In the matter of Farouk v Farouk (No. 2) [2021] FCA 270
In the matter of Geoffrey Edelston
Source
Original judgment source is linked above.
Catchwords
In the matter of Farouk v Farouk (No. 2) [2021] FCA 270
In the matter of Geoffrey Edelston
Judgment (15 paragraphs)
[1]
2021/155167:
Hydrodec Group Plc (Monitor Appointed) (First Plaintiff)
Mr Phillip Reynolds and Mr Anthony John Wright (Second Plaintiffs)
Hydrodec Group Plc (Monitor Appointed) (First Defendant)
Southern Oil Refining Pty Ltd (ACN 065 279 012) (Second Defendant)
Representation: Counsel:
2021/87641:
Ms E L Beechey w Ms E L Phelan (Plaintiff)
Mr J Baird (Defendant)
[2]
2021/155167:
Mr J Baird (Plaintiffs and First Defendant)
Ms E L Beechey w Ms E L Phelan (Second Defendant)
Hydrodec Group Plc is a public company incorporated in the United Kingdom under the provisions of the Companies Act 1985 (UK) and registered as a foreign company in Australia under Division 2 of Part 5B.2 of the Corporations Act 2001 (Cth) (the Company).
Judgment was entered in other proceedings in this Court on 10 February 2021 in favour of Southern Oil Refining Pty Ltd (SOR) against the Company and Hydrodec Australia Pty Ltd jointly and severally in the amount of $1,594,433 together with pre-judgment interest in the amount of $65,919 (the Judgment Debt).
That judgment was entered following publication of reasons for judgment on 29 January 2021: Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd [2021] NSWSC 24.
On 2 February 2021, Hydrodec Australia Pty Ltd (Hydrodec Australia) was placed into a creditors voluntary winding up.
On 4 March 2021, SOR served on the Company a demand under s 585(a) of the Corporations Act for payment of the Judgment Debt.
The Company did not comply with the demand.
On 17 March 2021, the Company lodged a notice of cessation of business with the Australian Securities and Investments Commission (ASIC) dated 12 March 2021.
On 29 March 2021, SOR commenced proceeding 2021/87641 in this Court seeking orders winding up the Company under ss 459A, 459P, 461 and 583 of the Corporations Act on the grounds of insolvency (the winding up proceedings).
Strike off action commenced by ASIC in relation to the Company on 14 April 2021 following the notice of cessation of business has been deferred to allow time for the winding up application to be determined.
On 19 April 2021, Black J dismissed the Company's application to adjourn the winding up proceedings on the basis that it intended to file an appeal from the judgment entered on 10 February 2021. Orders were made requiring the Company to file and serve its evidence in the winding up proceedings by 31 May 2021, with a view to a date for final hearing being allocated at the following directions hearing on 7 June 2021.
On 20 May 2021, the Company's directors resolved to obtain a moratorium under Part A1 of the Insolvency Act 1986 (UK) (the UK Act).
On 21 May 2021, the Company commenced a Part A1 moratorium by filing in the High Court of Justice, Business and Property Courts of England and Wales, a "Notice of directors' wish to obtain a moratorium", together with a consent from the proposed joint monitors of the moratorium, Mr Phillip Reynolds and Mr Anthony Wright of FRP Advisory Trading Limited.
After stating the directors' wish to obtain the moratorium, the notice stated:
"The directors of company are of the view that the company is, or is likely, to become unable to pay its debts."
The moratorium came into force on the filing of the notice at 11.07am (London time) on 21 May 2021. The initial period of the moratorium would have expired on 21 June 2021, but it was extended by the directors of the Company on 18 June 2021 and will now expire on 19 July 2021 unless further extended or terminated prior to 19 July 2021. The circumstances in which the moratorium may be terminated prior to, or extended beyond, 19 July 2021, are referred to later in these reasons.
The High Court of Justice allocated the number CR-2021-000908 to the notice filed (the UK proceeding).
On 28 May 2021, the Company commenced proceeding 2021/155167 in this Court seeking orders under Articles 15 and 17 of the Model Law on Cross-Border Insolvency of the United Nationals Commission on International Trade Law as applied in Australia pursuant to s 6 of the Cross-Border Insolvency Act 2008 (Cth) (the Cross-Border Act and the Model Law) [1] that the UK proceeding be recognised as a "foreign main proceeding" and that the Company itself, or alternatively the joint monitors under the moratorium, be recognised as the "foreign representative".
On 21 June 2021, the joint monitors were joined to these proceedings as the second plaintiffs.
The only other claim for relief under the Model Law that was pressed by the plaintiffs in proceeding 2021/155167 is a claim for orders pursuant to Article 21 that:
1. enforcement or execution against the Company's assets be stayed, except with the leave of the Court or the Company's prior written consent;
2. any person within the jurisdiction of the Court be restrained from transferring, encumbering or disposing of the Company's assets, except with the leave of the Court or the Company's written consent; and
3. the commencement, continuation or enforcement of any individual action or legal proceeding against the Company or its assets, rights and obligations, including the winding up proceedings, be stayed.
The claim for relief under Article 21 of the Model Law is dependent on the Court acceding to the plaintiffs' application for recognition of the UK proceeding as a foreign main proceeding. The jurisdiction to make orders under Article 21 depends on the existence of a "foreign proceeding" within the meaning of the Model Law that is recognised as a "foreign main proceeding" or as a "foreign non-main proceeding". The plaintiffs applied for recognition of the UK proceeding only as a "foreign main proceeding" and not as a "foreign non-main proceeding".
In the alternative to the claims under the Model Law, the plaintiffs seek a stay of the winding up proceedings under s 581(2) of the Corporations Act or applying common law principles which the plaintiffs submitted were the same as the principles to be applied under s 581(2). [2] Although this alternative claim relief was expressed in somewhat more general terms in the originating process, the plaintiffs' written and oral submissions were directed solely to an application for a stay of the winding up proceedings for the duration of the moratorium in the UK proceeding.
It is convenient to refer to proceeding 2021/155167 as the recognition proceedings.
On 4 June 2021, orders were made listing the recognition proceedings and the winding up proceedings (subject to the prior determination of the recognition proceedings) for hearing together on 21 June 2021.
[6]
Recognition proceedings
The Court must be satisfied that it has jurisdiction to make the order sought under the Model Law recognising the UK proceeding as a foreign main proceeding. In this case, that raises the following questions.
First, is the UK proceeding a "foreign proceeding" as defined in Article 2(a) of the Model Law? If not, then the Model Law does not apply in this case and the UK proceeding cannot be recognised: see Articles 1.1 and 17 of the Model Law.
Second, is the application for recognition being made by a "foreign representative" as defined in Article 2(d) of the Model Law? Only a foreign representative may apply for recognition of the foreign proceeding as a foreign main proceeding: see Articles 15.1 and 17.1(b) of the Model Law.
The additional jurisdictional requirements under Articles 17.1(c) and (d) are satisfied in this case. I note that the requirements of Article 15.3 of the Model Law are also satisfied.
Assuming that the Court has jurisdiction, the principal question that arises for determination is whether the UK proceeding is a "foreign main proceeding" within the meaning of Article 2(b) of the Model Law.
It is common ground that a foreign proceeding can only be recognised under the Model Law if it is a "foreign main proceeding" or "foreign non-main proceeding": see Article 17 of the Model Law. As I have already mentioned, the plaintiffs apply for recognition of the UK proceeding only on the basis that is a foreign main proceeding. There is no alternative application for recognition as a foreign non-main proceeding.
The question whether the UK proceeding is a foreign main proceeding (assuming that it is a foreign proceeding) depends on whether the Company has its "centre of main interests" in the United Kingdom: Article 2(b) of the Model Law.
If the UK foreign proceeding is a foreign main proceeding, it is to be recognised under Article 17.1, subject only to the provisions of Article 6. Article 6 requires consideration of whether the recognition of the UK proceeding as a foreign main proceeding is manifestly contrary to the public policy of Australia.
If all of those issues are determined in favour of the plaintiffs, it will then be necessary to determine whether to exercise the discretion to grant the stay and other orders sought under Article 21 of the Model Law in the circumstances of this case.
If the UK proceeding is not recognised as a foreign main proceeding under Article 17 of the Model Law, it will be necessary to determine the plaintiffs' application for a stay of the winding up proceedings under s 581(2) of the Corporations Act or at common law.
[7]
Winding up proceedings
The question is whether the Company is unable to pay its debts: Corporations Act, s 583(c).
[8]
Is the UK proceeding a foreign proceeding?
Article 2(a) of the Model Law defines a "foreign proceeding" as:
"… a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation."
