Deputy Commissioner of Taxation v Malphus Pty Ltd

ABRAHAM J: 1 This is an application by voluntary administrators pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act) to extend the time for convening the second meeting of creditors. 2 On 23 December 2019, the applicants were appointed the voluntary administrators of Pacific Bauxite Limited (the Company). 3 On 7 January 2019, the first meeting of creditors of the Company was held in Perth, Western Australia. At that meeting the applicants' appointment was ratified by creditors. 4 The convening period for the second meeting of creditors of the Company, in accordance with s 439A of the Act, lapses on 31 January 2020. 5 The applicants seek to extend the time for convening this meeting up to and including 30 June 2020, a period of five months. 6 On 16 January 2020, Justin Smith caused to be sent to the creditors of the Company a circular giving notice of the application before me. The information was made available on a relevant website able to be accessed by the necessary persons. A second circular was emailed to the creditors identified in the creditors listing on 22 January 2020. That same day the second circular was posted to the Australian Securities and Investments Commission (ASIC) and CKY Media via email. 7 The responses from the five unsecured creditors received to date state that they consent to the extension sought in the application. This response from creditors amounts to $332,234.34 of a total of $416,129.99.

Material relied on 8 Three affidavits were read at the hearing: (1) Affidavit of Cameron Shaw sworn and filed 22 January 2020; (2) Affidavit of Julian Thomson Walsh sworn and filed 24 January 2020; and (3) Affidavit of Justin Smith sworn and filed 24 January 2020. 9 The originating application was relied upon. In addition, written submissions by the applicants were filed in support of their application.

