eisa Ltd (admin apptd); App of Andrew Love [2000] NSWSC 940

JUDGMENT 1 HIS HONOUR: The plaintiff Mr Love applies by Originating Process filed on 29 September 2000 for a direction that he is entitled to cause eisa Ltd (eisa) to complete the Sale and Purchase Agreement dated 5 October 2000, document AJL14 in Exhibit B, and for a declaration that he is empowered to dispose of the property of eisa which is to be transferred pursuant to that agreement without convening a general meeting of the members of the company. Mr Love was voluntarily appointed Administrator of the Company by its directors on 21 September 2000. He is a chartered accountant of wide experience, including much experience in liquidations and other insolvency business, and significant experience in aspects of information technology and telecommunications business. The purchaser in that agreement is Austar United Broadband Pty Ltd referred to as Austar. 2 In the sale eisa would retain a number of assets which may have some value which cannot be presently assessed, but its most substantial asset by far is its business, an integrated internet-based communications business providing internet services, currently to about 80,000 subscribers. Austar is a secured creditor of eisa under a Loan Agreement and Deed of Charge dated 19 June 2000; at that time Austar agreed to advance and did advance $7.5m by way of a short term loan for working capital requirements, and there have been further advances by Austar since then. Completion of the sale would bring about repayment of the secured debts, and there would be a balance available for distribution among unsecured creditors. In July and August 2000 Austar attempted to take over the shares in eisa, but this attempt failed as Austar required 90 per cent of the shareholding and there were acceptances only for 87.1 per cent. The offer lapsed on 15 September 2000. eisa is a publicly listed company: its shares were suspended from ASX trading on 19 September 2000. Austar's interests in acquiring eisa's enterprise then moved to the form it now takes. 3 eisa was floated in August 1999 with subscribed capital of $57m. The company incurred a loss of $20m when on 1 June 2000 UUNET, a subsidiary of MCI WorldCom terminated an agreement for Eisa to buy a business called OzEmail Internet and claimed to forfeit the deposit which had been paid. eisa did not then have sufficient cash reserves to continue trading for more than two weeks, and the continuance of its business operations since then is attributable largely or completely to Austar's advances and to Austar's wish to keep the business, particularly the subscriber base, in existence so that Austar can pursue opportunities to acquire them. 4 Soon after his appointment Mr Love circulated a report to eisa's major creditors. The first meeting, to date the only meeting of creditors was held on 27 September 2000 and a committee of creditors was elected comprising representatives of five of the largest unsecured creditors, not being creditors related to eisa. By far the largest creditors are Optus Administration Pty Ltd and interests related to Optus, and Telstra. Four of the five major creditors who comprised the committee of creditors have expressed in writing the view that it is in the best interest of all creditors that eisa complete the sale of its assets to Austar, and have also expressed support of the terms of the sale as set out in a preliminary agreement described as the Term Sheet dated 21 September 2000, of which the agreement of 5 October 2000 is a detailed restatement. The Optus creditors have not given similar indications; they have not expressed any support for what is now proposed, nor have they expressed any opposition. ASIC and ASX have been given notice to the application, but neither has taken any step in relation to the application. 5 There has been no process of detailed consultation of the wishes of shareholders or of creditors, other than the major creditors who formed the committee. The state of the company's affairs, and the experience of failure to assemble a sufficiently large block of shareholding to give control on the takeover offer have produced a situation where it appears to me that protection of the interests of shareholders has passed out of the practical world; it is very unlikely, in any event which it seems reasonable to predict, that there will be any value for shareholders. In all practicality it is very unlikely that any unsecured creditors or grouping of unsecured creditors would be willing to take any course in eisa's affairs which major creditors have decided against, or do not support. The creditors represented on the committee form an absolute majority in amount of unsecured debts. The prospect that other creditors would provide funds either to continue eisa's business or otherwise to conduct eisa's affairs is slight indeed. 6 In making this appraisal I act on the material available, that is the detailed listing of creditors included in the report to major creditors of 26 September 2000. It is possible that that listing may be modified in a full insolvency administration, but I treat it as indicating the broad position sufficiently for the purpose of making a decision in hand. 7 Mr Love estimates that if the proposed Sale and Purchase Agreement is carried out it will realise enough money for him to have available a sum in the order of 46 to 60 cents in the dollar for unsecured creditors. This estimate is subject to revision if any substantial changes become necessary to the detailed list of creditors incorporated in the report of 26 September. eisa has other assets, but these consist largely of potential litigated claims which cannot be valued now in any reliable way. 8 eisa's affairs are now in a state of crisis which precludes Mr Love from taking more full or careful steps to inform and consult with creditors, or with shareholders. Holding the internet service business together depends on maintaining continuous access to telecommunication services, and these are provided principally, but not exclusively, by Optus and Telstra. If either or both Optus and Telstra terminated telecommunications services eisa's relationships with its subscribers and eisa's business would collapse rapidly; most of the business would be gone within one or two days as a subscriber can very readily make arrangements with a different internet service provider. Both Optus and Telstra are owed very large sums, and there is no reason why either of them may not decide to cease to provide service; the continued provision of service to the present time is presumably a reflection of their commercial judgments about the prospects of continuing to have a large block of telecommunications business if eisa's business continues in some form, and a judgment like that could change rapidly. If Austar ceased to make advances and adopted the position of enforcing its security for its large debt, eisa's position would collapse straight away. 9 Mr Love has the opportunity to complete the Sale and Purchase Agreement if he can comply with its conditions and complete the agreement tomorrow 6 October 2000; otherwise there is no clear basis for foreseeing any realisation. No other potential purchaser who might complete in the reasonably near future, or who might better Austar's terms is in prospect; and no one else is in Austar's position of having advanced money on the security of eisa's business, bringing with it a commercial inducement to see that the value of eisa's business is realised in some way. 10 The conditions for completion of the Sale and Purchase Agreement include conditions requiring support of the sale by the committee of creditors, requiring an application to the Court and that the business should remain operational. Condition 4.1(b) requires Mr Love to make application to the court for its sanction of the sale and also requires that the court should have sanctioned the sale or should not have enjoined the sale. No one has applied for an injunction to restrain the sale, and it is very unlikely that any creditor or shareholder would make such an application, as an application for an injunction would encounter the need to provide funds to maintain eisa's business while the litigation was being considered. 11 It is within the Court's power to make the direction and declaration sought having regard to the very wide terms of s 447D(1) of the Corporations Law. The proposed sale is within Mr Love's powers having regard to the ambit of the power conferred by subs 437A(1)(c). Having regard to the terms of s 436F, the exercise of that power is not under the control of the committee of creditors; and the committee of creditors has in the circumstances functioned as that section requires. Completing the Sale and Purchase Agreement will achieve the object of Pt 5.3A of the Corporations Law as stated in s 435A(b). 12 There is no open market in businesses like eisa's, but such transactions as Mr Love knows of suggest that he is achieving a good level of value in relation to the number of subscribers. 13 I am satisfied that carrying out the Sale and Purchase Agreement is the appropriate response to the imperatives of eisa's situation. If Mr Love does not do this straight away eisa's business and the value of its assets will probably collapse within a few days and the unsecured creditors will do far worse. 14 In these circumstances I made the orders asked on 5 October. *******

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Court

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Before

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Judgment (8 paragraphs)

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