Cussen, in the matter of Big Un Ltd (Subject to Deed of Company Arrangement) [2019] FCA 1162

JAGOT J: 1 This is an application under s 444GA(1)(b) of the Corporations Act 2001 (Cth) (the Act), seeking leave to transfer 80% of the shares of Big Un Limited (Big Un) to WOW World Digital Pty Ltd (WOW). 2 Big Un entered into a Deed of Company Arrangement (DOCA) on 15 January 2019. 3 Section 444GA of the Act provides as follows: Transfer of shares (1) The administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained: (a) the written consent of the owner of the shares; or (b) the leave of the Court. … (3) The Court may only give leave under subsection (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company. Principles 4 The applicable legal principles were recently set out by Banks-Smith J in Tucker, in the matter of Black Oak Minerals Ltd (subject to DOCA)(in liq) [2019] FCA 293 (Black Oak). Her Honour adopted the principles of Black J in In the matter of Paladin Energy Ltd (subject to DOCA) [2018] NSWSC 11 at [28]-[35] (Paladin), which in turn referred to the summary of principles provided in Re Kupang Resources Ltd (subject to Deed of Company Arrangement)(Receivers and Managers Appointed) [2016] NSWSC 1895 (Kupang Resources). 5 In each of these matters the Court emphasised that the test involves unfair prejudice to the interests of the shareholders. Further, in order to determine this, the Court must consider whether there is any residual value in the company as the issue involves comparing the circumstances in the event of a transfer of shares with the circumstances which would prevail in a liquidation. 6 The key principles are identified by Black J in Kupang Resources: [13] In Weaver v Noble Resources Ltd [[2010] WASC 182] above, Martin CJ also noted (at [69]-[71]) that the limitation in s 444GA(3) of the Corporations Act that the Court may only grant leave for a transfer of shares under s 444GA(1) if it is satisfied that the transfer would not unfairly prejudice the interests of members reflects the view expressed in the CAMAC report that the possibility of prejudice to a shareholder would arise if there were some residual equity in the company. His Honour also considered (at [78]-[79]) the content of the expression "unfairly prejudicial" and his Honour noted (at [80]) that something more than a mere transfer of shares without compensation would be necessary to establish unfair prejudice. [14] In Lewis, Re; Diverse Barrel Solutions Pty Ltd (subject to deed of company arrangement) [2014] FCA 53, White J noted (at [19]) that the terms of s 444GA(3), in focusing on the concept of "unfair prejudice" to shareholders, contemplated that a transfer of shares may result in some prejudice to the interests of shareholders and that: "Whether or not 'unfair prejudice' will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to the existing shareholders if the leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted." … [16] In Re Nexus Energy Ltd (subject to deed of company arrangement) [[2014] NSWSC 1910] above at [22], I followed the observation of Martin CJ in Weaver v Noble Resources Ltd above that the possibility of prejudice to a shareholder "would arise if there was some residual equity in the company." Mr Withers submits, and I accept, that it is difficult to see how shareholders could be prejudiced by the transfer of their shares in the absence of any residual value or equity in the company: Weaver v Noble Resources Ltd above at [70]; Re BCD (Operations) NL (subject to deed of company arrangement) above at [11]. Mr Withers also points out that the authorities establish that the fact that shares are to be transferred without compensation is not sufficient, in itself, to establish unfair prejudice: Weaver v Noble Resources Ltd above at [80]; Re Mirabela Nickel Ltd above at [39]. Mr Withers submits, and the case law seems to me to establish that there would not ordinarily be any prejudice, or no prejudice that has the requisite quality of "unfairness", if the shares to be transferred have no value, and there would be no distribution in the event of a liquidation which is the only realistic alternative to the proposed transfer. Facts 7 Big Un was listed on the Australian Securities Exchange in December 2014. When the company went into administration on 24 August 2018 it had 6140 shareholders and about 166 million shares on issue. 8 As a holding company Big Un owned all the shares of the operating company Big Review TV Limited (BRTV). 9 The plaintiffs submitted: … BRTV went into administration on 21 May 2018 (3 months before Big Un). Big Un raised capital to fund BRTV and when Big Un went into administration BRTV owed it $12.6 million. Big Un had also made an equity contribution into BRTV of $6.2 million. 10 The operations of BRTV are described as "subscription-based video marketing services to small-to-medium enterprises." (para 16 of Mr Neil Cussen's affidavit dated 29 March 2019 (Cussen #1)). 11 On 7 November 2018 BRTV went into liquidation after entering into and breaching its own DOCA. Paragraph 39 of Cussen #1 indicates that the liquidation did not impact on the License Agreement and that the rights under this License are the remaining operating assets of Big Un (para 10 of the plaintiffs' submissions). 12 The plaintiffs' submissions outline that: The second meeting of creditors of Big Un was held on 27 September 2018, and was adjourned for up to 45 business days…On 21 November 2018 this court extended that date to 20 December 2018, and the adjourned meeting was held on that date at which it was unanimously resolved that the DOCA be entered into. 13 Under the DOCA, WOW is to acquire 80% of the shares of Big Un in exchange for $350,000, defined as its "Contribution Amount". 14 In addition to this, as the plaintiffs' submissions put it: ….WOW has provided a capped indemnity to the Deed Administrators for: a. the cost of this application; and b. obtaining relief from ASIC under section 655A of the Corporations Act, so as to permit WOW to acquire 80% of the shares in Big Un without being in breach of section 606 (ASIC Relief). 