The first plaintiffs, Mr Hugh Armenis and Ms Katherine Barnet, are the joint and several liquidators of the second plaintiff Kimberley Diamonds Ltd (in liq) (the Company).
On 9 June 2017, the first plaintiffs were appointed as joint and several administrators of the Company pursuant to s 436A of the Corporations Act 2001 (Cth) (the Act). They were subsequently appointed as liquidators pursuant to a resolution of the Company's creditors passed on 6 December 2017.
The Company's principal activity was to act as the holding company of subsidiaries that conducted mining and exploration operations in Australia and internationally. The Company was the treasurer for this corporate group, externally sourcing the investment required to fund the operations of subsidiaries and lending the investment funds to those subsidiaries.
At the time of the first plaintiffs' appointment, the Company's wholly owned subsidiaries included Alto Minerals SL (a company incorporated in Spain) (Alto Spain).
The first plaintiffs' investigations in the period up to mid-2018 (in their capacity as administrators and subsequently as liquidators) revealed that Alto Spain held an investigative permit in relation to a gold, silver, copper and zinc project in Spain (the Spanish tenement).
In earlier proceedings in this Court, Black J made orders on 11 July 2018 granting approval nunc pro tunc under ss 477(2A) and 477(2B) of the Act for the first plaintiffs as liquidators to enter into the following agreements on behalf of the Company: [1]
1. Share Sale and Purchase Agreement dated 22 June 2018 between the Company (as vendor) and a third party purchaser (the Purchaser) in relation to the Company's shares in Alto Spain;
2. General Security Deed dated 22 June 2018 between the Purchaser (as the grantor) and the Company (as the secured party); and
3. Deed of Assignment dated 22 June 2018 between the Company (as assignor) and the Purchaser (as assignee).
It is convenient to refer to those earlier proceedings as the 2018 proceedings.
In their report to creditors dated 23 December 2020, the liquidators described the transaction that was the subject of the agreements approved in the 2018 proceedings as follows:
"After completing an extensive global marketing campaign, including the engagement of a non-exclusive selling agent, we entered into a sale agreement for the [Alto Spain] shares to a successful unrelated/third party bidder in August 2018.
The sale comprised of multiple tranches for the payment of the purchase price. These tranches are subject to certain terms and conditions being satisfied. These terms and conditions presently remain unsatisfied due to steps required to be determined/completed by the Spanish Government and Spanish mines department. As a result, the sale of these shares has not yet been completed."
The first plaintiffs commenced these proceedings by originating process filed in Court on 27 April 2021. The first plaintiffs seek:
1. an order pursuant to s 477(2A) and/or s 477(2B) of the Act that the first plaintiffs are authorised nunc pro tunc to enter into a Deed of Variation dated 5 September 2018, a copy of which is at tab 18 of confidential exhibit HA-2 to a confidential affidavit of Mr Armenis sworn on 26 April 2021;
2. an order pursuant to s 1322(4)(a) of the Act declaring that the first plaintiffs' failure to seek the Court's approval prior to entering into that Deed of Variation does not invalidate the Deed of Variation; and
3. an order pursuant to s 477(2A) and/or s 477(2B) of the Act that the first plaintiffs are authorised to enter into the proposed Deed of Acknowledgment and Release, a copy of which is at tab 19 of confidential exhibit HA-2 to a confidential affidavit of Mr Armenis sworn on 26 April 2021.
In support of these claims for relief, the first plaintiffs read an affidavit of Mr Armenis, and a further confidential affidavit of Mr Armenis, both of which were sworn on 26 April 2021.
The information set out above concerning the Company, the transactions concerning the Company's shares in Alto Spain and the 2018 proceedings is drawn from Mr Armenis's first affidavit sworn on 26 April 2021 and the documents exhibited to that affidavit, including reports issued by the first plaintiffs as administrators and as liquidators to creditors of the Company.
In his second (confidential) affidavit, Mr Armenis deposes that the Deed of Variation dated 5 September 2018, in respect of which the first plaintiffs seek approval under s 477(2A) and/or s 477(2B) of the Act, varied the terms of the Share Sale and Purchase Agreement dated 22 June 2018 that was the subject of the orders made on 11 July 2018 in the 2018 proceedings. The parties to the Deed of Variation are the Company (as vendor) and the Purchaser. Mr Armenis describes the circumstances in which he formed the view it was in the best interests of creditors of the Company for the Company to enter into the Deed of Variation.
The first plaintiffs entered into the Deed of Variation on behalf of the Company on 5 September 2018 without first seeking approval under s 477(2A) or s 477(2B). Mr Armenis has given evidence that it did not occur to him to seek approval at the time and he regards this as a regrettable oversight.
I have reviewed the Deed of Variation. I am satisfied that, at the time it was entered into, it was clear that obligations of both the Company and the Purchaser under the Deed of Variation were likely to be discharged more than 3 months after the Deed was entered into. That has proved to be the case. Accordingly, s 477(2B) of the Act required the liquidators to obtain the approval of creditors or the Court before entering into the Deed of Variation.