Background 10 The Company was incorporated on 14 February 2005. It is publicly listed on the Australian Stock Exchange. The total number of issued shares in the Company is 396,614,034 with a total amount paid of $20,181,348. Mr Peter Lewis is the sole director of the Company. 11 The main asset of the Company is its interest, through its subsidiaries, in prospecting licences in the Solomon Islands and Australia. The licences are largely in respect of prospecting bauxite mineral deposits. 12 The Company has two wholly owned subsidiaries: Iron Mountain Bauxite Pty Ltd ACN 614 956 106 (Iron Mountain) and PBX Aus Pty Ltd ACN 621 245 387. The main asset of Iron Mountain is its 50% shareholding in Eight South Investments Pty Ltd (formerly known as AU Capital Mining Pty Ltd) (Eight South) which holds mineral exploration licences in respect of projects in the Solomon Islands. There are four shareholders in Eight South (the Shareholders). On 23 September 2016, the Shareholders entered into a joint venture agreement in respect of certain mineral exploration projects in the Solomon Islands including the Nendo bauxite project (the Nendo Project). 13 Details of the Nendo Project, which is located on Nendo Island in the Solomon Islands, were provided. It is the subject of a prospecting licence that was issued by the Solomon Islands Minister of Mines, Energy and Rural Electrification (the Minister) to Eight South being licence PL01/16 (D Nendo licence) (the Nendo Licence). It is the applicants' understanding that the exploration carried out by Eight South has demonstrated extensive areas of potentially high-grade direct shipping bauxite mineralisation. 14 In June 2018, Eight South received a letter from the Minister advising that the Nendo Licence was cancelled, and the Nendo Project was suspended. Eight South commenced judicial review proceedings on 16 July 2018. 15 Suffice to say the cancellation of the Nendo Licence was held to be ultra vires by the High Court of the Solomon Islands and the matter is currently before the Court of Appeal of the Solomon Islands on application by the Attorney-General, where the hearing of the appeal in expected to take place in April 2020. 16 The Nendo Licence is effectively a major asset of the Company (via its subsidiaries). The value of that asset is directly contingent on the outcome of the Court of Appeal decision. Given the Solomon Islands High Court decision, the appeal, the exploratory nature of the Nendo Project and the likely cost of obtaining a valuation, the applicants are presently unable to estimate the value of the Nendo Licence. 17 Eight South has also carried out early exploration work as part of its South West New Georgia Bauxite Project, located on the island of New Georgia in the western province of the Solomon Islands (the New Georgia Project). A prospecting license has been issued to Eight South in respect of the New Georgia Project (the New Georgia Licence), the area covered by the licence comprising 236 km. As a result of the suspension of the Nendo Project, the Company focused on the New Georgia Licence for the purpose of its activities in the Solomon Islands, re-deploying personnel from the Nendo Project to the New Georgia Project. The applicants are not yet able to establish the value of the New Georgia Project. 18 The financial position of the Company is uncertain, depending on the value of the Nendo Project and the New Georgia Project. It could be worth in excess of $4.6M or it may have a net deficiency of around $300,000. 19 There are twenty unsecured creditors of the Company. The control value of the amount owed to unsecured creditors is $397,629.06. 20 The secured creditor of the Company is Olympus Australia (Olympus), which holds a security interest in respect of GPS equipment that they sold to the Company. The only priority creditor identified is a Mr Suraj Sanghani, the advised claim totalling $1,745.32. 21 Since the appointment of the applicants, the Company has not carried out any mineral exploration work in respect of tenements and related licenses in the Solomon Islands or Australia. 22 There are currently no employees of the Company. 23 The Company does not currently have an office out of which it trades. 24 Mr Shaw an experienced registered liquidator and chartered accountant states that if the convening period of the Company is extended for the requested period it is highly likely that the applicants' report to creditors will include proposals for the sale of the Company via a deed of company arrangement (DOCA) and may include an opinion in respect of a sale of the Company's assets and/or recapitalisation of the corporate shell. He further stated that the sale of the Company via a DOCA will likely result in a greater return to creditors compared to the Company being wound up on a creditors voluntary basis. He stated that, if Eight South successfully resists the appeal in the Court of Appeal, it may lead to positive negotiations with the joint venture partners (being the Shareholders) which has the potential to result in the recovery of sufficient funds for the payment of all creditors of the Company in full. This will negate the need for the sale of the Company or recapitalisation by shareholders. 25 Mr Shaw has formed that view based on the applicants' investigations to date, their review of the books and records of the Company, and their discussions with the Shareholders, the directors of the Company and Eight South and investors in Eight South. The applicants have not yet received a DOCA proposal. 26 Mr Shaw stated his reasons as to the need for an extension of the convening period in the following terms: 95. It is my opinion as voluntary administrator of the Company that the convening period in respect of the second meeting needs to be extended to 30 June 2020 to allow Mr Albarran and I to complete our investigations, provide a 439A Report to creditors and to state an opinion as to the future of the Company in that report that will maximise returns to creditors. I have formed this opinion based on my review of the Books and Records, on Mr Albarran and my investigations to date and, in particular, based on the following: (a) Mr Albarran and I do not yet hold the information we need to properly assess the Company, its assets and any DOCA proposal that we receive. (b) Mr Lewis, the sole director of the Company, is not in a position to put forward a proposal prior to the Solomon Island's Court of Appeal hearing and most likely not until after delivery of judgment by that Court. (c) Mr Albarran and I have been approached by a number of parties in respect of recapitalisation. However, as we do not have complete information in respect of the Company and its assets and because the Solomon Islands appeal is still to be heard we are not in a position to properly evaluate any proposal and its effect not only on creditors, but on shareholders. (d) If we accept a recapitalisation based on the likelihood of Eight South successfully opposing the appeal before judgment is given and Eight South is unsuccessful then shareholders of the Company may lose money on their investments. (e) If a recapitalisation proposal is accepted in respect of the Company on the basis that it is, in effect, a shell then shares of shareholders will in effect be diluted. If Eight South is then successful, then there may be a substantial windfall, the shareholders of the Company not receiving the benefit of that windfall given the dilution of their shares. 96. If Eight South is successful in opposing the appeal there is the possibility that the Nendo Licence can be sold without the need for a recapitalisation proposal.

