In the matter of Hills Limited [2023] NSWSC 1308

Affidavit evidence

1. The Deed Administrators rely on the affidavit dated 4 October 2023 of Mr Arnautovic, who is one of the two joint and several Deed Administrators. Mr Arnautovic refers to his and Mr Vouris' appointment as joint and several voluntary administrators of Hills and several associated companies on 2 June 2023 and to their subsequent efforts to obtain expressions of interest for the potential sale or recapitalisation of the Hills Group. He refers to an offer received by the voluntary administrators during the sale process from Stellar and to the decision by creditors of the Hills Group at the second creditors meeting on 7 August 2023 to execute the DOCA proposed by Stellar and to the subsequent execution of the DOCA on 23 August 2023. He notes that one of the conditions of that DOCA is that all issued shares in Hills are transferred to Starplex as sought in this application.
2. Mr Arnautovic outlines the events which led to the appointment of the voluntary administrators to the Hills Group. Mr Arnautovic refers to proceedings brought by Stellar against Hills Health in late 2016, in which Hills Health was successful at first instance, and to a capital raising undertaken by Hills in March 2023 after it had received judgment in its favour at first instance. Stellar successfully appealed against that judgment and the Hills Group companies were placed in voluntary administration, after Hills Health and Stellar were unable to negotiate a settlement of the judgment amount arising from the Court of Appeal's judgment and costs.
3. Mr Arnautovic in turn refers to the conduct of the voluntary administration and notes that, at the date of the voluntary administrators' appointment, approximately $19 million was owing to secured and unsecured creditors of the Hills Group. The Hills Group then owed approximately $6.1 million to secured creditors, with the largest part of that owed to a secured creditor, AMAL Security Services Pty Ltd as trustee for Causeway Wholesale Private Debt Master Fund ("Causeway"). A loan facility agreement between Hills Group and Causeway had a total accommodation limit of $6 million, and Causeway held an all present and after-acquired property security interest over the majority of the Hills Group companies, with the exception of, inter alia, Hills Health. The Hills Group also owed approximately $11.65 million to unsecured creditors, excluding inter-company loans. The Hills Group then had about 140 employees in Australia and amounts were due to them by way of employee entitlements.
4. Mr Arnautovic also outlines the steps taken by the voluntary administrators in a sale process of the Hills Group, during which a substantial group of potential purchasers was narrowed to four final offers from interested parties that were considered credible and capable of completion. Mr Arnautovic outlines the key terms of those offers and notes the view formed by the voluntary administrators that Stellar's proposed DOCA and creditors' trust, by which it would acquire the Hills Group of companies on a "whole of group" basis, would result in the highest return to creditors. Mr Arnautovic also refers to the voluntary administrators' report to creditors, prior to the second meeting of creditors, and to the creditors' decision at that meeting that Hills should execute the DOCA with Starplex.
5. Mr Arnautovic also outlines the key features of that DOCA and addresses the treatment of Causeway as a secured creditor. In summary, the DOCA provides that a creditors' trust will be formed to meet the claims of creditors of the Hills Group ("Trust Fund"). The Trust Fund will be a single pool for all creditors of companies in the Hills Group that are under administration. The Deed Administrators forecast that the gross amount to be contributed to the Trust Fund will be $21.3 million (corrected as I note below), comprised of cash and proceeds from debtors, with accrued administrator trading liabilities of $10.3 million to be paid from that amount, resulting in a net amount available for professional fees and creditor claims of $11.0 million (corrected as I note below). Causeway will be repaid in full from the Trust Fund in priority to unsecured creditors. All unsecured claims against the Hills Group companies under administration will be released in exchange for a right of distribution from the Trust Fund. Although Stellar's claim against Hills Group companies will be maintained, Stellar will not have any right to proceeds from the Trust Fund. Shareholders in Hills will receive no payment from the Trust Fund and no other payment in return for the transfer of their shares to Starplex. It is not necessary for me to address those matters in any greater detail, where the DOCA has not been challenged and provides the basis on which the issues in this application are to be determined.