15 The plaintiffs noted that the DOCA is conditional upon the Court granting leave for this application and the obtaining of the ASIC Relief. Contingent upon the conditions being fulfilled by the deadline, 31 July 2019, "WOW is to pay the Contribution Amount, a Creditors' Trust is to be set up (of which Mr Cussen is to be trustee) and 80% of the shares held by each of the Big Un shareholders are to be transferred to WOW." 16 The potential prejudice to Big Un's shareholders as a result of the transfer is considered in the plaintiffs' submissions: 14. Creditors' claims against Big Un are dealt with under the DOCA as follows: (a) Creditors who are secured, who are related parties of WOW, or who have an insured claim against Big Un maintain their existing rights and are excluded from the DOCA; (b) The remaining unsecured creditors (the Trust Creditors) are grouped into two classes: first, general unsecured creditors and second, Big Un members who may have a "Sons of Gwalia" type claim against the company, whose claims are subordinated to general unsecured creditors under s563A of the Corporations Act; (c) The $350,000 Contribution Amount and a GST Refund (now known to be $133,502) will go into the Deed Fund to be transferred to the Trustee of the Creditors' Trust as the "Creditors' Trust Deed Fund". The net proceeds of this fund (after expenses, remuneration and priority creditors' claims etc) is to be distributed to Trust Creditors; (d) The Creditors' Trust will also include a "Third Party Claims Fund" which is to hold any proceeds of claims which may be made by the Deed Administrators against third parties (Third Party Claims). The net proceeds of this fund (after expenses, remuneration and priority creditors' claims etc) is to be distributed to the Trust Creditors, and then to the shareholders of Big Un in proportion to their shareholdings as they stand now - ie before 80% goes to WOW. As Mr Cussen explains, this preserves the rights of shareholders as at the commencement of the administration to their share of any recoveries from claims against third parties, as if 80% of their shares had not been transferred to WOW. 15. The assets of Big Un that would be available in a liquidation but not under the DOCA are as follows: (a) Shares in three private companies (defined in Cussen #1 as Bellr, Realworld and Wayfarer). The shares in Bellr were bought for $50,000 in January 2018, those in Realworld for $150,000 in May 2015 and Wayfarer for $50,000. Mr Cussen has been offered $20,000 for the Bellr shares. Mr Cussen allocated a range of value of these shares of $220,000 to $250,000 (and Mr Norris has adopted a range of $16,000 to $225,000 on a liquidation basis); (b) The License Agreement, but since it is not transferable or able to be sublicensed it would have no value in a liquidation (a point on which both Mr Cussen and Mr Norris agree). Mr Norris has adopted a valuation range of $nil to $750,000 to this asset on a "going concern" basis; (c) Claims against third parties that would be available to a liquidator, but which are not available to the Deed Administrators. Mr Cussen identifies these as unfair preference claims for $621,761, uncommercial transactions claims of $669,045, unreasonable director related transactions claims of $798,451 and insolvent trading claims against the directors of $451,270. Mr Cussen provides a range of potential recoveries for these claims of zero to $658,339. 16. Against the loss of these claims in a liquidation, under the DOCA the Contribution Amount of $350,000 is to be provided by WOW. In assessing whether this "exchange" is productive of "unfair prejudice" to the shareholders, the Court may consider it relevant that the creditors of Big Un - who stand "first in line" to receive the benefit of this sum, ahead of Big Un's shareholders - voted unanimously in favour of the DOCA. Notice Requirements 17 The Australian Securities and Investment Commission (ASIC) was notified of the application for the extension of the convening period for the second meeting of creditors on 26 April 2019, in accordance with the Court orders made on 11 April 2019. 18 Further orders for service of the Leadenhall Valuation on Big Un's members and creditors and ASIC were made by the Court on 17 June 2019. These orders have been satisfied. 19 The plaintiffs observed at paragraph 25 of their submissions that there is no apparent objection by shareholders to the DOCA or to the transfer of 80% of their shares to WOW. When the matter was called for hearing, no shareholders sought to appear. 20 The plaintiffs also noted that: The Deed Administrators' correspondence with ASIC is exhibited to Cussen #3. ASIC has informed them that, based on the information and documents provided to date (including the Leadenhall Valuation) but subject to ASIC's consideration of the materials to be provided to the Court and any views of shareholders objectors, there is no reason why ASIC Relief could not be granted. Submissions 21 On 25 July 2019 ASIC gave notice that its decision in principle was to grant the ASIC Relief but that its decision would not take effect until a formal instrument of relief is executed. 22 The plaintiffs relied upon the Leadenhall Valuation to support the conclusion that Big Un has no residual value. They submitted that Big Un is "plainly insolvent" and that "its assets are substantially less than its liabilities". 23 The plaintiffs identified that the only (very unlikely) recovery by the shareholders is Third Party Claims, which require an excess of at least $3.5 million and that the BRTV liquidators do not bring a claim under s 588V for liability for the company's insolvent trading. In that circumstance, in any event, as the plaintiffs noted "Big Un's shareholders would share in the surplus distribution in proportion to their existing shares in the company, ie excluding WOW." 24 According to the plaintiffs the only possible "down side" for the shareholders under the DOCA is the loss of the liquidator's claims, with an uncertain return estimated to range from zero to $658,000. Nevertheless, the plaintiffs submitted that this is to be weighed against: (1) The certainty of the $350,000 Contribution Amount; and (2) The fact that the shareholders will retain 20% of their existing shareholding in a company which is free to re-start its previous operations in Australia relieved of its existing unsecured liabilities. 25 The plaintiffs said that "in any event, in all likelihood, the shareholders will receive no dividend from the liquidation, so the point is essentially academic". 26 The plaintiffs observed that by voting unanimously in favour of the DOCA, the creditors took the view that "this was a reasonable commercial outcome for them - and not "unfairly prejudicial"." 27 I accept these submissions. Accordingly, orders should be made as sought in the interlocutory process. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.