The plaintiffs submit that a moratorium under Part A1 of the UK Act is a foreign proceeding within the meaning of Article 2(a). The plaintiffs' submissions referred to the provisions of the UK Act and also relied on evidence of Mr Glen Flannery. Mr Flannery is a solicitor in England and Wales specialising in the field of restructuring and insolvency and a partner of an international law firm CMS Cameron McKenna Nabarro Olswang LLP.
Part A1 of the UK Act was inserted into the UK Act by the Corporate Insolvency and Governance Act 2020 (UK), which commenced on 26 June 2020.
Under s A3 of Part A1, the directors of a company that is not an overseas company and is not subject to an outstanding winding up petition may obtain a moratorium for the company by filing certain documents with the High Court of Justice, including a notice of the directors' wish to obtain a moratorium, a statement from the directors that the company is (or is likely to become) unable to pay its debts and a statement from the proposed monitor (a qualified insolvency practitioner) that it is likely in their view that a moratorium would result in the rescue of the company as a going concern. Pursuant to s A7(1)(a), the moratorium comes into force and the appointment of the monitor takes effect at the time at which the requisite documents are filed with the court.
If the company is subject to an outstanding winding up petition, the directors may apply for a moratorium under s A4 and that application must be heard and determined by the court. The court may make an order that the company should be subject to a moratorium only if it is satisfied that a moratorium would achieve a better result for the company's creditors as a whole than would likely be achieved if the company were wound up (without first being subject to a moratorium). Pursuant to s A7(1)(b), the moratorium does not come into effect unless and until the court makes an order.
In the present case, the directors of the Company obtained the moratorium under s A3, notwithstanding that the winding up proceedings had already been commenced in this Court. Counsel for the plaintiffs submitted that s A3 applied because no winding up petition had been presented in the United Kingdom. Counsel for SOR did not make any submissions in relation to this question and no issue was raised as to whether the moratorium was obtained in accordance with Part A1. I therefore proceed on the assumption that the moratorium was obtained in accordance with Part A1 of the UK Act and is in force in accordance with that law.
Pursuant to s A9, the moratorium terminates 20 business days after the day following the commencement of the moratorium (referred to as the initial period). However, the moratorium may be extended beyond the initial period:
1. for a further period of 20 business days, by the directors of the company without the consent of creditors (s A10);
2. for a further period up to one year from the commencement of the moratorium, by the directors of the company with the consent of creditors (ss A11 and A12);
3. by the court (ss A13 and A15); or
4. if the directors of the company propose a company voluntary arrangement (s A14).
An extension by the directors, with or without creditor consent, is achieved by the filing of a notice that they wish to obtain an extension together with certain other documents, including a statement of the monitor that, in the monitor's view, it is likely that the moratorium will result in the rescue of the company as a going concern.
The effects of the moratorium are set out in Chapter 4 of Part A1. They include:
1. certain restrictions on the enforcement of pre-moratorium debts (s A18, s A21), and restrictions on the company paying those debts (s A28);
2. restrictions on the opening of insolvency proceedings, including a prohibition on the presentation of a winding up petition and the making of a winding up order (except on the application of the company's directors) (s A20);
3. a prohibition on the company entering into certain contracts (s A28);
4. a prohibition on the company granting security over its property without the monitor's consent, which may be given only if the monitor thinks that the grant of security will support the rescue of the company as a going concern (s A26); and
5. a prohibition on the company disposing of its property except in the ordinary course of business, with the consent of the monitor or pursuant to a court order (s A29).
Subject to these constraints, the management of the company remains in the hands of its directors.
The monitor is an officer of the court (s A34) who must monitor the company's affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern (s A35). The directors of the company must provide to the monitor any information that the monitor requires for the purpose of carrying out their functions (s A36). The monitor may apply to the court for directions about the carrying out of those functions (s A37).
The moratorium terminates at the end of the period for which it is in force under the provisions referred to above. However, it may be terminated earlier:
1. if the company enters into an insolvency procedure, which includes administration or liquidation (s A16);
2. by the monitor in certain circumstances set out in s A38, including:
1. if the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern (or, conversely, that this objective has been achieved);
2. if the monitor thinks that they are unable to properly carry out their functions due to a failure by the directors to provide information to the monitor;
3. the monitor thinks that the company is unable to pay moratorium debts or pre-moratorium debts for which the company does not have a payment holiday during the moratorium;
1. by the court on an application by a creditor, director or member of the company or any other person affected by the moratorium challenging the conduct of the monitor in failing to bring the moratorium to an end under s A38 (s A42); or
2. by the court on an application by a creditor or member of the company claiming that the directors have managed the company's affairs, business and property during the moratorium in a manner that has unfairly harmed the interests of creditors or members, or some creditors or members (s A44).
In my opinion, the UK proceeding is a foreign proceeding within the meaning of Article 2(a) of the Model Law, for the following reasons.
It is a proceeding in the High Court of Justice pursuant to the UK Act, which is a law relating to insolvency. The proceeding is collective in nature, in that it is premised on the joint monitors' opinion that it is likely that the moratorium would result in the rescue of the Company as a going concern. This opinion was stated in the documents filed with the High Court of Justice to obtain the moratorium and subsequently to extend the moratorium.
For the duration of the moratorium, the assets and affairs of the Company are subject to the control or supervision by the High Court of Justice. This control or supervision is exercised through the joint monitors, who are officers of the court and have the supervisory obligations referred to at [44] above in addition to the power to consent to the transactions referred to at [42] above that are otherwise prohibited. The High Court of Justice will also exercise control directly if and when specific applications of the kind referred to at [40], [42] and [45] above are made by the joint monitors, the directors, creditors or members of the Company or other persons affected by the moratorium.
The purpose of the control or supervision is to facilitate the moratorium being utilised with a view to the rescue of the Company as a going concern. Given that a moratorium can only be obtained under Part A1 of the UK Act if the directors have formed the view that the company has become, or is likely to become, unable to pay its debts, it is inevitable that efforts to rescue the company in question will involve some reorganisation. In this case, the plaintiffs submitted that the relevant reorganisation is the refinancing of the Company's indirectly held subsidiary, or a sale of that subsidiary (structured either as a share sale or an asset sale).
[9]
Is the application for recognition being made by the "foreign representative"?
Article 2(d) of the Model Law defines "foreign representative" as:
"a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative in the foreign proceeding"
The primary submission of the plaintiffs in the recognition proceedings is that the Company is the foreign representative. The plaintiffs' alternative submission is that the joint monitors are the foreign representatives.
SOR did not wish to be heard on the question of the whether the Company or the joint monitors are the foreign representatives, and did not direct any submissions to that issue.
In my opinion, the joint monitors, and not the Company, are the foreign representatives in this case. Taking into account the constraints that apply to the Company's dealings with its assets and entry into contracts referred to at [42] above, the role of the joint monitors referred to at [44] above and the joint monitors' power to terminate the moratorium referred to at [45] above, the joint monitors are in substance the persons authorised to administer the reorganisation as officers of the High Court of Justice.
The fact that the directors of the Company have the continued ability to undertake some transactions without the consent of the joint monitors does not support the plaintiffs' primary submission that the Company is authorised to administer the reorganisation. The constraints on the directors' dealings on behalf of the Company during the moratorium render this case distinguishable from the case of In the matter of Senvion GmbH (No. 2) [2019] FCA 1732, in which the foreign court had ordered that the debtor company was entitled, under supervision of a custodian, to administer and dispose of its assets. Under the provisions of Part A1 of the UK Act to which I have referred above, the joint monitors have a degree of control (as opposed to mere supervision) by reason of their ability to grant or withhold consent to transactions of the kind that would be central to any reorganisation, including the disposal of property and the granting of security. The test to be applied in determining whether to grant or withhold that consent is whether they consider that the transaction will support the rescue of the company as a going concern.
The joint monitors were joined to these proceedings as the second plaintiffs on 21 June 2021, thereby satisfying the requirement under Article 17 of the Model Law that the application for recognition of the foreign proceeding be made by a foreign representative within the meaning of Article 2(d) of the Model Law.
[10]
Summary of relevant evidence
In this section of these reasons, I summarise the evidence that is relevant to the question of whether the UK proceeding is a foreign main proceeding and/or the plaintiffs' application for a stay of the winding up proceedings and other action under the Model Law and/or under s 581 of the Corporations Act and/or at common law. The matters referred to are not in dispute, except where indicated to the contrary.
As I have already mentioned, the Company is incorporated in the United Kingdom.
Since about October 2019, International House at 24 Holborn Viaduct, London, England has been the Company's registered office in the United Kingdom.
