By Interlocutory Process dated 2 December 2015 Mr Rahul Goyal and others as joint and several administrators of Renex Holdings (Dandenong) 1 Pty Ltd (Admins Apptd) and several other companies apply, under s 447A of the Corporations Act 2001 (Cth) for an order that Pt 5.3A of the Act is to operate, in respect of those companies, such that, if an indemnity available to the administrators under s 443D of the Act is insufficient to meet an amount for which they may be liable out of two borrowings, then they will not personally be liable to repay such amount to the extent of that insufficiency. To put that proposition in plainer terms, the administrators in effect seek an order under s 447A to limit the personal liability which the Act would otherwise impose upon them, in such a borrowing, in respect of the two advances. Those two advances are first, an advance that has already been made, albeit on contractual terms which seek to limit the administrators' liability so far as lawfully possible, by a secured creditor of the companies, AREO Sarl ("AREO") to those companies and, second, a further proposed advance of money by AREO to the companies. It will be necessary to deal with those advances separately below, after I set out something more of the relevant facts.
The application is supported, first, by an affidavit of Mr Goyal dated 29 October 2015, which had previously been read by the administrators in support of a successful application to extend the convening period. Mr Goyal notes that the administrators were appointed on 9 October 2015. He refers to the structure and operations of the Renex companies, which together operate an integrated waste treatment and resource recovery facility, treating contaminated soil and industrial waste at a facility in Dandenong, Victoria. Mr Goyal in turn refers to the activities performed by several companies in the group in respect of that facility. Mr Goyal's evidence is that the total liabilities of the companies, at the date of the administrators' appointment, were very substantial, being in the order of nearly $90 million, which comprised almost entirely amounts owed to secured lenders, with a relatively small amount being owed to trade creditors, and a potential claim by the Environmental Protection Authority so far as the companies may ultimately be placed in liquidation and fail to undertake certain clean-up activities, and a further claim by the Australian Taxation Office which is presently disputed. Importantly, Mr Goyal noted that the companies employed twenty-one persons on a full-time basis and one employee on a part-time basis. That matter is of some importance because, as will emerge below, there are a relatively small number of persons who will stand to benefit from this application, but the largest class of those persons, and on one view those who will benefit most, are the companies' employees who stand to have their employment continued if the application is successful.
Mr Goyal notes that the companies' secured lenders comprise, first, AREO, which is described as a "super-senior lender", and which has consented to this application so far as the first advance is concerned, and not yet expressed a view as to the second advance, and a series of junior ranking note holders. One of those note holders, OP Trust Private Equity 1 Inc, was granted leave to be heard on this application under r 2.13 of the Supreme Court (Corporations) Rules but, in the event, Counsel appearing for it did not have instructions in respect of the application, and has made no submissions on its behalf.
There was evidence before me, at the time that orders were made to extend the convening period, in Mr Goyal's first affidavit, of AREO's agreement to provide the administrators with $1.5 million to continue operating the business, and Mr Goyal had then indicated that that funding would last approximately one month, with a view to allowing the administrators to either explore a recapitalisation or sale of the business. Mr Goyal had there noted, as has come to pass, that the administrators would then approach AREO for further funding, if either option was viable. In the event, it appears that the proposed recapitalisation which was one of the options then under consideration has not proved viable, but a sale process which was the other option under consideration is continuing, and is addressed in Mr Goyal's further evidence.
By his second affidavit read in support of the application, dated 2 December 2015, Mr Goyal updates the information in respect of the creditors of the companies, although the substance of that information is consistent with that led in his earlier evidence. He refers to an amendment made to the facility with AREO on 28 October 2015, which documented the administration funding advance in the amount of $1.5 million which is the first advance the subject of this application. He indicates that the administrators now intend to approach AREO for its agreement for additional borrowings, by further amendment to the facility agreement with AREO, but, as I will indicate below, the administrators seek to do so, on the basis that they would not be personally liable for that borrowing. Mr Goyal indicates that the purpose of the further advance would be for the funding of the operation of the companies in administration, as going concerns, pending the conclusion of the sale process. Mr Goyal sets out reasons, which seem to me to be logical, why it is unlikely that such funding would be available from anyone other than AREO, given the present state of the security interests in respect of the companies.
