In the matter of Mediacloud Pty Ltd [2021] NSWSC 357

Background

1. Mediacloud is a company which delivers a cloud-based broadcast platform for preparation and delivery of media content, referred to as the Mediacloud Playout System (Mr Kogan's affidavit sworn 1 April 2021 at [10]). Mr Kogan deposes that the technology developed by Mediacloud provides broadcasters with an unique way of managing media assets, playout and distribution which increases a broadcaster's content flexibility and provides a cloud-based broadcast playout system that enables its customers to distribute their media content to any broadcast network over the internet (at [10]).
2. The Mediacloud Playout System was initially developed by Mediacloud's parent entity, Deluxe Broadcast Services Ltd (DBS), and that company, which is a private company registered in England, retains the intellectual property in the Mediacloud Playout System (at [11]).
3. Mr Kogan deposes (at [15]) that Mediacloud derives its revenue from three key customers: Special Broadcasting Service (SBS) which accounts for more than 90% of Mediacloud's revenue; TVSN Channel Pty Ltd, a cable television and satellite television shopping network channel which is owned by Direct Group Pty Ltd and is broadcast in Australia on free-to-air television and through Foxtel; and Indigenous Community Television Ltd, a digital television channel broadcast on satellite television and also streamed online.
4. Mr Kogan deposes (at [18]), (and emphasis is placed on this in the submissions on the present application), that SBS was and continues to be heavily reliant on the Mediacloud Playout System for the day-to-day continuity of its own media services in order to broadcast its programming on television.

Voluntary administration

1. On 9 November 2020, Jonathan Philip Henry and Barry Frederic Kogan were appointed as joint and several administrators of Mediacloud pursuant to s 436A of the Corporations Act (at [20]).
2. The first meeting of the creditors of Mediacloud (pursuant to s 436E of the Corporations Act) was held on 19 November 2020 (at [22]).
3. On 2 December 2020, the administrators and Mediacloud applied for an extension of the period in which the second meeting of creditors of Mediacloud was required to be convened. That application came before the Corporations List Judge on 3 December 2020, and on that day Black J made orders including an order pursuant to s 439A (6) of the Corporations Act that the convening period defined in s 439A (5)(b) of the Corporations Act in respect of Mediacloud be extended up to and including 8 March 2021.
4. Following that order, a funding agreement was entered into on 14 December 2020 between SBS, Mediacloud and the administrators, pursuant to which a facility was made available to the administrators by the funder for the approved purpose, that being defined in the definition section of the funding agreement as meaning (Mr Kogan's affidavit sworn 14 December 2020, Annexure A): (a) payment of such expenses of the Borrower as necessary to allow the Borrower to continue to trade on a "business as normal" basis during the administration. (b) payment of the Administrators properly incurred and approved remuneration (in accordance with clause 3.3.3(c), costs and expenses (including reasonable legal fees)). (c) payment of any expenses of the Borrower in connection with or for the purpose of continuing to trade Deluxe Broadcast Services Limited and Vericom AB, so far as they are necessary to ensure "business as normal" for the Borrower, or to progress a transaction with respect to the Borrower.
5. The facility limit was $850,000. Drawdown was conditional on the conditions precedent being satisfied, and Mr Kogan's evidence is that those conditions precedent have been satisfied. As I understand it, the administrators have not yet needed to drawdown on the financing facility, but it is expected that they may need to do so if the company is to continue trading.