6. In the result, the voluntary administrators estimate a return to the DOCA and the Trust Fund of approximately 54.2 cents in the dollar to unsecured creditors (corrected as I note below), substantially larger than the likely return to unsecured creditors in liquidation of between approximately 16.9 and 26.5 cents in the dollar, in each case exclusive of GST. That greater return arises, inter alia, because Stellar will not prove for the debt owed to it against the amounts that will be paid into the Trust Fund; the DOCA allows the continued employment of Hills' employees and avoids crystallising employee liabilities that would otherwise be met in priority to claims of unsecured creditors; and Stellar has also entered an arrangement which supports Hills' recovery of debts which form part of the Trust Fund. There is likely to be no return to shareholders in either a liquidation or the DOCA, where in each case the amount of the Hills Group's assets are not sufficient to meet the claims of its unsecured creditors. Mr Arnautovic also addresses the consequences if this application is unsuccessful, involving the likely liquidation of the Hills Group of companies and a further sale process which he anticipates would achieve a worse result than that obtained under the DOCA.
7. Mr Arnautovic also outlines the reasons that he considers that there would be no return to shareholders of Hills under any of the possible outcomes of the administration, including a liquidation, and that result obviously follows from the fact that none of the available alternatives will fully discharge the prior claims of Hills' creditors. Mr Arnautovic also addresses the reasons that he considers that there is no unfair prejudice in the transfer of shares, for the purposes of s 444GA(3) of the Act, and I return to that question below. He also refers to an application for relief made by Hills to the Australian Securities and Investments Commission ("ASIC") under s 655A of the Act, so as to permit the transfer of the shares in Hills to take place without contravention of Ch 6 of the Act, and I refer to ASIC's position in respect of that application below. He also addresses the manner in which the Deed Administrators then intended to give notice to members and creditors of this application, and I refer below to the evidence as to that notice.
8. By a second affidavit dated 23 October 2023, Mr Arnautovic referred to correspondence with ASIC in respect of the application and, in particular, to correspondence between ASIC and the Deed Administrators' solicitors, by which ASIC had raised a question as to the effect of transfer of the shares in Hills on any claims by shareholders in respect of the previous capital raising by Hills. Mr Arnautovic there rightly pointed out that the effect of the DOCA, upon completion, would be to extinguish all claims of creditors unless otherwise preserved by its terms, and that any claim by shareholders against Hills would be extinguished by the DOCA. I recognise that, if the Court declined to approve the transfer of those shares under s 444GA of the Act, and that prevented completion of the DOCA, those claims would not be extinguished by the DOCA, although that result would also deprive Hills' unsecured creditors of the better return which they would receive under the DOCA to that which they would likely receive in a liquidation. However, as Mr Arnautovic also points out, that would not assist shareholders in Hills who may contemplate such claims, which are subordinated to the claims of ordinary unsecured creditors under s 563A of the Act. Those shareholders would obtain no return from Hills in respect of such claims, where unsecured creditors will receive only a partial return in a liquidation or under the DOCA. Mr Arnautovic also notes that the DOCA does not extinguish any claim which may be available to shareholders against the directors of Hills, or against Hills or its directors to the extent that any insurance policy responds to that claim. On that basis, Mr Arnautovic expresses the view and I accept that shareholders are not prejudiced by the effect of the DOCA upon its completion. Mr Arnautovic also there corrected the calculations contained in his first affidavit, and the figures I have set out above reflect this correction .