Mr Goyal there indicated that it appeared there was an advantage in the companies continuing to trade as a going concern, up to the conclusion of the sale process, so far as it would maximise the potential proceeds of a sale process and, conversely, avoid the potential discount to the amount received by the companies on a sale of the business, or a sale of their assets after the business had been closed, in a liquidation. It should be noted that, as Mr Goyal's further evidence makes clear, that proposition is correct, in one sense, although its commercial implications in this case are somewhat out of the ordinary. It seems to be correct that, as Mr Goyal notes, that the sale proceeds available to the companies would be maximised by sale of the business as a going concern, and there appears to be a significant risk that those sale proceeds would be substantially reduced, and claims upon the companies increased, including by the Environmental Protection Authority's claim, in a liquidation. However, a significant practical qualification to that proposition arises because, as Mr Goyal's evidence indicates, it is likely that the proceeds of a sale of the business, even on a going concern basis, would not be sufficient to discharge claims other than by secured creditors. I put that proposition in a broad way, without going into detail, against the contingency that the question of which secured creditors would be discharged by any sale proceeds would be commercially sensitive, so far as it may give indications as to the likely sale proceeds that might be obtained.
In those circumstances, while it is true that the companies may receive higher sale proceeds of the sale of the business in an administration than a liquidation, the only parties to benefit, in a practical sense, are those secured creditors who would share in the proceeds, and the employees to the extent that they retain the opportunity to continue in employment while the administrators are running the business, and so far as they have the further opportunity to retain employment with any purchaser of the business. That is, of course, a significant matter for the employees individually, and collectively, and for the community so far as it is in the interests of the community to maximise the prospect that its members may retain employment.
Mr Goyal's second affidavit indicates that this application has been notified to the Australian Securities and Investments Commission, which has not sought to intervene, and to the security trustee for the second ranking note holders. One of those note holders, OP Trust, has appeared as I noted above, although it has not sought to make submissions on the application.
Mr Goyal also notes that there was reference to the possibility of further funding at the first creditors meeting of the companies held on 21 October 2015, although it appears that creditors other than the secured creditors do not have specific notice of this application. That is not a matter which gives rise to concern, in my view. First, it appears that the persons who stand to be affected by this application are only the secured creditors, since other creditors have little prospect of recovery in any event. Second, the orders sought, in an appropriate form, contemplate notification of the orders made to other creditors and an opportunity for other creditors to apply to vary them or set them aside if so advised.
Finally, the administrators rely on Mr Goyal's further affidavit dated 4 December 2015, which indicates the likely position as to the outcome of a sales process, so far as distributions to creditors are concerned. I have had regard to that evidence, but do not refer to it further by reason of the potential commercial sensitivity to which I referred above. Mr Goyal also indicates that, if the Court is prepared to make the orders which are sought, the administrators would seek to have one of the Renex companies borrow the further amount from AREO. Mr Goyal indicates that the administrators have not yet decided whether they would cause that borrowing to take place if the Court declined to make those orders and, in effect, the administrators were required to accept personal liability for that borrowing, although he indicates a tentative view that the administrators would not then cause that borrowing to take place. He notes that, absent that borrowing, the administrators would have not would not have sufficient cash to cause the companies to continue to trade the business, that employment of employees would be terminated with immediate effect, the administrators would promptly call a second meeting of creditors and would recommend a liquidation, and that the liquidators would then sell the assets of the Renex companies, for an amount which he anticipates would be substantially less than the offers made during the current sale process.
Mr Bova, who appears for the administrators in this application, draws attention to the authorities as to the circumstances in which orders of this kind may be made under s 447A of the Corporations Act. In particular, he refers to the observations of Gilmore J in Mentha Re Griffin Coal Mining Co Pty Ltd (admin apptd) [2010] FCA 1469; (2010) 82 ACSR 142 at [29]-[30], where his Honour noted that relevant factors included whether the proposed arrangements were in the best interests of the company's creditors and consistent with the operation and objects of Pt 5.3A of the Act; whether the proposed arrangements will enable the company to continue to trade for the benefit of creditors; whether creditors are not prejudiced or disadvantaged and stand to benefit; and whether notice has been given to those who may be affected. That summary has been adopted in subsequent authorities, including by Gordon J in Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (admin app) [2011] FCA 1493 and in my decisions in Re System Advisors Group Pty Ltd [2013] NSWSC 826 and Re Nexus Energy Ltd [2014] NSWSC 1041.