Legal principles 27 Section 439A(6) provides that the Court may extend the convening period on an application made during or after the period referred to in s 439A(5). 28 In Crawford, in the matter of North Queensland Heavy Haulage Services Pty Ltd (Administrators Appointed) [2017] FCA 635 at [18]-[20] Markovic J summarised the relevant principles as follows: In exercising the jurisdiction to extend time under s 439A(6) the Court must have regard to the objects of Pt 5.3A of the Act as set out in s 435A. Those objects are to maximise the chances of the company or as much as possible of its business continuing in existence or, if that is not possible, to result in a better return for the companies' creditors and members than would result from an immediate winding-up of the company. The approach taken by the Court in applications of this type is well settled. The power to extend the time for convening the second meeting is one that should not be exercised as of course. Rather, the Court must strike an appropriate balance between the expectation that administration will be a relatively speedy matter and the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders (see In the matter of Harrisons Pharmacy Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) [2013] FCA 458 (Harrisons Pharmacy) (per Farrell J) at [11] and the authorities referred to therein). Other relevant factors, particularly in the circumstances of this case, are: (1) whether the prospects of a better outcome for creditors through a longer period of administration may outweigh the general expectation of a prompt resolution of the administration: see Fincorp Group Holdings Pty Ltd (2007) 62 ACSR 192; [2007] NSWSC 363 (Fincorp) at [18]; (2) the fact that while the voluntary administration continues there is an embargo or moratorium on the enforcement of remedies by secured creditors, lessors and others, a factor which may militate against the too ready grant of an extension: see Fincorp at [4]; and (3) whether an extension is necessary to enable the administrators to prepare and provide the report and statements, and to arrive at the opinion required by s 439A(4), in order to inform creditors adequately so that they, in turn, will be in a position to decide whether to terminate the administration, execute a DOCA or place the company in liquidation: see Re Pan Pharmaceuticals Ltd (admins apptd) (ACN 091 032 914) (McGrath and Honey as joint liquidators) (2003) 46 ACSR 77; [2003] FCA 598 at [41]). 29 The principles were also recently summarised by O'Bryan J in Deputy Commissioner of Taxation v Malphus Pty Ltd (Administrators Appointed), in the matter of Malphus Pty Ltd (Administrators Appointed) [2019] FCA 471 (Malphus) at [23]-[30]. 30 In particular the applicants draw attention to the observation in Malphus at [27] that "the interests of creditors can be prejudiced not only by delay but also by the convening of premature meetings, where the administrator has been unable to obtain adequate information for the preparation of the report and statements required by s 439A(4) of the Act in a form which enables creditors to make an informed decision". 31 The applicants also referred to the oft-cited categories of reasons given for an extension of the convening period identified by Austin J in Re Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) [2009] NSWSC 585; (2009) 72 ACSR 352 at [13], highlighting the last three categories, namely the time needed for thorough assessment of a DOCA proposal; where the extension will allow sale of the business as a going concern; and more generally, that additional time is likely to enhance the return for unsecured creditors.

Consideration and determination 32 I accept the evidence placed before me that the applicants need more time for the development and assessment of DOCA proposals; that further time may also allow for the sale of the Company's business and that additional time is likely to enhance the return for unsecured creditors. The reasons outlined by Mr Shaw in his evidence, set out above at [26] (and more fully explained in the detail of his evidence), provide a proper basis to grant the extension. It is also apparent that the outcome of the Court of Appeal hearing will have a significant impact on the value of the Company and any ultimate outcome. 33 There is no prejudice the secured creditor Olympus in respect of the GPS equipment, as the applicants will not sell that equipment without Olympus' consent or payment in full of its debt. There are no employees of the Company and therefore no risk of prejudicing employees of the Company in allowing the convening period to be extended. There are no premises being maintained by the Company and no exploration is currently being carried out. 34 I accept the evidence of Mr Shaw that there is little risk of prejudice to unsecured creditors of the extension and that on the current financials of the Company the unsecured creditors would receive far less than a full return if the Company is immediately wound up. 35 As noted above, the responses from the five creditors that have been received, which relate to a substantial portion of the total, is that they consent to the application. 36 Having regard to the statements of legal principle which apply to such an application for an extension and the circumstances of the Company, it is appropriate to make an order extending the convening period for the second meeting of creditors of the Company up to and including 30 June 2020. It is clear that the objects of s 435A of the Act are best served by granting the extension. 37 In light of the above, as I have already noted, I am satisfied that the orders sought by the administrators in their originating process filed on 22 January 2020 should be made. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Abraham.