That address is also the registered office address for a company called Registered Address Ltd. That company's website states that it offers the service of permitting other companies to use its registered address as their registered address for £55 per annum (plus VAT).
There is no evidence that the Company conducts any business at its registered office address in London. Its board meetings are not held at that registered office, as I refer to further below.
The Company also has a registered office in Australia, as required by s 601CT of the Corporations Act.
The three directors and the secretary of the Company reside in the United Kingdom. Mr Christopher Ellis, the Chief Executive Officer of the Company, gave evidence that board meetings generally occurred approximately six times per year and were held in person in London prior to the start of the COVID-19 pandemic. These meetings were held at the offices of a firm known as Arden, who were the Company's nominated advisors. Mr Ellis gave evidence that, since about February 2020, board meetings are held by phone or using the Zoom platform due to public health conditions and restrictions in the United Kingdom, and that all directors participating in those meetings are located in the United Kingdom. According to Mr Ellis, the meetings are therefore deemed to have taken place in the United Kingdom in accordance with article 126.2 of the Company's articles of association.
Mr Ellis also gave evidence that the Company's "group accountant", who is responsible for reviewing the accounts of the Company and its subsidiaries, is also resident in the United Kingdom. The group accountant is responsible for reviewing and reconciling accounts prepared in the United States of America for the Company's only trading subsidiary, Hydrodec of North America, LLC.
Mr Reynolds describes the Company as being "administered" in London.
The Company's shares were listed on the London Stock Exchange, but its shares were cancelled from trading on 6 April 2021, after being suspended on 1 October 2020.
The Company is the holding company of a group of companies (the Hydrodec Group), the structure of which is depicted by the following diagram:
The Hydrodec Group specialises in the re-refining of waste transformer oil using a proprietary technology in respect of which companies within the Hydrodec Group hold patents in various countries around the world. The Company itself does not hold any patents or other intellectual property in relation to the re-refining process. The end product of that process is known as "SUPERFINE".
Mr Reynolds has given evidence describing Hydrodec Holdco Limited (Holdco) as the Company's "principal asset". Holdco is incorporated in the United Kingdom and is the entity through which the Company owns all the other companies in the Hydrodec Group with the exception of two dormant companies.
However, Mr Reynolds describes Hydrodec North America LLC (Hydrodec NA) as the Company's "major asset", as it is the sole trading subsidiary within the Hydrodec Group.
The Company's website contains the following statements on its "About Us" page (emphasis added):
"About Us
We are a clean-tech oil re-refining group with operations in the USA. We apply proprietary technology to re-refine used and contaminated waste oil to produce, market and distributes [sic] SUPERFINE™ transformer oil and naphthenic base oil.
Our technology is a proven, highly efficient, oil re-refining and chemical process. It was initially developed to target the multi-billion dollar, worldwide market for transformer oil used in electricity generation. Contaminated waste oil is processed at our plant at Canton, Ohio, US, with distinct competitive advantage. Our process delivers very high recoveries (>99%), producing transformer oil that tests 'better than new' at competitive cost and without environmentally harmful emissions. The process also completely eliminates PCBs, a toxic additive banned under international regulations."
The "Our Strategy" page of the website describes the foundations of the Company's business model as including "Advantaged location in the USA with proximity to markets". The website describes Hydrodec NA's "state-of-the-art facility in Canton, Ohio" where "we offer a sophisticated and sustainable solution for dealing with used transformer oil".
The Company's most recent annual report and financial statements are for the year ended 31 December 2018 and were filed with the United Kingdom Companies' House on 4 July 2019. The annual report states (emphasis added):
"Hydrodec Group plc is a clean-tech industrial oil re-refining group with operations in the USA.
Hydrodec's technology is a proven, highly efficient, oil re-refining and chemical process principally targeted at the multi-billion USD market for transformer oil used by the world's electricity industry. …
In 2016, Hydrodec received carbon credit approval from the American Carbon Registry ('ACR') enabling its product to be sold with a carbon offset and creating an incremental revenue stream. The Group is now generating carbon offsets through the re-refining of used transformer oil, which would otherwise ordinarily be incinerated or disposed of in an unsustainable manner. This is a highly distinctive feature for the Group, confirming (as far as the Board is aware) that Hydrodec is the only oil re-refining business in the world to receive carbon credits for its output. This is a significant endorsement of the Company's proprietary technology and standing as a leader in its field.
Hydrodec's shares are listed on the AIM Market of the London Stock Exchange."
The annual report and financial statements are in US dollars.
It is plain from the description of the "2018 Highlights" and the "Strategic Report" within the annual report that the sources of revenue were operations at the plant in Canton, Ohio and the sale of carbon credits generated by activities in the United States, and that plans for growth and expansion were focussed on establishing "future partnerships for acquisition of additional and more sustainable feedstock supplies in the USA in order to develop a stronger footprint in this key market" and "entry into additional US geographies through partnerships and royalty agreements".
The "Strategic Highlights" of 2018 listed in the annual report include:
"Significantly increased ownership interest in [Hydrodec NA] from 58% to 85%
Injected further working capital into US operations
Commenced sale of non-core, loss-making Australian operations
Began broadening the base of feedstock suppliers"
As I understand the numerous references to "feedstock" in the 2018 annual report, it is a key input into the process by which SUPERFINE is produced. The "Chief Executive Officer's Review" in the 2018 annual report describes feedstock as "the key constraint to business growth" and refers to these constraints as driving reduced output in 2018 compared to the previous year. The Chief Executive Officer describes the resolution of feedstock constraints as "the Board's overriding strategic focus".
The "Post period-end highlights and current trading" points listed in the 2018 annual report include:
"Reorganisation and strengthening of the US business with a new management and reporting structure combined with a number of internal promotions and new hires within operations
Focus on generating new partnerships and securing additional feedstock in the USA
…
After some delays, the Australian sales process is now progressing …"
The "Chairman's Statement" within the 2018 annual report refers to "the Company's US utility-targeted strategy" and states:
"It is in the US where we intend to realise growth, through improved feedstock acquisition, and new partnerships with US government entities, US utilities and field service collection companies"
The Chairman refers to the Company's increased ownership of Hydrodec NA as part of a strategy to "ensure full operational control of the Group's key facility". The "Chief Executive Officer's Review" in the 2018 annual report states (my emphasis):
"Further to its strategic review and as part of the realignment of its interests in the US, the Company reached an agreement with its long term partners, G&S, to increase [the Company]'s interest in [Hydrodec NA] from 58% to 85%; to restructure the governance and representation on the [Hydrodec NA] board; to increase plant and commercial efficiency at the Canton, Ohio facility; and to provide [the Company] with overall operational control."
It appears from the description of the Hydrodec NA management and staffing arrangements in the "Chief Executive Officer's Review" in the 2018 annual report that, as at 31 December 2018, there were three directors on the board of directors of Hydrodec NA that had been nominated by the Company and that the Chairman of the Company was also the Chairman of Hydrodec NA. As at the date of these reasons, the Company has acquired the remaining 15% of the shares in Hydrodec NA and the board of Hydrodec NA has been reduced to a sole director, namely, Mr Ellis, who is also the Chief Executive Officer of the Company. Mr Ellis gave evidence that the "US management team" of Hydrodec NA reports to him and that he makes decisions for Hydrodec NA after consulting with the Company's board of directors. It is clear from the minutes of meetings of the directors of the Company to which I refer below that it is the Company's board that drives decisions made in relation to Hydrodec NA.
The "Chief Executive Officer's Review" in the 2018 annual report states that the earnings of the Hydrodec Group's business are "based within the US and, currently, Australia". Elsewhere in the 2018 annual report, the Australian operations are described as loss-making and "discontinued". There is evidence suggesting that Australian operations ceased in August 2019, but the notes to the 2018 financial statements concerning revenue indicate that those operations may have ceased during the 2018 calendar year. Those notes state:
"The Group has one main operating segment, Re-refining, which is classified as the treatment of used transformer oil and the sale of SUPERFINE oil. Subsequent to the cessation of operations in Australia during the year (the 'discontinued operations'), the Group's operating segment arises from one geographic location, being USA."
The "Chief Executive Officer's Review" in the 2018 annual report describes the Hydrodec Group's principal financial facilities as a seven year USD $10,000,000 finance lease arrangement with a financier in the United States and shareholder loans from Mr Andrew Black of USD $3,600,000 as at 31 December 2018.
[11]
Consideration and determination
The plaintiffs submit that the United Kingdom is the centre of main interests for the Company within the meaning of the Model Law because:
1. a company's centre of main interests is presumed under Article 16.3 of the Model Law to be the State in which the company has its registered office in the absence of proof to the contrary; and
2. the Company's registered office is in the United Kingdom.
