In the matter of Global Stress Index Pty Ltd (subject to deed of company arrangement) [2020] NSWSC 183

In the matter of Global Stress Index Pty Ltd (subject to deed of company arrangement) [2020] NSWSC 183 - NSWSC 2020 case summary — Zoe

Background

The circumstances giving rise to the application are as follows.
The Company carried on a technology development business focusing on utilising its intellectual property to develop a health technology known as "Felix", to measure and monitor psychometric, biometric and behavioural indicators of acute and chronic stress.
There are 35 shareholders of the Company who according to the records of ASIC comprise 199,800 F Class shares paid to $340,000.98 and 1,050,422 ordinary shares paid to $4,230,428.89. The F class shareholders are the initial seed investors in the Company. The F class shares do not hold voting rights at meetings, but are entitled to participate in dividends and distributions in a winding up: cl 15, Constitution
On 30 October 2019, the Company's sole director, Mr Travis Wild, appointed Mr Woodgate as voluntary administrator of the Company. Investigations by Mr Woodgate revealed that the Company ceased trading in approximately July 2019. It has not traded since.
In his report to creditors dated 26 November 2019, Mr Woodgate estimated that total unsecured creditor claims are $2,008,929, compared to the book value of those claims of $189,548. The creditor claims included the claims of five bondholders (the Bondholders), who hold convertible bonds which are convertible into ordinary shares at $19.02 per share. The estimated value of the Bondholders claims is $1,869,538. In addition, the estimated value of the unsecured claim of Broadcentric (Asiapacific) Ltd (Broadcentric) is $95,475.
Mr Woodgate assessed the value of the Company's assets which comprise cash, loans to various parties and intangible property as materially lower than the book value of $3,965,157. In particular, he estimated that directors loans of $18,404 have an estimated realisable value of between $0 and $1,813; the debt of $3,691,472 owing by a UK subsidiary, Global Stress Index UK Limited (GSI UK), is irrecoverable as GSI UK was wound up on 10 July 2019; the debt of $5,582 owing by a related entity, Natural Wisdom Pty Ltd, has an estimated nil realisable value; and the intangible property consisting of two patent pending applications, the Felix trademark and a domain name, is recorded as having a book value of $245,478. The expenditure on the development of that intellectual property is in the order of $4 million.
Mr Woodgate identified two potentially voidable transactions. The first related to a potential insolvent trading claim against Dr Wild of approximately $1,900. He expressed the view that pursuit of that claim was uncommercial. The second claim related to the interest rate on the convertible loans of 50 per cent which may be voidable as an unfair loan. Mr Woodgate noted that interest at 50 per cent amounted to $427,350, that the Bondholders had submitted a proof of debt for only $142,500 and that an interest rate of 25 per cent, which he considered may be appropriate, amounted to $213,675.
In his further report to creditors dated 6 December 20129, Mr Woodgate stated that he had obtained a valuation of the Company's intellectual property, and whilst the valuation was commercially sensitive, the valuation is materially less than his revised estimate of creditors' claims of $1,994,429.
At the adjourned second meeting of creditors was held on 16 December 2019, creditors resolved that the Company execute a deed of company arrangement (DOCA), which was executed on that date.
The material terms of the DOCA include: 1. the DOCA is subject to and conditional upon the transfer of all shares on issue in the Company as at 30 October 2019 (Existing Shareholders' Shares) to the Bondholders and Broadcentric (New Shareholders) (clause 7(a)); 2. Mr Woodgate, as deed administrator, will seek leave under s 444GA of the Corporations Act for the transfer of the Existing Shareholders' Shares (clause 7(b)); 3. the New Shareholders' unsecured claims against the Company will be converted from debt to equity, and shares will be issued to them in the proportions specified in the DOCA (clause 6(c)); 4. the New Shareholders will not participate in distributions in the DOCA (clause 6(e)); and 5. the funder, Dr Wild, will contribute a deed payment of $206,833 which, together with any cash held by the deed administrator, will constitute the deed fund (clauses 11 and 12; definitions of "Deed Payment" and "Administrator's Cash").
In short, the object of the DOCA is that the Bondholders and Broadcentric will convert their claims into equity and not participate in the deed fund, and the remaining creditors' will receive their entitlement under the deed fund which will include a contribution by Dr Wild, and it is presently estimated that there will be a dividend of 100 cents in the dollar, assuming no increase in the quantum of creditors' claims. The DOCA is conditional upon the transfer of the shares of the existing 35 shareholders to the Bondholders and Broadcentric; and the proposed transfer requires the leave of the Court under s 444GA.