Mr Bova submits, first, that the proposed arrangements are in the best interests of creditors and will enable the companies to continue to trade for the benefit of creditors and are consistent with the operation and objects of Pt 5.3A of the Act. It is plain enough that the proposed arrangements will allow the companies to continue to trade, at least for a short period, and will also allow sale arrangements to go forward, in circumstances that that is unlikely otherwise to be possible. It also it seems to me that the proposed arrangements are in the best interests of the company's creditors, albeit in a somewhat special sense. That proposition arises in this fashion. Those arrangements are in the best interests of those secured creditors who would stand to benefit from a distribution on a sale of the companies' business. They are in the best interests of employees, and to that extent consistent with Pt 5.3A of the Act, so far as they stand to preserve the employment of such employees, at least in the short term, and maximize the prospect of their continued employment by a purchaser of the business in the longer term. They are not disadvantageous to other creditors, to the extent that they would not receive such a distribution, because they fell below the level of priority that would give rise to such a distribution, or where they would not receive a distribution in a liquidation from diminished sale proceeds. In that sense, while the class of persons who may benefit from the arrangement is limited, there are no others who would be disadvantaged, because others who would already not receive a distribution, on any scenario, will not be disadvantaged by the orders sought. Notice has been given to those who will be immediately affected, namely the secured creditors. As I noted above, notice has not been given to unsecured creditors or to employees, but the latter are not affected for the reason noted above, and liberty to them to apply is reserved in any event, and employees are, for the reasons I have noted, likely to be advantaged by the application.
The present case seems to me to be one that, as Mr Bova notes, is in some respects analogous to that in Re Nexus Energy Ltd above, although the benefits of an order in that case were somewhat more straightforward, where the range of persons who would benefit from it was wider. However, in this case, as in that case, the commercial situation seems to be one where the administrators' reluctance to incur personal liability in respect of a borrowing is plainly justified. The administrators identify a risk, which is plainly real, that they would be unable to satisfy such a borrowing by reason by any right of indemnity, if either the sale process fails or the companies are placed in liquidation, for whatever reason. In those circumstances, as I noted in Nexus Energy, it is not to be expected that the administrators, in order to promote the interests of the companies or their creditors, should be expected to expose themselves to substantial personal liabilities, and the relevant commercial arrangements are only likely to go forward if an order of this kind is made. Once the Court is satisfied, as I am, that there is some benefit at least to some classes of persons from the arrangements, and no significant disadvantage to other classes of person, then the order should be made to allow those advantages to be obtained.
I should note, for completeness, that I indicated above that there were two classes of borrowing. The first was a borrowing which had already occurred, and as to which the variation operates, in a sense, retrospectively. However, as I noted above, that borrowing occurred on terms which contemplated that, so far as lawfully possible, the administrators would not incur personal liability for it and, in those circumstances, what is sought to be done by the order, in respect of that previous borrowing, is to give effect under Pt 5.3A of the Act to the terms on which that borrowing took place as a matter of contract. I see no particular difficulty with that course, so far as the Court would have been prepared, on the findings that I have reached, to give effect to such an order before it were made. Plainly, in seeking such an order after the event, the administrators have been exposed to a degree of commercial risk in the interim, but the fact that that order is sought after the event is no reason not to make it if it is otherwise a proper order to be made. So far as the order for a future borrowing is concerned, the findings which I have reached above indicate that that order should be made.
Finally, I note that the administrators seek an order, in a common form, that their costs of the interlocutory process be paid pro rata as a cost of the administration of each of the companies. An order of that kind is properly made in this case where the application is brought in order to advance the interests of the administration, and where its benefit would be applied to each of the companies in the group.
Accordingly, I make orders in accordance with the short minutes of order initialled by me and placed in the file with several amendments.
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Decision last updated: 02 February 2016