Proposed DOCA - Telstra

1. On 24 December 2020, Telstra Corporation Ltd (Telstra), which had for some time had an interest in acquiring the assets and business of the company, proposed a DOCA (Mr Kogan's affidavit sworn 1 April 2021 at [45]-[47]).
2. The proposed DOCA was structured as a purchase of the Mediacloud business through the acquisition of all of the shares in Mediacloud and the purchase of certain assets of its parent company, DBS, (Mr Kogan's affidavit sworn 1 April 2021 at [45]-[46]).
3. On 8 March 2021, the administrators finalised and issued a report to creditors pursuant to s 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (Ex A at 35) (March 2021 Report). The March 2021 Report noted that Mediacloud was under voluntary administration and that the administrators were currently trading the Mediacloud business on a "business as usual" basis (Ex A at 41). The Report also noted that the administrators had performed preliminary investigations into the activities of Mediacloud in the months leading up to the appointment, and that nothing had come to the administrators' attention to suggest that any claims existed that would provide a return to creditors if the company went into liquidation (Ex A at 43).
4. The DOCA proposed by Telstra is summarised in the March 2021 Report (see Ex A at 45, 79). Relevantly, the proposed DOCA is a proposal for Telstra to acquire the shares in Mediacloud from its parent company, DBS, which is domiciled in the UK, and that Telstra will take on most of the company's liabilities, including employees' entitlements in full and also non-related party debt. The only excluded liability is that of related party creditors which will be extinguished. Other liabilities are proposed to be paid out in full from a fund contributed to by Telstra.
5. The March 2021 Report recommended that the creditors vote for the proposed DOCA at the second meeting of creditors on the basis that it was expected to provide a superior, more certain and timely outcome to creditors, and maximise the prospects of continued employment for the employees of Mediacloud (Ex A at 45).
6. I was also taken to the section of the March 2021 Report which summarises Mediacloud's liabilities (Ex A at 54). I note that there is only one security interest identified by a search of the Personal Property Securities Register (PPSR) as at the appointment date, that being a photocopier supplier (and repayments have been made to that creditor). As to the liabilities in relation to employees, there being some 70 or so staff, the total value of estimated employee entitlements amounts to around $4.166 million, of which roughly $2 million is a contingent liability that would be payable on redundancy of the employees (Ex A at 55). The amount owed to unsecured creditors as at the date of appointment amounts to around $1.223 million, of which related party creditors are owed some $545,000.
7. Also in evidence is a copy of the term sheet put forward by Telstra in relation to the proposal for a DOCA which sets out the purpose of the DOCA as summarised in the March 2021 Report (see Ex A at 95).

Second meeting of creditors and resolution re proposed DOCA

1. The second meeting of creditors was held on 15 March 2021. At that meeting a resolution was put to the creditors in relation to entry into of the proposed DOCA, and that resolution was unanimously passed (Mr Kogan's affidavit sworn 1 April 2021 at [51]).
2. Mr Kogan has deposed that since the second meeting of creditors, the administrators, Telstra, DBS and their solicitors have been working to prepare and finalise a DOCA and associated documents in final form to give effect to the initial proposed DOCA (Mr Kogan's affidavit sworn 1 April 2021 at [53]-[54]). Execution of the instruments in question was scheduled to occur on 25 March 2021 (at [55]).

Issue arising on due diligence

1. However, in the course of final due diligence conducted by Telstra, an issue arose following the discovery that Mediacloud was part of a consolidated tax group (at [56]). Mr Kogan was deposed that Telstra required substantial further time beyond the 15 business day period following the second meeting to assess the import of the tax consolidated status of the group and to seek whatever internal approvals it required. However, he has also deposed that Telstra had not disavowed all future interest in acquiring the assets and the business of the company (at [56]-[59]). Mr Kogan has deposed (at [60]) that, based on his recent interactions with Telstra, as well as his interactions with Telstra throughout the course of the administration, he is of the view that: (i) Telstra has performed significant due diligence over the last twelve months in order to progress an acquisition of the Mediacloud business; (ii) nothing had come to his attention prior to the emergence of Mediacloud's participation in the consolidated tax group to suggest that completion would not be able to occur as planned; and (ii) all relevant parties were, but for the information about the consolidated tax group, working towards execution of the proposed DOCA and in a position to execute the relevant instruments by the execution date.
2. Further, Mr Kogan has deposed that, in his view, Telstra remains interested in pursuing an acquisition of the Mediacloud business and is working through due diligence and internal approvals to determine its position moving forward, including the structure of any acquisition.
3. On the present application, emphasis is placed on two matters in this regard. First, that Telstra has had a longstanding interest in the business and the acquisition of the business (see the March 2021 Report at [8.1.1] - Ex A at 77). Second, that SBS, which is a key provider of support to the administrators, has supported and endorsed the process by which Telstra would acquire the assets and business of the company (Mr Kogan's affidavit sworn 1 April 2021 at [61]-[62]).
4. In Mr Kogan's affidavit sworn 1 April 2021, he refers to and exhibits a letter received dated 1 April 2021 from SBS in which the chief financial officer of SBS, Nitsa Niarchos, confirmed that SBS is committed to supporting the administrators and Mediacloud during the voluntary administration period, and in particular the administrators' continued attempts to restructure or sell the businesses of Mediacloud to Telstra, including through a DOCA (Ex A at 131-132).
5. The letter states that it remains SBS's preferred position that the businesses and/or assets of Mediacloud be sold to, and ultimately owned by, Telstra. It further notes that, in the event that Telstra is not in a position to submit a further proposal, then (to the extent possible) SBS will assist the administrators to find an alternative option to ensure business continuity for Mediacloud, which may include SBS considering its own proposal for the acquisition of Mediacloud.