[4]

Section 444GA, Corporations Act

Section 444GA(1) of the Corporations Act provides that the administrator of a deed of company arrangement may transfer shares in the Company if the administrator has obtained the written consent of the owner of the shares or the leave of the Court. Section 444GA(3) provides that the Court may only give leave under sub-section (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the Company. The principles applicable to the exercise of the Court's power to grant leave under s 444GA are well established.
The principles on which the Court exercises the power under s 444GA are well established. The fact that a person may be prejudiced by an order does not establish, of itself, that the order is unfair. The question is whether that prejudice is unfair. That directs attention to the relevant legislative policy underlying s 444GA and the evidence of the precise nature of the prejudice said to have been suffered.
As Black J observed in Re Kapang Resources Ltd [2016] NSWSC 1895 at [12], the legislative policy reflects a recommendation of the Legal Committee of the Companies and Securities Advisory Committee Report on Corporate Voluntary Administration (June 1998) to the effect that the law should grant deed administrators the ability to compulsorily transfer company shares where necessary for the purposes of implementing a DOCA under which payment of creditors' debts was dependent upon such transfer occurring.
In Lewis, in the matter of Diverse Barrel Solutions Pty Ltd (subject to a deed of company arrangement) [2014] FCA 53, White J identified the following relevant considerations at [19]: …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.
The applicable principles were drawn together and summarised by Brereton J in In the matter of Statewide Office Furniture Pty Ltd [2018] NSWSC 1393 at [76]: In the context of a company which is subject to a deed of company arrangement, the question of residual value in the company is significant in determining whether a transfer would prejudice the interests of shareholders. Something more than a mere absence of compensation must be established before it could be said that there is unfair prejudice to the members, because if the shares are worthless there is no unfairness in there being no compensation. While the transfer of shares may involve unfair prejudice to members if there is some residual equity in the company, there would not ordinarily be unfair prejudice if the shares to be transferred have no value, so that there would be no distribution in the event of a liquidation which is the only realistic alternative to the proposed transfer. (Citations omitted.)

[5]

Consideration

In the present case, the evidence shows that the Company has a significant deficiency. In the absence of the DOCA, the alternative would be liquidation, without any prospect of shareholders receiving a distribution in the liquidation. On the deed administrator's most optimistic liquidation scenario the outcome is a deficiency after administrators' costs of $2,049,196; on the pessimistic liquidation scenario the outcome is a deficiency after administrators' costs of $2,086,009. And there is nothing in the reports to creditors which suggests that there would be any benefit in terms of recoveries from further investigations that would be carried out in a liquidation of the Company.
The only material asset of the Company is its intellectual property. The amount of the Company's creditors significantly exceeds the value of that intellectual property, both on the basis of the book value of those assets and the valuation report obtained by the deed administrator. The valuation report is the subject of a confidentiality order, given the commercially sensitive nature of the valuation if the DOCA does not proceed and the Company goes into liquidation. On its face, the passages of the valuation report to which I have been taken to by counsel for Mr Woodgate, provide a reasoned basis for the valuation that has been carried out. ASIC did not appear at the hearing to argue that the valuation report was unreliable or defective or flawed.
The evidence shows that the shares in the Company have no residual value. There is no suggestion that existing shareholders can provide the means by which the shares in the Company may obtain some value. Nor is there any realistic prospect of the shares obtaining some value within a reasonable time, if the alternative to permitting the proposed transfer of shares would be a company in liquidation. Whilst some of the responses from shareholders have expressed disappointment and frustration concerning the conduct of Dr Wild and the failure of the Company, given the significant capital contribution made by shareholders, it is clear that if the DOCA does not proceed, the shareholders will be no better off in the event of a liquidation.
In the circumstances, there is no unfair prejudice to the shareholders if leave being granted to Mr Woodgate to transfer their shares to the Bondholders and Broadcentric in accordance with the deed of company arrangement. It is also in the interests of the creditors in having the DOCA carry into effect, that such leave should be granted.

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Legislation Cited (1)

Cases Cited (3)

Cited By (2)