The plaintiffs submit that the presumption in Article 16.3 is not rebutted in this case.
The plaintiffs submit that, even if the presumption in Article 16.3 does not apply (contrary to their primary submission), the Court "can be comfortably satisfied" that the United Kingdom is the centre of main interests for the Company because:
1. the Company's three directors all reside in the United Kingdom, as does its company secretary who is responsible for assisting with compliance requirements and the group accountant who is responsible for reviewing and reconciling accounts prepared by Hydrodec NA's accountants in the United States;
2. the evidence of Mr Reynolds and Mr Ellis establishes that the Company's affairs are administered in the United Kingdom, its board of directors meets in the United Kingdom and, prior to the COVID-19 pandemic, directors attended these meetings in person in London;
3. the Company's website has a link to a "Contact Us" page that clearly records its registered address at International House in London and provides two United Kingdom email addresses for shareholder enquiries and general enquiries together with a United Kingdom telephone number;
4. the Company's affairs are not administered in the United States;
5. the Company's principal asset is its shares in Holdco, and that asset is located in the United Kingdom where Holdco is incorporated;
6. Hydrodec NA, the only trading entity within the Hydrodec Group, is not directly owned by the Company and, in any event, the sole director of Hydrodec NA is Mr Ellis, who resides in the UK and makes decisions in his capacity as sole director in the UK after consulting with the directors of the Company who also reside in the UK; and
7. with the exception of SOR and the Company's solicitors, all creditors of the Company are in the United Kingdom.
The plaintiffs submit that, on the basis of the matters above, the Court should determine that the United Kingdom is the Company's centre of main interests and that the UK proceeding must therefore be recognised as a foreign main proceeding under Article 17.2 of the Model Law.
SOR submits that the presumption under Article 16.3 cannot apply because the Company has registered offices in both London and Sydney.
SOR further submits that the evidence overwhelmingly establishes that Hydrodec's centre of main interests is not in the United Kingdom, and the presumption under Article 16.3 is rebutted (if it applies at all, contrary to SOR's primary submission).
In relation to Article 16.3, the plaintiffs point to the Company's lodgement of a notice of cessation of business with ASIC on 17 March 2021. The plaintiffs' written submissions describe the Company as "formerly registered as a foreign company in Australia". However, in oral closing submissions, counsel for the plaintiffs acknowledged (correctly) that Hydrodec remains registered as a foreign company in Australia: see [9] above. A Sydney address continues to be recorded in ASIC's register as the Company's registered office.
In cases such as the present where a company has more than one registered office, there is nothing in the Model Law or the Cross-Border Act that requires only one of those offices to be treated as relevant for the purpose of the presumption in Article 16.3 of the Model Law. In my opinion, it must follow that the presumption does not apply in respect of the location of any of the company's registered offices, and the Court must determine the location of the company's centre of main interests in accordance with all of the relevant evidence concerning the company and its operations. I note that my opinion aligns with the approach taken by Randall AsJ in Indian Farmers Fertiliser Cooperative Ltd v Legend International Holdings Inc (2016) 52 VR 1; [2016] VSC 308 at [78]-[81].
For that reason, the presumption in Article 16.3 of the Model Law does not apply in this case to presume that the place where the Company has its centre of main interests is the United Kingdom (or, for that matter, Australia).
Further, for the reasons explained immediately below, I accept SOR's submission that the evidence overwhelmingly establishes that the Company has its centre of main interests in the United States of America and not in the United Kingdom.
The expression "centre of main interests" is not defined in the Model Law, but has been considered in a number of cases. [4] As Jagot J said in Young, Jr, in the matter of Buccaneer Energy Limited v Buccaneer Energy Limited [2014] FCA 711 at [7], the key proposition that emerges from the authorities is that the centre of main interests must be identified by reference to criteria that are objective and ascertainable by third parties. Whilst there has been some divergence of views expressed in the authorities as to whether the centre of main interests is to be determined as at the date of commencement of the relevant foreign proceeding or as at the date of the hearing of the application for recognition, [5] the evidence in the present case does not suggest that one approach may result in a different outcome compared to the other approach and it is therefore not necessary to consider which approach is to be preferred.
In my opinion, the following objective matters, readily ascertainable by third parties on the basis of information published by the Company concerning its affairs, establish that the Company has its centre of main interests in the United States of America.
The Company is the ultimate holding company of a number of subsidiary companies that appear to be incorporated in the United Kingdom (Holdco), the United States (Hydrodec Inc and Hydrodec NA), Australia (Hydrodec Development Corporation Pty Ltd and Hydrodec Australia, which is in liquidation) and Japan (Hydrodec Japan Co Ltd and Hydrodec Eco Japan Co Ltd, both of which are described as "dormant" in the corporate structure diagram exhibited to Mr Reynolds' affidavit affirmed on 26 May 2021): see [66].
The Company itself does not trade. Hydrodec NA is the entity within the Hydrodec Group that is trading and earning revenue. [6]
Hydrodec NA is wholly owned (indirectly) by the Company. Its trading activities are conducted from its plant in Canton, Ohio in the United States of America and its business model is built on its strategic relationships with feedstock suppliers in the United States and carbon credit approvals issued by the American Carbon Registry and the United States market is its "key market" and the focus of its plans for future growth. [7]
Although Mr Black is the Company's largest creditor, a financier in the United States is the Hydrodec Group's principal creditor under a USD $10 million finance lease. [8] As counsel for the plaintiffs submitted, the directors of the Company are attempting to "reorganise" the Company by refinancing the United States facility, or selling Hydrodec NA. This submission implicitly recognises the critical importance of the United States finance facility and Hydrodec NA to the continuing existence of the Company.
The administration of the affairs of the Company involves, in substance the administration of the operations of Hydrodec NA. That is plain from:
1. the information published in the Company's 2018 annual report, including the description of the "operations in the USA" as the operations of the Company; [9]
2. the Company's efforts to acquire 100% ownership of Hydrodec NA from about 2018; [10] and
3. the minutes of the meetings of the directors of the Company referred to at [85]-[88] above and the 3 February 2021 announcement referred to at [89]-[90], which show that the Company itself (not Hydrodec NA) is working on the refinancing of the United States operations and that matters concerning Hydrodec NA are front and centre of the discussions and deliberations of the Company's board of directors and not merely consultation by Mr Ellis.
In my opinion, the matters referred to at [142]-[145] above demonstrate that, although several corporate entities are interposed between the Company and Hydrodec NA, the affairs of the Company are, in substance, the business and operations of Hydrodec NA in the United States. The interposed corporate entities merely own the shares in the next entity down the chain in the Hydrodec Group corporate structure. Hydrodec NA is the only entity within that structure undertaking any trading activities.
The matters referred to at [142]-[145] above are ascertainable by third parties on the basis of the information published in the Company's 2018 annual report and in subsequent announcements. Although third parties would not have access to the minutes of meetings of the directors of the Company, they would be able to ascertain from the 3 February 2021 announcement that the refinancing of the United States operations is a matter that the Company is working on.
For those reasons, the Company has its centre of main interests in the United States of America, and not in the United Kingdom.
I reject the plaintiffs' submissions to the contrary, which placed almost conclusive weight on the incorporation of the Company in the United Kingdom, the location of a registered office in the United Kingdom (at which no business of the Company is conducted) and the residence of its directors in the United Kingdom.
I acknowledge that the Company is incorporated in the United Kingdom and has a registered office there, that its directors are resident in the United Kingdom, that its board meetings are held in the United Kingdom and it employs the services of a company secretary and group accountant in the United Kingdom. As I have explained above, the Company's activities through its directors and company secretary and the activities of its group accountant are directed to the administration of operations in the United States with some associated and administrative compliance work that is required by reason of the Company being incorporated in the United Kingdom. Neither the place of incorporation nor location at which the work of the directors, secretary and accountant is carried out, outweigh the matters referred to at [142]-[145] above so as to warrant a different conclusion as to the location of the Company's centre of main interests. For the same reason, I do not regard the residence of Hydrodec NA's sole director in the United Kingdom as material.
I acknowledge that the "Contact Us" link within the Company's website provides the details of the Company's registered address in London and United Kingdom email addresses and telephone numbers. It also provides another means to "contact us" via the "Business and Site Address" for Hydrodec NA, together with United States email addresses and telephone numbers.