Benefits of the administration continuing

1. Mr Kogan has deposed (in his affidavit from [65] onwards) as to the effect of the administration continuing. In particular, he has deposed to his belief that a sale or restructure will result in a better outcome for Mediacloud stockholders (at [66]).
2. Mr Kogan has deposed that, in a liquidation scenario, the prospects of selling the business as a going concern would be more difficult as purchasers will be unable to acquire the business and assets through a DOCA (see at [67]); and that, should a going concern sale not be achievable, the operations of the business of Mediacloud will cease and the liquidator will be tasked with realising the assets of Mediacloud (at [68]).
3. At [69], Mr Kogan has deposed, that based on their analysis of the estimated outcomes under the DOCA and in a liquidation, the administrators consider that, in the event that Mediacloud is placed into liquidation and the business is discontinued, there will be a likely return to former employees of between 0 to 5.1 cents in the dollar in all scenarios, and no likely return to external unsecured creditors in any scenario.
4. Mr Kogan has deposed (at [70]) that, if Mediacloud is wound up, then: (i) the value of the business of Mediacloud as a going concern will not be preserved; (ii) the continued employment of Mediacloud's employees may come to an end; (iii) even if Mediacloud's employees remain employed, their existing accrued entitlements would be crystallised in a winding up which may prejudice other creditors such as the Commonwealth Attorney General's Department who administers the Fair Entitlements Guarantee Scheme; (iv) the possible avenues for the sale or restructure of the business of Mediacloud would be limited; and (v) the quantum of unsecured creditor claims will be higher than compared to a DOCA.
5. This is because, under the DOCA, various credit claims (such as those of continuing employees) will effectively be assumed by or transferred to Telstra; whereas (in the event that Mediacloud is placed into liquidation) such claims (including redundancy entitlements of approximately $2.4 million) will be provable in the winding up of Mediacloud.

Legislative background

1. By way of legislative background, s 439C of the Corporations Act provides that, at the second meeting of creditors convened under s 439A, the creditors may resolve one of three things, including (a) that the company execute a DOCA, and (c) that the company be wound up. As already noted, there was a unanimous resolution for the execution of a DOCA in the present case.
2. The difficulty that arises here is that, pursuant to s 444B (2), where a resolution is passed to execute a DOCA at such a meeting, then the company must do so within 15 business days after the end of the meeting of creditors or such further period as the Court allows on an application made within those 15 business days.
3. Fifteen business days from the date of the second creditors' meeting in the present case will expire tomorrow. The applicants do not, however, seek an extension of time under s 444B (2). This is because it is anticipated that there may be an alteration or revision of the DOCA (following the discovery of the tax consolidated status of the company and whatever enquiries may be made by Telstra in that regard) and there are authorities that stand for the proposition that the execution of a revised DOCA would not be one that was executed pursuant to a meeting under s 439A (see Re Eastmark Holdings Pty Ltd (2015) 109 ASCR 116; [2015] NSWSC 1437 per Brereton J, as his Honour then was).
4. It is anticipated that either Telstra will want to enter into some alternative arrangement or there will be some form of different arrangement that may be put for approval by the creditors.
5. The effect of the company not complying with s 444D(1) and (2) is that, pursuant to s 446A(2), the company would, in those circumstances, be taken to have passed a special resolution under s 491 that the company be wound up voluntarily (a deemed winding up) and to have done so without a declaration made and lodged under s 494.
6. Accordingly, if orders are not made of the kind sought today, and the DOCA is not executed by close of business tomorrow, then there will be a deemed winding up and, consistent with this, the administration would then come to an end (see, for example, s 435C(3)).