9. By her affidavit dated 23 October 2023, Ms Jennifer Nettleton, who is an experienced registered liquidator and chartered accountant at KordaMentha, confirmed her compliance with the Expert Witness Code of Conduct and noted that she was required to assess the residual equity in Hills on a liquidation basis, and also noted that any claim by shareholders or former shareholders arising from issues as to disclosure in the capital raising did not alter her opinion that there was a material shortfall of assets available to meet claims against Hills, and that the shares in Hills had no value. In her independent expert report, Ms Nettleton referred to the requirements of ASIC Regulatory Guide 111 Content of expert reports, which required her to provide an independent opinion of the value, if any, of shareholders' residual equity in Hills on a "winding up" or "liquidation" basis where that is the likely or necessary consequence of the transfer of shares not being approved. She analysed the expected outcomes of a liquidation on a low case and high case basis, in each case concluding that there would be a shortfall of assets available to meet creditors' claims with a negative equity position of between approximately $11.6 and $15.8 million, and a nil value of equity. Ms Nettleton also noted a matter which may contribute to that result, being that in the three financial years ending 30 June 2021, 30 June 2022 and 30 June 2023 the Hills Group had incurred substantial losses totalling $44.9 million and that its net assets had suffered a corresponding decline from approximately $33.2 million at June 2021 to $6.2 million at 30 June 2023. Ms Nettleton also there calculated the amount of the return to unsecured creditors in a liquidation, reaching the result now adopted by the Deed Administrators in further affidavit evidence led in the application.
10. The Deed Administrators also read the affidavit dated 20 October 2023 of Ms Xinyi (Cindy) Chen, an employee of the Deed Administrator's firm, Hall Chadwick. She gives evidence that documents relating to this application were sent by email to members and creditors of Hills in accordance with orders previously made by the Court. An exhibit to Ms Chen's affidavit includes a circular sent by the Deed Administrators to creditors and shareholders, drawing attention to the explanatory statement and accompanying documents in relation to the application for leave to transfer the shares in Hills. No shareholders in Hills appeared to oppose this application at the hearing.
11. The Deed Administrators also read the affidavit dated 20 October 2023 of Ms Jessica Webb, who is also an employee of Hall Chadwick, who refers to publication of documents relating to the application on the Deed Administrators' website and the Hills Group's website, and to an advertisement published in the Australian Financial Review in respect of the application. Ms Webb also refers to three emails received from two shareholders of Hills, one of whom (in two emails) refers to his unhappy experience of investing in the capital raising by Hills, and the other of whom expresses the view that shareholders have good grounds for a class action in respect of the capital raising. I refer further to that matter below. The exhibit to Ms Webb's affidavit also included the detailed explanatory statement made available by the Deed Administrators to creditors and shareholders in respect of the proposed transaction and the independent expert's report, in compliance with ASIC's requirements for relief from Ch 6 of the Act in respect of a transaction of this character. I refer to the independent expert's evidence led in these proceedings below.
12. The Deed Administrators also read the affidavit dated 20 October 2023 of Mr Thomas Schinckel who is a solicitor acting for Starplex in respect of the proceedings. He refers to the filing by Starplex of a Notice of Appearance in the proceedings, and indicates that he had not received, and was not aware of Starplex receiving correspondence from any persons opposing the relief sought by the Deed Administrators in the proceedings.
13. The Deed Administrators also read the affidavit dated 23 October 2023 of Ms Bridget Edghill, a solicitor acting for them in respect of the application, who referred to the application for relief lodged with ASIC under s 655A of the Act in respect of the proposed transfer of the shares in Hills. In his affidavit dated 24 October 2023, Mr David Armstrong, also a solicitor acting for the Deed Administrators in respect of the application, referred to correspondence with ASIC in respect of that application for relief and this application.