The plaintiffs' submission that all creditors of the Company are in the United Kingdom, with the exception of SOR and the Company's solicitors, is not supported by the evidence referred to at [83] above, which is limited to Mr Ellis' recollection. There are no recent financial statements against which his recollection can be tested. In any event, the amounts owing to SOR and the Company's solicitors are material.
For completeness, I should add that I do not regard the fact that the Company's shares were previously listed on the AIM of the London Stock Exchange as relevant to the determination of its centre of main interests either as at the date of commencement of the moratorium or as at the date of commencement of the recognition proceedings. The Company's shares had been suspended from trading since 1 October 2020 and cancelled on 6 April 2021. In any event, during the period when its shares were trading on the AIM of the London Stock Exchange, the Company itself described its operations as being conducted in the United States and described its focus as being the expansion of its operations in the United States market for its re‑refined oil products. It pursued that focus by, amongst other things, acquiring 100% ownership of Hydrodec NA.
For all of these reasons, the UK proceeding is not taking place in the State where the Company has its centre of main interests. It follows that the UK proceeding cannot be recognised as a foreign main proceeding under Article 17.2 of the Model Law and all of the plaintiffs' claims for relief under the Model Law must be dismissed.
[12]
Alternative application to stay the winding up proceedings under Corporations Act, s 581(2) or at common law
Section 581(2) of the Corporations Act provides:
"(2) In all external administration matters, the Court:
(a) must act in aid of, and be auxiliary to, the courts of:
(i) external Territories; and
(ii) States that are not in this jurisdiction; and
(iii) prescribed countries;
that have jurisdiction in external administration matters; and
(b) may act in aid of, and be auxiliary to, the courts of other countries that have jurisdiction in external administration matters."
The winding up proceedings are an "external administration matter" as defined in s 580(c) of the Corporations Act because they are a matter relating to the insolvency of the Company, which is a "Part 5.7 body" within the meaning of s 9 of the Corporations Act. [11] The United Kingdom is a "prescribed country". [12]
In my opinion, the recognition proceedings are also properly characterised as an "external administration matter" because they are proceedings for the recognition of a moratorium in respect of a Part 5.7 body whose directors commenced the moratorium by filing a notice stating that they were of the view that the Company is unable to pay its debts or is likely to become unable to pay its debts. [CB 411] The UK proceeding itself is an "external administration matter" for the same reason.
Section 581(2) of the Corporations Act does not oblige this Court to stay the winding up proceedings merely because a moratorium has commenced in the United Kingdom. Rather, s 581(2) requires the Court to consider whether it would be proper in all the circumstances of this case (including the existence of the moratorium in the United Kingdom) to provide aid and act in an auxiliary manner to the High Court of Justice by not exercising the power under Chapter 5 and s 583 of the Corporations Act to wind up the Company: Legend International Holdings Inc v Indian Farmers Fertiliser Cooperative Limited (2016) 52 VR 40; [2016] VSCA 151 (Legend International) at [3], [30]-[31].
As I have referred to earlier in these reasons, the plaintiffs also relied on common law principles in support of their alternative application for a stay of the winding up proceedings, but submitted that the relevant common law principles were the same as the principles that apply under s 581(2) of the Corporations Act. [13]
For the following reasons, I do consider that it would be proper in all the circumstances of this case to provide aid and act in an auxiliary manner to the High Court of Justice by stating the winding up proceedings for the duration of the moratorium.
The Company is unable to pay its debts.
It has bought some time by obtaining the moratorium in the UK proceedings.
As submitted by counsel for SOR and acknowledged by counsel for the plaintiffs, the moratorium does not involve a plan for the rescue of the Company. Counsel for the plaintiffs submitted that: "It's obvious and acknowledged there is no plan … What is hoped to occur is set out in Mr Reynolds' report…". [14] It is clear from all of the evidence referred to at [66]-[128] above that there is merely a hope that some further time for the Company to continue negotiations for the refinancing or sale of Hydrodec NA that it commenced by at least late 2019 (albeit with different potential financiers and potential purchasers) may result in a refinancing or sale that generates sufficient funds for Hydrodec NA to put the Company in funds to pay some of its creditors.
The plaintiffs rely heavily on the opinions of Mr Reynolds that it is in the best interests of creditors for the moratorium to continue because a better outcome will be achieved for creditors if the Company is afforded this further time to achieve the proposed refinancing or sale than if the Company is wound up and its assets are realised on a liquidation basis. [15] However, I place little weight on these opinions because Mr Reynolds simply does not engage with the question whether there is any realistic prospect of either the refinancing or sale being achieved in circumstances where this has not occurred despite the Company's efforts since at least late 2019. Mr Reynolds merely says that the refinance discussions are progressing [16] and that the strategy will switch to securing a sale of Hydrodec NA if the refinancing fails. [17] In the absence of any assessment of the prospects of a refinancing or sale now being achieved despite the long history of unsuccessful negotiations, Mr Reynolds' opinions that the continuation of the moratorium is in the best interests of creditors do not rise above the level of bare assertion.
The position is not improved by the joint monitors having made statements to the High Court of Justice in documents filed in the UK proceeding to the effect that, in their view, it is likely that the moratorium will result in the rescue of the Company as a going concern. If the refinancing does not succeed (consistently with the outcome of refinancing efforts since at least late 2019), then it is not at all clear how the sale of the only trading subsidiary and source of revenue within the Hydrodec Group would result in the rescue of the Company as a going concern. Such a sale would seem to have the very opposite effect. Indeed, Mr Reynolds' report to the directors of the Company dated 9 May 2021 stated that a sale of Hydrodec NA (structured either as a share sale or asset sale) at the prices then under discussion with potential purchasers would lead to the insolvency of the Company. [18] According to Mr Reynolds' report, even a refinancing would not put the Company in sufficient funds to pay all of its creditors. [19] I infer that the refinancing that is the primary focus of the directors' efforts during the moratorium could only rescue the Company as a going concern if all creditors were willing to accept payment of only a proportion of their debts, or defer the due dates for payment. There is no evidence concerning the likely attitude of creditors to such a proposal, with the exception of Mr Black. Whilst Mr Black is the Company's largest creditor, significant amounts are owed to the other creditors.
Counsel for the plaintiffs emphatically submitted that Mr Reynolds is the joint monitor and is therefore entitled to give his opinions. Mr Reynolds is indeed entitled to give his opinions, but they lack substance in the absence of the assessment I have referred to in the circumstances of this particular case. I reject the plaintiffs' submissions that, because this Court is not supervising the moratorium or the negotiations, it is improper for me to question the basis of Mr Reynolds' opinions in this manner for the purpose of considering whether the Court should act in aid of and auxiliary to the High Court of Justice by staying the winding up proceedings in Australia.
I reject the plaintiffs' submission that a winding up order made by this Court would be to the detriment of the Company and its creditors and of negligible benefit to SOR. The proposition that a winding up order would be to the detriment of the Company and its creditors depends on acceptance of the proposition that there is a better alternative, namely the continuation of the moratorium. Whether the continuation of the moratorium is a better alternative depends on an assessment of whether there is any realistic prospect of the Company being rescued. In the absence of that assessment, it cannot be said that the winding up of the Company at this stage, in circumstances where it is unable to pay its debts, is to the detriment of creditors. To the extent that the plaintiffs rely on Mr Reynolds' estimated outcomes for creditors or refinancing, sale or winding up referred to at [122]-[123] above, these are hypothetical calculations performed on the basis of assumptions about the terms of any refinancing or sale, assumptions about the value of assets and other assumptions. [20] The Court was not directed to any evidence supporting any of those assumptions as a reasonable basis to assess potential outcomes for creditors.
As counsel for SOR submitted, the High Court of Justice has not had any occasion in the UK proceeding to make an assessment of whether the moratorium is likely to result in the rescue of the Company as a going concern or to achieve a better result for creditors than if the Company were wound up at this stage. Nor has the High Court of Justice issued any request to this Court to act in aid of the High Court of Justice by staying the Australian winding up proceedings so as to facilitate the continuation of the moratorium. Whilst a letter of request is not a prerequisite to the Court's obligation under s 581(2) of the Corporations Act to act in aid of and be auxiliary to the High Court of Justice, I am not persuaded that a stay of the winding up proceedings would be in aid of the High Court of Justice in this particular case having regard to the matters referred to at [163]-[167] above and in the absence of any such request identifying assistance that the High Court of Justice considers it requires: see Legend International at [20].
I also reject the plaintiffs' submissions that the benefits of a winding up for SOR would be negligible, and that a winding up in Australia would have no utility. Those submissions are founded on an assumption that s 583(d) of the Corporations Act would limit any liquidator appointed by this Court to dealing with the assets and affairs of the Company outside the United Kingdom. That assumption is incorrect. I accept the submissions made by counsel for SOR that s 583(d) expressly provides that it only applies if the Part 5.7 body is a "registrable Australian body", and that the Company is not a "registrable Australian body" as defined in s 9 of the Corporations Act because it is a foreign company.