Submissions

1. The following submissions are made by the applicant as to why an extension of the administration should be granted so as to avoid a deemed winding up; and as to why such an extension is in the best interests of creditors (see, for example, Mr Kogan's affidavit sworn 1 April 2021 at [71]-[72]; the applicants' written submissions on the present application at [56]-[63]).
2. In their written submissions, the applicants submit that the administration should be extended for the following reasons: (i) the extension of the administration period provides the best prospect of selling or restructuring the business of Mediacloud as a going concern; (ii) ongoing trading is important to ensure the ongoing employment of Mediacloud's employees; (iii) without the extension, the prospect of an alternative DOCA being advanced as a mechanism to restructure the business may not be available; (iv) a winding up increases the risk of crystallising additional liabilities of Mediacloud; (v) it is highly unlikely that any prejudice will be caused to stakeholders by reason of a continuation of the administration and the avoidance of a winding up due to the funding provided by SBS; (vi) orders extending the administration will ensure, it is submitted, that the creditors of Mediacloud remain the parties deciding its future; and (vii) there is substantial benefit to the broader community in avoiding a winding up insofar as the business' continued operation is important to ensuring that SBS can broadcast its programmes.
3. The applicants submit that there is no apparent prejudice to creditors or shareholders if the orders sought were to be made. In particular, it is noted that there is no evidence that any third party rights have intervened between the second meeting of creditors and the present application; and it is emphasised that the proposed short minutes of order also make provision for creditors to have liberty to apply (if there were to be any unforeseen prejudice perceived to be occasioned as a result of the orders).
4. Reference is made by the applicants to a decision of Barrett J, sitting at first instance, in Re Kruger Engineering Pty Ltd (2006) 60 ASCR 191; [2006] NSWSC 1063 (Re Kruger). Reliance is placed on this decision effectively as supporting the proposed course of action in circumstances where, in that case, his Honour made remedial orders under s 447A sanctioning a process essentially identical to that which is proposed in the present case, albeit where in that case the application was made after a further creditor's meeting was held and the creditors had resolved that the company enter into a new DOCA which differed from that which had been the subject of a resolution passed under s 439C(a).
5. It is submitted that the current regime seeks substantially similar orders as those that were made in Re Kruger, except on a prospective basis, and therefore Re Kruger is relied upon to support the proposition that the Court has power to make those orders.
6. Reference is also made to the decision of Farrell J in Dickerson, in the matter of McWilliam's Wines Group Ltd (subject to Deed of Company Arrangement) (No 4) [2021] FCA 139 at [33]-[36] where her Honour was satisfied that the making of similar orders was appropriate in circumstances where there had been a failure to complete the current DOCA in accordance with its terms and it was in the best interests of the company's creditors to further adjourn the creditors' meetings so as to maintain flexibility and potentially avoid an untimely liquidation of the company.
7. As to the relief that is sought, the applicants submit that there is power pursuant to s 447A of the Corporations Act and s 90-15 of the Insolvency Practice Schedule to avoid a deemed winding up of the company extending the administration period upon the non-execution of the initial proposed DOCA, and to abridge the time for convening a further meeting of creditors.
8. In relation to s 90-15(1) of the Insolvency Practice Schedule it is noted that the power conferred thereby has been described as very broad and that it has been used in various cases to modify the operation of the Insolvency Practice Rules with respect to the convening and conduct of creditors' meetings.
9. Thus, it is submitted that it provides an available source of power to abridge the time required for the giving of notice to convene a meeting of creditors of the company, and that in the present case the proposed abridgement of time for that purpose does not prejudice the creditors who already have notice of the proposed orders that are sought and are familiar with those matters. Further, it is noted that if a s 439A meeting were to be convened, the creditors would only have five business days' notice in any event, so the proposed abridgment of time harmonises with that.
10. Two further matters were raised in oral submissions in the present application. The first, in relation to prayers 1 and 2 of the relief sought, was to note that, if the due diligence issue had arisen before the second meeting of creditors, then the administrators would have had the power, and would in all likelihood have exercised the power, to adjourn the second creditors' meeting for a maximum of 45 business days in order to permit Telstra to continue the investigations that it is seeking to make in order to determine the import of the consolidated tax status of the group. In the present case, it is said that what is being sought is a substantially similar result to that which the administrators would have been able to rely upon at that time.
11. The second matter that was raised by the applicant is that any continuation of the administration leading to Telstra or another entity purchasing or seeking to purchase the assets or business of the company will necessarily involve a further meeting of creditors, such that creditors will ultimately decide on either a further DOCA or to place the company in liquidation. Therefore, it is submitted that the proposed orders do not derogate from the rights which would be available to creditors under Pt 5.3A of the Corporations Act. It is submitted that the only option not then being available to creditors on this scenario will be to return the company to the directors (which is not appropriate because the company is insolvent).

