schedule (Corporations) defines when a company is taken to be in "external administration" and that includes when a deed of company arrangement has been entered into in relation to the company. Relevantly to applications for directions under s 90-15 as provided for under s 90-20(d), s 9 of the Corporations Act defines "officer" of a corporation to include an administrator of a deed of company arrangement executed by the relevant company. Accordingly, Mr Cook was entitled to make the application for directions under s 90-15 and the Court has jurisdiction in relation to that application. 47 Although its terms are unconstrained, in determining whether to make orders under s 90-15 of the Insolvency Practice Schedule (Corporations), Courts have typically taken into account factors to which the Courts usually adverted in giving directions to liquidators and administrators under powers conferred by the Corporations Act before the Insolvency Practice Schedule (Corporations) came into force: see GDK Projects Pty Ltd, in the matter of Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541 at [32]-[33] and the cases there cited. Those principles include: (1) When liquidators and administrators seek directions from the Court in relation to any decision they have made, or propose to make, or in relation to any conduct they have undertaken, or propose to undertake, they are not seeking to determine rights and liabilities arising out of particular transactions, but are rather seeking protection against claims that they have acted unreasonably or inappropriately or in breach of their duties in making the decision or undertaking the conduct. They can obtain that protection if they make full and fair disclosure of all relevant facts and circumstances to the Court: In the matter of Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; (2002) 115 FCR 409 (Re Ansett) at [44] (Goldberg). (2) The Court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: Re Ansett at [65]-[66]. 48 In In the matter of One.Tel Ltd [2014] NSWSC 457 at [32]-[33], Brereton J noted the following concerning the giving of judicial advice by way of directions under s 511 of the Corporations Act before its repeal upon the introduction of s 90-15 of the Insolvency Practice Schedule (Corporations) as follows: … The jurisdiction is analogous to the judicial advice jurisdiction under (NSW) Trustee Act, s 63. The effect of a direction under s 511 is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty [In the matter of Ian James Purchas as liquidator of Astarra Asset Management Pty Ltd (in liq) [2011] NSWSC 91, [36]; Re Timbercorp Limited (in liq) [2011] VSC 189, [3]; International Pty Ltd (in liquidation) (No 7) [2012] VSC 551, [88]]. … the ability of a liquidator to approach the Court for directions is intended to facilitate the liquidator's functions and should be interpreted widely to give effect to that intention [Re One-Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83] Having regard to the broad terms of s 90-15(1), the Court accepts that similar principles apply to the Court's determination of an application for directions by an external administrator under that provision. 49 Although the Notes were issued in two tranches, the terms relating to conversion of Notes into shares in the Company (Notes Deeds) are identical. Relevantly: (1) Clause 3.3.2 provides that the Notes are unsecured obligations of the Company and rank behind all secured creditors and equally with all unsecured creditors. (2) Clause 1 defines "End Date" as being 31 December 2021. (3) Clause 1 defines the "Maturity Date" as being the first to occur of a "Capital Raise" (being a situation where the Company raises equity by the issue of shares after the day which is five business days after the date of the relevant Notes Deed or as otherwise agreed in writing by the parties) or a "Liquidity Event" (being a listing, following an initial public offering of shares, a sale of all of the shares, or the sale of all or substantially all of the Company's assets). (4) Clause 3.9 provides that, subject to waivers of pre-emptive rights being obtained, on the Maturity Date, the Notes would be redeemed by the issue of shares in the Company in accordance with a formula set out in the Notes Deeds. If no Maturity Date occurred by the End Date, or the waivers of pre-emptive rights were not obtained by then, the Notes would be redeemed for their face value. 50 Mr Cook says that, on one argument, the existence of the redemption rights under cl 3.9 of the Notes Deeds establishing the obligations on which the Notes were issued creates the possibility that, although their claims as unsecured creditors will have been extinguished by distributions out of Deed Fund 1 and Deed Fund 2 or Effectuation occurring, Noteholders may be entitled to insist on the issue of shares in the Company. Mr Cook submitted that any ongoing obligation of the Company to issue shares to the Noteholders, and the possibility that such a right might be enforced after Myhalo has performed its obligations under the DOCA, is inconsistent with one of the assumptions that underpins Myhalo's support for the DOCA as secured creditor and deed proponent. That assumption is that, upon the earlier to occur of the payments out of Deed Fund 1, Deed Fund 2 or Effectuation of the DOCA, Myhalo will hold 100% of the issued capital of the Company. In exchange, the Noteholders will obtain $100,000 between them, a return which is greater than they would receive upon the liquidation of the Company. 51 In circumstances whereby the debts acknowledged by the Note Deeds are extinguished upon distributions being made out of Deed Fund 1 or Deed Fund 2, it is difficult to see that cl 3.9 of the Notes Deeds can have any operation since there will be no debt to convert. While the Court prefers that view, it is unnecessary to make that finding. At issue is whether a direction should be given to Mr Cook in the terms sought. 52 The Court is satisfied that it should give the direction for which Mr Cook applied because: (1) While it is the Court's view that its preferred interpretation is correct, there is an area of uncertainty so that making the direction will allow the Deed Administrator to proceed confidently in the administration of the DOCA. (2) It is a condition precedent to the DOCA that a direction of the kind described at [44] above is obtained within 90 business days after 6 February 2020 or such later date as the Deed Administrator and Myhalo agree if either of Myhalo or Mr Cook so requires. On 12 March 2020, Mr Cook received written notice from Myhalo's solicitors of the requirement to seek this relief in relation to the Notes. If the direction is not given, the likely alternative is liquidation of the Company in which it is unlikely that the Noteholders will receive any payment and all creditors will (in Mr Cook's view, which the Court accepts) be worse off. Accordingly the making of the direction will facilitate the administration of the DOCA and serve the purposes of Part 5.3A. (3) The Noteholders suffer no material prejudice by the making of the direction. As noted, on the facts presently known, they would receive nothing on the liquidation of the Company. While the terms of the direction refer to the advice being given to the Deed Administrator and the Company, in fact, the advice is given solely for Mr Cook's benefit as deed administrator under the power conferred by s 90-15 of the Insolvency Practice Schedule (Corporations). The direction does not preclude Noteholders from asserting such rights as they might have in another venue. They also have leave to approach the Court in relation to this order. (4) All Noteholders who participated at the second creditors' meeting, who appear to be all of the Noteholders, voted in favour of the resolution to approve the DOCA in circumstances where the notice of the meeting noted that it would be a condition precedent to the DOCA that relief of this kind be obtained. (5) Notice of the application to this Court was given to all Noteholders and none appeared to oppose orders being made.

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