It follows that I also accept SOR's submissions that a liquidator appointed by this Court would be able to investigate potential voidable transaction claims and insolvent trading claims in relation to the Company, seeking assistance in foreign jurisdictions under Chapter IV of the Model Law to the extent necessary. I make no assumptions about whether such assistance would be granted by those foreign jurisdictions, as that would depend on all relevant circumstances at the time of any application for assistance. Given the lack of any evidence that would support an inference that the moratorium has a realistic prospect of facilitating a refinancing or sale of Hydrodec NA, let alone rescuing the Company as a going concern, it is to the benefit of all creditors that those matters be investigated and pursued where appropriate without further delay. That is particularly so in circumstances where the Company is dependent on Mr Black to fund its operations during the moratorium, and Mr Black has used his provision of that funding to secure a right to require security for the Company's existing debts from other companies in the Hydrodec Group. There is a real risk that this, and any further steps that Mr Black may take to give effect to this agreement with a view to improving his security position, will be to the detriment of all other creditors as referred to at [110]-[114] above.
Whilst I consider that the winding up would benefit all creditors for the reasons outlined immediately above, it is relevant to my determination to refuse the stay of the winding up proceedings that there is a material amount owing to creditors in Australia - approximately $1.6 million to SOR and approximately $330,000 to the Company's Australian solicitors.
For those reasons, the plaintiffs' application for an order under s 581(2) of the Corporations Act staying the winding up proceedings is dismissed.
[13]
Consideration and determination of the winding up proceedings
The Company is a "Part 5.7 body". [21] Pursuant to s 583 of the Corporations Act, the Company may be wound up under the provisions of Chapter 5 if, relevantly, the company is unable to pay its debts.
As I mentioned earlier in these reasons, SOR served on the Company a demand for payment of the Judgment Debt on 4 March 2021. The Company did not comply with that demand within three weeks after service of the demand, or at all. Accordingly, the Company is presumed to be unable to pay its debts by reason of s 585(a): Queensland Phosphate Pty Ltd v Korda (No. 2) [2019] VSCA 215 at [96].
The Company adduced no evidence to rebut the presumption. Indeed, the Company adduced no evidence at all on the final hearing of the winding up proceedings. The sole basis of its opposition to a winding up order was its contention that the Court should grant the relief sought in the recognition proceedings and stay the winding up proceedings. The Company's application for a stay of the winding up proceedings as failed for the reasons already explained. I am satisfied that the Company is insolvent within the meaning of s 95A of the Corporations Act
Mr Cameron Crichton and Mr Michael McCann, registered liquidators, both of Grant Thornton, have consented to be appointed by the Court and to act as joint and several liquidators of the Company. SOR filed a Consent of Liquidators on 9 April 2021.
The originating process and supporting affidavits and the Consent have been served on the Company in accordance with the requirements of the Supreme Court (Corporations) Rules 1999 (NSW) (the Corporations Rules). SOR notified ASIC of the filing of the winding up proceedings as required by s 470(1)(a) and notice of the winding up application was published on ASIC's Published Notices website on 7 April 2021 in accordance with s 465A of the Corporations Act and the Corporations Rules.
For all of those reasons, I am satisfied that the Court has power to wind up the Company under s 459A of the Corporations Act, and that it is appropriate that the winding up order be made.
[14]
Conclusion and orders
For the reasons above, I make the following orders in the recognition proceedings (2021/155167):
1. Proceedings dismissed, save in relation to the question of costs which are reserved.
I make the following orders in the winding up proceedings (2021/87641):
1. Order that Hydrodec Group Plc ARBN 128 253 592 be wound up in insolvency pursuant to s 459A of the Corporations Act 2001 (Cth).
2. Order that Cameron Crichton and Michael McCann of Grant Thornton be appointed as the joint and several liquidators of Hydrodec Group Plc ARBN 128 253 592.
I make the following directions in the recognition proceedings and the winding up proceedings:
1. Direct Southern Oil Refining Pty Ltd to file and serve written submissions in relation to the costs of proceedings 2021/87641 and 2021/155167 by 5pm on 2 July 2021.
2. Direct Hydrodec Group Plc, Mr Philip Reynolds or Mr Anthony Wright to in response to file and serve any submissions in response to the submissions of Southern Oil Refining Pty Ltd concerning the costs of proceedings 2021/87641 and 2021/155167 by 5pm on 9 July 2021.
3. Reserve the question of the costs of proceedings 2021/87641 and 2021/155167 for determination on the papers after 9 July 2021.
[15]
Endnotes
References to the Model Law are references to the Model Law as applicable in Australia pursuant to the Cross-Border Act, unless expressly indicated to the contrary.
T122.35-122.41.
See M Davies, AS Bell, PLG Brereton and M Douglas, Nygh's Conflict of Laws in Australia (10th ed, 2020) at paragraphs 32.31-32.35 and the authorities there referred to, including AssetInsure Pty Ltd v New Cap Reinsurance Corp Ltd (in liq) (2006) 225 CLR 331; [2006] HCA 13 at [58].
Ackers (as joint foreign representative) v Saad Investments Company Limited (in official liquidation) (a company registered in the Cayman Islands) [2010] FCA 1221 at [42]-[43] and [49] and see also, for example, Young, Jr, in the matter of Buccaneer Energy Limited v Buccaneer Energy Limited [2014] FCA 711 at [7]-[9]; Wood v Astra Resources Ltd [2016] FCA 1192 at [8]-[14]; Meng (as joint and several trustees of the property of Mackellar (a bankrupt) v Mackellar [2020] FCA 1151 at [44]-[45]; Hung (Trustee); In the matter of Farouk v Farouk (No. 2) [2021] FCA 270 at [24]-[26].
In the matter of Geoffrey Edelston; Soneet R Kapila in his capacity as trustee in bankruptcy for the estate of Geoffrey Edelsten appointed under Chapter 11 of the Bankruptcy Code (US) v Edelsten [2014] FCA 1112 at [36]-[41] and the authorities there referred to.
See [81] above.
See [70]-[98] above.
See [82] above.
See [72] above.
See [79] and [98] above.
The Company is a "registrable body" (as defined in s 9) because it is a "foreign company" (as defined in s 9), and it has been registered under Division 2 of Part 5B.2 of the Corporations Act.
See Corporations Act, s 580 and Corporations Regulations 2001 (Cth), reg 5.6.74.
T122.35-122.41.
T120.30-120.36.
See [122] above.
See [120] above.
See [122
Exhibit 1, pp 399-406 at p 400.
Exhibit 1, pp 399-406 at pp 400 and unsecured creditors listed at p 403..
Exhibit 1, pp 399-406.
See [156] above.
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: 25 June 2021
The Chief Executive Officer, Mr Ellis, has given evidence in these proceedings that, with the exception of SOR and the Company's Australian lawyers, he does not recall the Company itself having any material creditor outside the United Kingdom. He deposed that, as the Company itself does not trade, "its only likely liability outside UK would be by any guarantee". It is not clear why the Chief Executive Officer has not provided details of any such guarantees and appears to consider that any amounts owing by the Company under guarantees are not debts or are not material. In cross-examination, Mr Ellis denied that the Company had guaranteed debts of Hydrodec NA.
The Company has not filed any annual report and financial statements, and has not published any audited financial statements, for 2019 or 2020.
Minutes of a meeting of the directors of the Company held on 23 December 2019 record discussion concerning "Refinance", including a valuation obtained by a potential financier of "our equipment" purchased for $25 million "not long ago". Having regard to the description of the Company's operations in the 2018 annual report, I infer that the equipment referred to is the equipment located at Hydrodec NA's plant in Canton, Ohio in the United States.
Minutes of a meeting of the Company's directors held on 26 February 2020 record further discussion of "Cash/refinancing/strategic options" including that: "Absent any further funding, CE [Mr Ellis] may need to shut plant down and lay off some staff." The minutes record further discussion about how amounts owing to staff and under the "US bank lease" will be met.
Minutes of a meeting of the Company's directors held on 18 March 2020 record further discussions concerning refinancing possibilities and the adverse impact of lack of working capital on the plant in Canton, Ohio.
Minutes of a meeting of the Company's directors held on 23 March 2020 record further discussions concerning refinancing possibilities and whether United States government financial assistance associated with Ohio lockdown regulations in the COVID-19 pandemic may be available if the plant in Canton, Ohio is shut down.