Determination

1. For the reasons that have been put forward in the submissions by the applicants, I am of the view that orders in the form of the Short Minutes of Order are appropriate and that it is in the best interests of creditors for there to be a continuation of the conduct of the administration in order to permit all possible steps to be taken to see whether a sale of the assets and business of the company can proceed.
2. In those circumstances, I will make orders in accordance with the Short Minutes of Order which have been handed up and which I will initial and date and they include an order that these orders be entered forthwith.
3. I make those orders.

Schedule SHORT MINUTES OF ORDERS 1. Pursuant to section 447A(1) of the Corporations Act 2001 (Cth) (Corporations Act), in the event that Mediacloud Pty Ltd (Administrators Appointed) (Company) does not execute the instrument setting out the terms of the deed of company arrangement specified in the resolution passed at the second meeting of creditors of the Company on 15 March 2021 (Second Meeting) within 15 business days after the end of the Second Meeting in accordance with section 444B(2)(a) of the Corporations Act, Part 5.3A of the Corporations Act is to operate in relation to the Company as if (notwithstanding section 446A of the Corporations Act) the Company is not taken to have passed a special resolution under section 491 of the Corporations Act that the Company be wound up voluntarily but is to remain under administration until the earlier of: 1. 11 June 2021 (in which case, in the absence of any resolution by creditors of the Company and execution of a deed of company arrangement in accordance with sub-paragraph (b) below, the Company is then taken to have passed a special resolution under section 491 of the Corporations Act that it be wound up voluntarily); or 2. 15 business days after the date on which the creditors of the Company resolve at a meeting of creditors (Further Meeting) that the Company enter into a deed of company arrangement (in which case, if the Company executes the instrument setting out the terms of the deed of company arrangement specified in a resolution passed at the meeting of creditors, the instrument becomes a deed of company arrangement entered into for the purposes of Division 10 of Part 5.3A of the Corporations Act). 1. Pursuant to section 447A(1) of the Corporations Act, Part 5.3A of the Corporations Act is to operate in relation to the Company such that the Further Meeting (as contemplated by order 1(b) above) is a meeting of creditors convened under section 439A of the Corporations Act but that, at the Further Meeting, for the purposes of any resolution pursuant to section 439C of the Corporations Act, the creditors of the Company may resolve only: 1. that the Company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompany any notice of meeting); or 2. that the Company be wound up. 1. Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Corporations Act, section 75-20 of the Insolvency Practice Rules (Corporations) 2016 (Cth) is to operate as if the Further Meeting (as contemplated by order 1(b) above) may be convened by the Administrators giving notice of the meeting to eligible creditors of the Company (including the persons or entities claiming to be creditors of the Company) no less than five (5) business days before the date of the meeting. 2. The Administrators take all reasonable steps to cause notice of these orders to be given, within two (2) business days of the making of these orders, to: 1. the creditors of the Company (including persons or entities claiming to be creditors), in the manner set out in subparagraph 4(a) of the orders made on 3 December 2020; and 2. the Australian Securities and Investments Commission. 1. Any person who can demonstrate a sufficient interest has liberty to apply to vary or discharge the orders made in paragraphs 1 to 3 above, on two (2) business days' written notice being given to the Applicants and to the Associate to Ward CJ in Eq. 2. The costs of and incidental to this application be costs and expenses in the administration, and be paid out of the assets, of the Company. 3. These orders be entered forthwith. 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: 09 April 2021