I gratefully adopt White J's summary of the principles that the Court applies when considering an application for approval under s 477(2B) of the Act in Re Lewis (as liquidators of Concrete Supply Pty Ltd (in liq)) (2020) 145 ACSR 459; [2020] FCA 841 at [16]:
"(a) the Court makes its assessment having regard to the purposes for which liquidators' powers exist, including the serving of the interests of those concerned in the winding up, the achievement of what is necessary for the proper realisation of the assets of the company, and assisting in its winding up: Re HIH Insurance Ltd [2004] NSWSC 5 at [15]; Stewart, Re Newtronics Pty Ltd [2007] FCA 1375 at [26(6)];
(b) a primary consideration is the impact of the agreement on the duration of the liquidation and whether that is, in all of the circumstances, reasonable in the interests of the liquidation: Re Opel Networks Pty Ltd [2013] NSWSC 1245 at [7]; Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [30];
(c) the Court's approval is not an endorsement of the proposed agreement but merely constitutes permission for liquidators to exercise their commercial judgment: Re Bell Group Ltd (in liq); Ex parte Woodings (as liquidator of Bell Group Ltd) (in liq) [2009] WASC 235 at [58];
(d) again, generally, the Court does not refuse an approval unless there can be seen to be some lack of good faith, some error in law or principle or some real and substantial grounds for doubting the prudence of the liquidator's conduct: Re Spedley Securities Ltd (in liq) (1992) 10 ACLC 1742 at 1745;
(e) a court may also refuse approval if the terms of the proposed agreement are unclear: Re United Medical Protection (No 4) [2002] NSWSC 516; (2002) 20 ACLC 1647 at [45];
(f) the role of the Court is to grant or deny approval to the liquidator's proposal. It is not to develop some alternative proposal which might seems preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1642 at 1649; and
(g) nevertheless, the Court does not simply "rubber stamp" whatever is put forward by a liquidator: Re Stewart; Newtronics, at [26(1)]."
Having regard to the matters referred to at [8] above, Mr Armenis' confidential affidavit and the documents exhibited to that affidavit, I consider that the liquidators' entry into the Deed of Variation was consistent with the purpose of their powers in the circumstances described by Mr Armenis as arising after the execution of the Share Sale and Purchase Agreement and affecting the realisation of the Company's shares in Alto Spain under that agreement. Any impact of the Deed of Variation on the duration of the liquidation was commensurate with those circumstances and their impact on the sale of the Alto Spain shares. The evidence does not disclose any lack of good faith or error in law or principle on the part of the liquidators in entering into the Deed of Variation. Nor does the evidence point to any substantial grounds for doubting the prudence of the liquidators' conduct in doing so.
It is not clear to me that the Deed of Variation also required approval pursuant to s 477(2A). That is because it is not clear on the face of the deed whether the variations that it effects to the Share Sale and Purchase Agreement compromised a debt that was owed to the Company at the time the deed was entered into. The variations concern obligations of the Purchaser under the Share Sale and Purchase Agreement to pay the purchase price for the Alto Spain shares in the tranches referred to at [8] above within a stipulated time period after the occurrence of specified events. Because those events involve dealings by a foreign government, foreign public authorities and various other foreign entities, the liquidators informed the Court that they are presently uncertain whether those events had occurred as at 5 September 2018. If the specified events had already occurred, then the effect of the Deed of Variation was to compromise a debt that was owed to the Company. If the specified events had not already occurred, then it is doubtful that the Deed of Variation compromised a debt in the strict sense in which that word has been construed in the context of s 477(2A): see Re One.Tel Ltd (2014) 99 ACSR 247; [2014] NSWSC 457 at [63] and the authorities there cited.
It is not necessary to form a concluded view about whether the Deed of Variation compromised a debt owed to the Company. In cases such as the present where it is uncertain whether a debt was (or will be) compromised by entry into the transaction (or proposed transaction), the Court should not dismiss the application for approval on the basis that s 477(2A) does not apply: Re HIH Insurance Ltd [2004] NSWSC 5 at [11]-[12].
The matters to be considered by the Court when determining whether to make an order under s 477(2A) of the Act are much the same as the matters considered on an application under s 477(2B). The main difference is that s 477(2B) "focusses particular attention on the need to ensure that contractual provisions as to timing do not cut across the general expectation that winding up will proceed in as expeditious a fashion as circumstances allow: see Re HIH Insurance Ltd, supra, at [15].
I am satisfied that approval should be granted in respect of the Deed of Variation under s 477(2A) of the Act for the same reasons I have already explained at [16] above. Even assuming that the events that triggered the Purchaser's obligation to make the payments required by the Share Sale and Purchase Agreement had occurred prior to 5 September 2018, there are no substantial grounds for doubting the prudence of the liquidators' commercial judgment to enter into the Deed of Variation in the circumstances described in Mr Armenis' confidential affidavit.