14. Mr Izzo also points out that the transfer of shares contemplated by the DOCA in this application would require relief from ASIC in relation to the requirements of s 606 of the Act and that ASIC's approach to granting that relief is set out in ASIC Regulatory Guide 6 Takeovers: Exceptions to the general prohibition ("RG6"). That Regulatory Guide indicates (RG6.203) that, once ASIC has reviewed an application for relief, it will generally (and where appropriate) grant "in principle" relief subject to ASIC continuing to monitor the court process and the court granting leave under s 444GA of the Act. By letter dated 24 October 2023, ASIC advised the solicitors acting for the Deed Administrators, in common form in respect of an application of this character, that ASIC had decided in principle that it would grant the relief sought by the Deed Administrators under s 655A of the Act to permit the transfer of the shares in Hills. ASIC also noted, in accordance with its usual practice, that it would defer executing an instrument of relief until the Court had granted leave to the Deed Administrators under s 444GA of the Act for such a transfer, noted the policy considerations to which ASIC had regard in making that decision, and rightly noted that this was a different decision to that which would be made by the Court in respect of s 444GA of the Act.

Applicable principles

1. Section 444GA of the Act, on which this application is founded, relevantly provides that: "(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."
2. The case law establishes that the test to be applied under this section is concerned with "unfair prejudice" rather than any prejudice to the interests of relevant shareholders: Cussen, Re Big Un Ltd [2019] FCA 1162 ("Big Un") at [5]; Re Global Stress Index Pty Ltd (subject to deed of company arrangement) [2020] NSWSC 183 ("Global Stress Index") at [15]. The statutory test requires the Court to consider the circumstances of the case and the policy of the legislation, as summarised in s 435A of the Act: Lewis, Re Diverse Barrel Solutions Pty Ltd (subject to deed of company arrangement) [2014] FCA 53 at [19]; Re Kupang Resources Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2016] NSWSC 1895 ("Kupang") at [14]; Big Un at [6]. The transfer of shares without compensation does not, of itself, establish unfair prejudice: Weaver v Noble Resources Ltd [2010] WASC 182 ("Noble Resources") at [80]; Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 ("Mirabela Nickel") at [39]; Kupang at [13]; Big Un at [6]; Global Stress Index at [18]. The statutory test generally focuses on whether there would be any residual value in the shares if the relevant company was to proceed in liquidation, at least where that is the likely or necessary consequence of the transfer of shares not being approved: Noble Resources at [69]-[71]; Mirabela Nickel at [42]; Re Paladin Energy Ltd (subject to Deed of Company Arrangement) [2018] NSWSC 11 ("Paladin Energy") at [33]; Kupang at [13]; Big Un at [5]. Ordinarily, there will be no "unfair prejudice" if the shares 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: Kupang at [16]; Big Un at [6]; Re OrotonGroup Limited (Subject to Deed of Company Arrangement); Application of Strawbridge and Kanevsky [2018] NSWSC 1213 at [37]; Global Stress Index at [18].
3. The applicants, here the Deed Administrators, bear the legal onus of proving that the discretion to allow the share transfer should be exercised in their favour: Re Nexus Energy Ltd (Subject to Deed of Company Arrangement) (2015) 105 ACSR 246 ("Nexus Energy") at [27]. However, shareholders (had any appeared to oppose this application) would bear an evidentiary onus to establish the facts relevant to any prejudice on which they rely in such an application: Nexus Energy at [27]; Paladin Energy at [33].
4. Mr Izzo also refers to Tucker, in the matter of Black Oak Minerals Ltd (Subject to a Deed of Company Arrangement) (in liq) (2019) 134 ACSR 472; [2019] FCA 293 ("Black Oak Minerals") at [32]-[35], where Banks-Smith J observed that: "As noted in the Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth), the requirement that the transfer not unfairly prejudice shareholders is intended to direct the Court to consider the impact of a compulsory sale on shareholders where there may be some residual value in the company. As Martin CJ noted in Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301: … [t]he notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair. … … So, something more would have to be established before it could said that unfair prejudice to the members of the company could arise. As White J explained in Lewis, in the matter of Diverse Barrel Solutions Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 53 at [19]: 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. According to Re Nexus Energy Ltd (Subject to Deed of Company Arrangement) [2014] NSWSC 1910; (2015) 105 ACSR 246 at [27] (Black J), there is an evidentiary onus on the shareholders to raise any consideration telling against the exercise of the discretion, but the ultimate onus of satisfying the court that the discretion should be extended remains on the Deed Administrators. This requires that the Administrators prove that the transfer would not unfairly prejudice the interests of the company."