On 3 February 2021, the Company published an announcement to the London Stock Exchange including a financing update, the announcement of a proposed joint venture in the United States, and an update concerning its financial statements.
The "Financing Update" section of the announcement stated:
"The Company has continued to work on a refinancing package in respect of the Canton plant and assets in order to replace the existing equipment lease, which is over-collateralised, with an extended facility to provide additional funds for feedstock, approved capital expenditure and growth opportunities.
Despite delays, due in part to the global pandemic, progress continues to be made. The Company has an agreement in principle with one party to provide funding of up to US$6.75 million and is in advanced stage negotiations with its existing US bank to conclude arrangements.
In recent months, Hydrodec has been reliant on the support of its major shareholder, Andrew Black, who has lent approximately US$0.2 million further in cash since 1 October 2020, the date of the Company's previous update.
If there are further delays in completing the refinancing, the Company's cash and working capital positions could be impacted accordingly."
The announcement then referred to the proposed joint venture in the US as involving a non-binding heads of agreement signed with an unidentified US recycling company. The intention was to combine the partner's proven access to a supply of transformers from US utilities with Hydrodec NA's proven ability to produce re-usable transformer oil and generate carbon credits, so as to create "a market leading re-refining business in the US". The expected signing of the operating agreement for the proposed joint venture was stated to be "subject to the resolution of [the Hydrodec Group's] funding position."
The announcement then referred to the judgment of Parker J delivered on 29 January 2021 that gave rise to the Judgment Debt. The announcement stated that the Company was reviewing its options in relation to the judgment, including its rights of appeal.
Under the heading "Financial statements update", the announcement stated that the Hydrodec Group had been unable to conclude its audit in respect of the 18 month period to 30 June 2020 "due to the ongoing impact of the pandemic and the Company's financial constraints". The announcement expressed the Board's commitment to publishing these audited accounts "at the earliest opportunity" but advised that they were unlikely to be completed by 31 March 2021. The announcement stated:
"The Company's shares remain suspended from trading on AIM pending the publication of these financial statements and resolution of the current financial difficulties and, in the event that the deadline of 31 March 2021 is not met, then under the AIM Rules the Company's shares will be cancelled from trading on AIM."
On 31 March 2021, the Company published an announcement to the London Stock Exchange, which stated:
"The Company is pleased to confirm that it has reached agreement on a US$6.75 million (gross of fees and retentions) financial package in respect of the Canton, Ohio plant and assets in order to replace the existing equipment lease, which is over-collateralised, and to provide additional funds for feedstock, approved capital expenditure and growth opportunities. The Company has also reached agreement with its existing US lender as to repayment arrangements for the outstanding US$4.3 million loan. The funding will be drawn down in tranches with the first tranche expected to be received by 7 April 2021."
The announcement then stated that the potential joint venture partner referred to in the 3 February 2021 announcement had subsequently offered to acquire all of, or a controlling stake in, Hydrodec NA. The announcement stated: "Whilst the offer did not meet the Board's expectations as to valuation, the parties remain in constructive discussions, including as to the possibility of the potential partner taking a minority stake in [Hydrodec NA] rather than the proposed JV structure."
I note that, at a meeting of the directors of the Company on 25 March 2020, Mr Andrew Black had expressed a preference for any bid by a potential purchaser of Hydrodec Group to be "at plc level" because a bid for Hydrodec NA "may leave nothing for plc shareholders". Mr Black is a director of the Company. His concern about whether any sale of Hydrodec NA would realise sufficient funds for monies to be remitted to the Company as the ultimate holding company of Hydrodec NA may reflect his position as a shareholder of the Company (at least at that time) but may also reflect his position as a creditor of the Company. In his affidavit affirmed on 2 June 2021, Mr Reynolds described Mr Black as the Company's largest creditor and deposed that the amount owing to him is £6.99 million. That is consistent with the Company's balance sheet extracted from its management accounts as at 31 December 2020, which records shareholder loans of £6.95 million. Documents tendered by SOR disclose that the monies owing to Mr Black are the subject of a facility agreement entered into in November 2015 (as varied) and a debenture which creates a fixed and floating charge over the assets of the Company.
In his affidavit, and in his report to the directors of the Company dated 9 May 2021, Mr Reynolds refers to Mr Black as a former shareholder of the Company. The 3 February 2021 announcement referred to at [90] above described Mr Black as the major shareholder of the Company. In circumstances where the Company's shares have been suspended from trading since 1 October 2020, it is difficult to see how his status as a shareholder could have changed since 3 February 2021. However, the United Kingdom Companies House extract for the Company records a filing on 29 April 2021 of "Cessation of Andrew Wilson Black as a person with significant control on 1 April 2021". Ultimately, it is not necessary to determine in these proceedings whether Mr Black is a current or former shareholder of the Company.
After referring to the sale negotiations with the potential JV partner, the 31 March 2021 announcement stated:
"The Company can also announce that the remaining historic interest in [Hydrodec NA] that had been held by G&S has now been transferred back to Hydrodec - as such Hydrodec is currently the 100% owner of [Hydrodec NA]."
The 31 March 2021 announcement continued:
"Despite having now reached agreement as to the refinancing, the ongoing impact of the pandemic and the Company's financial constraints have resulted in the group being unable to conclude its audit in respect of the 18 month period to 30 June 2020 at this time. The Company's shares where suspended on 1 October 2020 and, in accordance with the AIM Rules, trading in the Company's shares will now be cancelled with effect from 1 April 2021.
…
The Board notes that, in the recent past, the Company's market capitalisation and lack of liquidity in its shares have impacted certain of the potential advantages to having the shares admitted to trading on AIM. Whilst the Board had not intended to cancel the admission, it considers that it may be in the best interests of shareholders given, inter alia, the reduction in corporate running costs that result therefrom, noting the Company's financial constraints.
The Board remains committed to publishing its outstanding audited accounts at the earliest opportunity."
No such audited accounts have been published.
The cancellation of the admission of the Company's shares to trading on the AIM of the London Stock Exchange was announced on 6 April 2021.
The UK Balance Sheet from the Company's management accounts as at 31 December 2020 records that the Company has total assets of approximately £24.79 million, comprising approximately £14.54 investments in subsidiaries and approximately £10.25 million in intercompany loans (after a £7.5 million write down for impairment of those loans). The majority of the intercompany loans (before impairment) are recorded as owing by Holdco, Hydrodec Inc (the immediate holding company of Hydrodec NA) and Hydrodec Australia.
It is Mr Reynolds' understanding that the intercompany loans are repayable in the United Kingdom. There was no evidence of the basis of Mr Reynolds' understanding. He did not give any evidence as to whether his investigations and enquiries concerning the Company's assets had included a review of any loan agreements or other documentation recording the terms of the intercompany loans. A debt is generally situated where the debtor resides. [3] In this case, the evidence before the Court is not an appropriate basis on which to make a finding as to whether the debts owing to the Company under the intercompany loans are situated in the jurisdictions where each relevant subsidiary resides or in some other location.
In any event, the location of those assets is not material to the issues to be determined in these proceedings because the available evidence indicates that the debts are likely to have little, if any, value. The subsidiaries indebted to the Company under the intercompany loans are either non-trading or, in the case of Hydrodec NA, so short of funds that the Company was considering shutting down its plant and laying off staff in February 2020 and was pursuing a refinancing or sale as recorded in the Company's board minutes referred to at [85]-[88] above. There is no evidence to suggest that Hydrodec NA's financial position has improved since February 2020. Although the Company announced to the market that the refinancing had been agreed on 31 March 2021, any such agreement was promptly terminated or abandoned because efforts to negotiate essentially the same refinancing package are ongoing under the moratorium, with parallel negotiations being conducted for the sale of Hydrodec NA.
As referred to at [12]-[15] above, the moratorium and the UK proceeding commenced at 11.07am on 21 May 2021.
On the same day, the Company and Holdco entered into a facility agreement and debenture with Mr Black.
Under the facility agreement, Mr Black agreed to provide a loan facility of £240,000 to the Company for the purpose of paying an arrangement fee of £20,000 to himself, funding the fees, costs and expenses associated with the moratorium and funding the Company's "trading and rescue efforts". The loan is repayable on the day after the date of termination or expiry of the moratorium. It is convenient to refer to this as the moratorium facility.
Under the debenture, the Company and Holdco granted a fixed and floating charge in favour of Mr Black over all of their assets and undertaking as security for the amounts owing to Mr Black under the facility agreement referred to immediately above. It is convenient to refer to this as the moratorium debenture.