The Court has power to make orders under ss 477(2A) and 477(2B) retrospectively, in an appropriate case: Re Lewis, supra, at [22] and the authorities there cited; see also In the matter of Kimberley Diamonds Ltd (in liq), supra, at [7]-[8]. I am satisfied that it is appropriate to do so in relation to the Deed of Variation. There is no reason not to accept Mr Armenis' explanation that the failure to obtain prospective approval was an oversight on the liquidators' part in circumstances where they were focussing on dealing with events beyond their control and the impact of those events on the Share Sale and Purchase Agreement and the realisation of the Company's shares in Alto Spain.
The retrospective operation of the orders approving the Deed of Variation under ss 477(2A) and (2B) of the Act renders the additional order sought by the liquidators under s 1322(4)(a) of the Act unnecessary. I therefore decline to make the order sought under s 1322(4)(a), taking the same approach as Black J adopted in the 2018 proceedings: In the matter of Kimberley Diamonds Ltd (in liq), supra , at [9].
I have also reviewed the proposed Deed of Acknowledgement and Release in respect of which the liquidators seek approval pursuant to ss 477(2A) and 477(2B) of the Act. I have considered Mr Armenis' evidence concerning that proposed transaction.
The parties to the proposed Deed of Acknowledgement and Release are the Company and the Purchaser. It is not necessary to refer to its terms, save to observe that it will, on "closing":
1. bring to an end the relationship between the Company and the Purchaser under the Share Sale Agreement as varied by the Deed of Variation; and
2. result in the Company realising some value for its shares in Alto Spain.
The liquidators expect that the "closing" under the Deed of Acknowledgment and Release will occur within a matter of days or weeks. Approval is therefore not required under s 477(2B) of the Act.
As with the Deed of Variation, it is uncertain whether the proposed Deed of Acknowledgment and Release compromises a debt owed to the Company. Again, that is because the Purchaser's obligations under the Deed of Variation are conditional on the occurrence of specified events which involve the dealings of a foreign government, foreign public authorities and certain other foreign entities. Those events are beyond the control of the liquidators, and they do not presently know whether those events have occurred. If those events have occurred, then the Purchaser owes a debt to the Company under the Deed of Variation. The amount of that debt is dependent on the particular combination of events that have occurred. If the amount of the debt is at the higher end of the range of possibilities under the Deed of Variation, then the proposed Deed of Release and Acknowledgement will compromise a debt owed to the Company. For the reasons explained at [18] above, the liquidators' application for approval under s 477(2A) should not be dismissed on the grounds of uncertainty about whether a debt owed to the Company is to be compromised by the proposed entry into the Deed of Release and Acknowledgment.
On the basis of Mr Armenis' confidential affidavit and my review of the proposed Deed of Acknowledgement and Release in the context of the history of the Company's sale of its shares in Alto Spain referred to above, I am satisfied that that the liquidators' commercial judgment to enter into the Deed of Release and Acknowledgement has been made consistently with the purpose of the liquidators' powers. There is no evidence to suggest any lack of good faith or error of law or principle on the part of the liquidators in proposing to enter into the deed. There is no substantial reason to doubt the prudence of the proposed transaction. I have formed that view taking into account the uncertainty as to whether the events have occurred triggering the Purchaser's obligation to make payments under the Share Sale and Purchase Agreement (as varied) and, if those events have not yet occurred, the uncertainty surrounding when they might occur.
The Company's creditors have not been notified of the liquidators' application for the relief in the originating process. One reason for this is that the application has been made on an urgent basis because the liquidators have a very short window of opportunity to enter into the Deed of Acknowledgement and Release. I note Mr Armenis' evidence that, since issuing their report to creditors on 23 December 2020 containing the information referred to at [8] above, the liquidators have not received any inquiries from creditors concerning the sale of the Company's shares in Alto Spain. I infer from this that the creditors have been content with the liquidators' approach to realising those assets thus far. In those circumstances, and given that I found no reason to doubt the liquidators' good faith and commercial judgment in entering into the Deed of Variation and proposing to enter into the Deed of Acknowledgement and Release, the lack of notice of the application to creditors is no reason to refuse the relief sought.
[2]
Orders
For the reasons above, I make the following orders:
1. Order pursuant to s 477(2A) and s 477(2B) of the Corporations Act 2001 (Cth) that the first plaintiffs are authorised nunc pro tunc to enter into the Deed of Variation dated 5 September 2018, a copy of which is at tab 18 of Exhibit HA-2 to the confidential affidavit of Hugh Armenis sworn on 26 April 2021 of 49 paragraphs.
2. Order pursuant to s 477(2A) of the Corporations Act 2001 (Cth) that the first plaintiffs are authorised to enter into the proposed Deed of Acknowledgement and Release, a copy of which is at tab 19 of Exhibit HA-2 to the confidential affidavit of Hugh Armenis sworn on 26 April 2021 of 49 paragraphs.
3. Order that the first plaintiffs' costs and expenses of the application for the relief set out in the originating process filed on 27 April 2021 be costs and expenses in the liquidation of the second plaintiff to be paid out of the second plaintiff's assets.
4. Order that these orders be entered forthwith.
[3]
Endnote
In the matter of Kimberley Diamonds Limited (in liq) [2018] NSWSC 1106.
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Decision last updated: 05 May 2021