5. Those observations were cited with approval in Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 9) (2020) 148 ACSR 648; [2020] FCA 1652 ("Virgin") at [29]-[36].

The Deed Administrators' submissions and determination

1. The evidence to which I have referred above establishes that, if the transfer of shares in Hills is not approved, the DOCA will likely be terminated, Hills will be wound up and unsecured creditors will likely receive a lesser return and shareholders will receive no return. On the other hand, the DOCA delivers unsecured creditors a return that has been sufficiently attractive to them that they have voted in favour of its execution. Although shareholders would receive nothing under the DOCA or a winding up, no shareholder has objected to the proposed transfer of shares in Hills, or otherwise sought to be heard in relation to this application.
2. Mr Izzo submits and I accept that the interests of shareholders of Hills in the present case will not be unfairly prejudiced if leave is granted pursuant to 444GA for the transfer of the shares in Hills because the residual equity in Hills has no value. He refers to Ms Nettleton's independent expert report, to which I referred above, and particularly to her conclusions that the DOCA proposal is estimated to result in returns of 100 cents in the dollar to secured creditors and employees and 54.2 cents in the dollar in relation to unsecured claims; a winding up, if the DOCA does not complete, would likely result in a lower recovery for creditors than that estimated under the DOCA, with a deficiency of assets to meet claims of between $15.8 million and $11.6 million and nil residual equity; and that the shares in Hills have a nil value. Mr Izzo points out that Mr Arnautovic has expressed substantially the same view in his evidence, which I also noted above, and has in particular expressed the view that there will be no return for shareholders of Hills under either the DOCA or a liquidation scenario and that, where the Hills shares do not have any value, the failure of the DOCA will result in the winding up of the Hills Group, and the estimated return to members in a liquidation scenario would be nil, so the transfer of the shares in Hills to Starplex will not cause unfair prejudice to the interests of the members of Hills for the purposes of s 444GA of the Act. No shareholder in Hills has sought to contest that evidence and there is no reason not to accept it.
3. Mr Izzo also submits, and I also accept, that this result is not affected by any claim available to Hills shareholders in respect of its capital raising in March 2023. I noted above that such a claim would be released under the DOCA in exchange for a right of distribution from the Trust Fund and, to the that extent that the approval of the share transfer allows the completion of the DOCA, it will prejudice such a claim. However, as Mr Izzo points out and as I noted above, such a claim would in any event arise from "buying, holding, selling or otherwise dealing in" shares in Hills, and would be a "subordinate claim" for the purposes of s 563A of the Act, and would be postponed under that section "until all other debts payable by, and claims against, the company have been satisfied". That cannot occur where unsecured creditors of Hills will not be paid out in full under the DOCA and the Trust Fund, and the loss of a subordinate claim by shareholders is not reason not to approve the transfer where that claim would have no value.
4. For these reasons, I am satisfied that there is no prejudice to shareholders in Hills in the proposed share transfer, and (if I were incorrect in that view) any relevant prejudice would not be "unfair" in the relevant sense.
5. The Deed Administrators also seek orders under s 447A of the Act to provide machinery by which a proposed transfer of shares in the subject company may be put into effect, including orders permitting the Deed Administrators to execute and lodge relevant share transfer documents and ensure the entry of the acquirer's name on Hills' register of members, and I accept the Court has power to and should make those orders consequential on the findings that I have reached above: Black Oak Minerals at [39]-[40]; Virgin at [36].

Orders

1. For these reasons, I made the orders sought by Hills at the conclusion of the hearing.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 November 2023