The moratorium debenture does not secure amounts owing by the Company to Mr Black under the existing facility and existing debenture referred to at [96] above. The liabilities secured by the moratorium debenture are limited to the amounts due, owing or payable by the Company and Holdco to Mr Black pursuant to the moratorium facility, and expressly exclude amounts due, owing or payable under the existing facility and existing debenture.
However, clause 9.2 of the Facility Agreement provides that Mr Black reserves the right at any time, at his sole discretion (acting reasonably), to require the Company and/or Holdco to enter into or procure the entry into "such additional or replacement Security of whatever nature acceptable to [Mr Black] as [Mr Black] may specify". Clause 9.1 must be read in the context of clause 9.2, which refers to the security for "the Liabilities", which are defined in in clause 1.1 in the following terms which do not exclude the existing facility and existing debenture:
"the aggregate at any time of all monies and liabilities, actual or contingent, outstanding or otherwise due, owing or incurred from [the Company] to the Lender on any account or in any manner, including under the Finance Documents."
It is reasonably arguable that clause 9.2, properly construed, confers on Mr Black a right to require Holdco to provide security for the £6.99 million owing to him by the Company under the existing facility referred to at [96] above. There is no evidence that Mr Black had any such right prior to entering into the moratorium agreement. Such a right, if exercised, would confer on Mr Black the status of secured creditor in respect of assets of Holdco, facilitating the repayment of the Company's existing debts to Mr Black out of Holdco's shares in Hydrodec Inc, which in turn owns Hydrodec NA. This would leave other creditors of the Company (including SOR) to be paid out of any funds available to be remitted to the Company by Holdco via Hydrodec Inc (following any sale of that company's shares in Hydrodec NA) or via Hydrodec NA and Hydrodec Inc (following any sale of the assets of Hydrodec NA).
Clause 12.6 of the moratorium facility provides some insight into the potential value to Mr Black of the right to require Holdco to provide security for the amounts owing to him by the Company notwithstanding the security already provided by the Company under the existing denture. Clause 12.6 of the moratorium facility provides:
"… in the event that [Mr Black] initiates and progresses and application under Section 873 of the Companies Act 2006 to extend the time to register the Existing Debenture at Companies House (the 'Application'), [the Company] shall promptly provide such reasonable consent and cooperation as [Mr Black] may (acting reasonably) request in connection with the Application. Taking into account [the Company's] financial position and the competing claims against it, [Mr Black] acknowledges and agrees that [the Company] shall be neutral in relation to the Application, that the Borrower shall be under no obligation to positively support the Application, and that the matter will need to be determined by the Court."
Clause 12.8 of the moratorium facility requires the Company and Holdco to do all things reasonably required by Mr Black to create, perfect, protect or maintain any security conferred or intended to be conferred on Mr Black by the moratorium debenture or the existing debenture.
There is no evidence that the joint monitor approved the moratorium debenture as would have been required by s A26(1) of the UK Act if the debenture had been entered into after the moratorium commenced. I therefore infer that the moratorium facility and moratorium debenture were entered into shortly prior to the commencement of the moratorium at 11.07am on 21 May 2021.
In addition to providing the moratorium facility, Mr Black agreed to defer repayment of the £6.99 million owing to him by the Company under the existing facility for a period of 12 months.
In his affidavit affirmed on 26 May 2021, Mr Reynolds described the objective of the moratorium as being to "afford the Company the breathing space it needs to pursue the refinancing and/or orderly realisation of value in [Hydrodec NA]". It is plain from Mr Reynolds' report to the directors of the Company dated 9 May 2021, referred to in his affidavit, that the "refinancing" to which he is referring is a refinancing of the banking facilities of Hydrodec NA.
In his affidavit affirmed on 2 June 2021, Mr Reynolds deposed that the Company's board of directors were continuing discussions with a proposed new lender to Hydrodec NA with a view to raising USD $6.75 million to refinance existing debt of USD $4.3 million and "provide funds that can be remitted to Hydrodec Group Plc". I note that the amounts involved in this refinance package now under negotiation are the same as for the refinance package that the Company announced to the market as having been agreed on 31 March 2021.
Mr Reynolds deposed:
"I understand that the lender has been made aware of the current position in connection with Hydrodec Group Plc and the Moratorium, the claim of Southern Oil Refining and the use of the funds to be generated from the refinance, and has confirmed that this is not an obstacle to the refinance, and is continuing with its due diligence."
I place little weight on this evidence, as Mr Reynolds has not given evidence of the source or basis of his understanding. There is no evidence suggesting that Mr Reynolds himself is involved in the negotiations with the prospective lender. Assuming that the source or basis is information provided by an officer of the Company to Mr Reynolds, the evidence appears to be second-hand hearsay. No evidence has been adduced from any director of the Company concerning the status of the Company's dealings with the prospective lender. Mr Ellis gave no evidence about those dealings other than very general evidence that he is involved in the negotiations and evidence identifying the prospective lender.
In his affidavit affirmed on 14 June 2021, Mr Reynolds deposed that:
"As Monitor I am content that the refinance discussions are progressing, and that, subject to formalising finalising [sic] a funding agreement for a further period, the moratorium extension will occur."
The negotiations for a refinancing of Hydrodec NA or a sale of the shares in Hydrodec NA or the assets of the company had not produced any agreement at the time of the hearing of these proceedings on 21 and 22 June 2021.
In his affidavits affirmed on 26 May, 2 June and 14 June 2021, Mr Reynolds has given evidence that:
1. in his opinion, a better outcome will be achieved for creditors, including SOR, if the Company is afforded the time to achieve the proposed refinancing or an orderly realisation of the value of Hydodec NA, compared to if the Company and its assets are realised on a liquidation basis;
2. specifically, Mr Reynolds estimates that the return to the Company's creditors would be 76 per cent if the refinancing proceeds, or between 20 - 54 per cent if the refinancing is unsuccessful but a share or asset sale of Hydrodec NA is achieved;
3. it is his understanding that the Company has no assets in Australia that could be realised by any liquidator appointed by this Court;
4. in his opinion, the benefits to SOR of a winding up of the Company in Australia are negligible, whereas the detriment to all creditors of the Company losing the opportunity to undertake the proposed refinancing or an orderly sale of Hydrodec NA are significant;
5. recognition of the moratorium in Australia and achieving a stay of the winding up proceedings is a key part of the Company's strategy, developed with Mr Reynolds' assistance and, in his opinion, it is in the best interests of creditors to allow the moratorium to continue to see if the refinancing can be achieved without the perceived uncertainty of a liquidator being appointed in Australia;
6. if the refinancing fails then "the strategy will switch to securing a sale of [Hydrodec NA] and I understand that management are running parallel discussion with the current Interested Party."
Counsel for the plaintiffs in the recognition proceedings submitted that Mr Reynolds' evidence concerning the estimated returns referred to at [122(2)] above was based on the calculations set out in his report dated 9 May 2021 addressed to the Company's directors. However, counsel acknowledged that those calculations suggest an estimated 76 per cent return to SOR only, and not to all creditors of the Company, in a refinancing scenario. This would leave unpaid other creditors who are collectively owed approximately £1.4 million, in addition to Mr Black who is owed approximately £6.99 million as I have referred to above.
There is a dispute between the parties about whether Mr Reynolds' understanding that the Company has no assets in Australia is correct. Mr Ellis gave oral evidence that the Company has assets located in the United Kingdom, the United States and Australia. It is not clear whether Mr Ellis was referring to the subsidiary companies within the Hydrodec Group incorporated in those jurisdictions, of which the Company is the ultimate holding company, or to assets directly owned by the Company that are located in those jurisdictions, including Australia. The available evidence does not provide an appropriate basis for the Court to make a finding as to whether or not the Company owns assets in Australia.
In addition to the Judgment Debt owed to SOR in the amount of AUD $1,660,352, the solicitors who acted for the Company and Hydrodec Australia in the proceedings before Parker J are owed approximately AUD $330,000. Given that the solicitors acted for both of those companies in those proceedings, it is reasonable to infer that this is a debt owed jointly and severally by the Company and Hydrodec Australia.
The moratorium was for an initial period of 20 business days expiring on 21 June 2021, but was extended for a further period that now expires on 19 July 2021
Mr Black has agreed to extend the moratorium funding to the end of July 2021.
Mr Reynolds deposed that the moratorium may be the subject of further extensions. Any such extensions will require either the consent of 75 per cent of creditors (in value) in accordance with s A11 and s A12 of the UK Act or an order of the High Court of Justice. Any such extensions will be subject to the provisions of ss A38, A42 and A44 of the UK Act pursuant to which the moratorium may be terminated, as referred to at [45] above.