Longley v ACN 090 609 868 Pty Ltd

REASONS FOR JUDGMENT 1 This is an application by the liquidators of three Solar group companies, which were formerly known as Solar Systems Pty Ltd (Solar Systems), Solar Power Stations Australia Pty Ltd (SPSA) and Solar Systems Generation Pty Ltd (Solar Systems Generation). The application raises a novel point concerning the manner in which in a winding up assets are to be distributed between creditors. 2 The point comes about in this way. The principal activities of the Solar group were the research and development of solar technology, the construction of solar power plants and the manufacture of components of solar power-station technology. The group fell into financial difficulty and in September 2009 Messrs Longley and McEvoy were appointed as each company's administrators. 3 At the time of their appointment the ANZ held a fixed and floating charge over the assets of Solar Systems and SPSA. The debt to the bank was discharged by the bank exercising its rights of combination and set-off. Certain shareholders had also lent money to Solar Systems (the First Shareholder Loan). Initially the company borrowed $26.6 million but this had increased to $41.585 million by March 2009. The First Shareholder Loan was secured by a fixed and floating charge over the property of Solar Systems and SPSA. In July 2009 Solar Systems entered into a further loan agreement under which shareholders lent it $16.6 million (the Second Shareholder Loan). The Second Shareholder Loan was also secured by a fixed and floating charge over the property of Solar Systems and SPA. 4 During the course of the administration it was necessary for the administrators to borrow money to enable the companies to continue to trade while the administrators attempted to sell the assets or arrange for debt to be capitalised so that the companies could continue their operations. For that purpose the administrators with the approval of the Court entered into two bridging finance agreements with a number of shareholders on the security of charges over group assets. 5 The first post-administration shareholder loan was for $3,850,000 (the "First Bridge Loan"). The lenders were granted a fixed and floating charge over the property of Solar Systems and SPSA. The second post-administration loan (referred to as the "Second Bridge Loan") was for $2,250,000 of which only $1 million was drawn down. A fixed and floating charge over the property of Solar Systems and SPSA was granted to the lender. 6 A Priority Deed governing the relationship between the lenders under all the secured loans has been executed. It is not necessary to refer to the terms of that agreement, except to say that the Second Bridge Loan was repaid in May 2010 in accordance with the terms of the Priority Deed. 7 In due course the administrators were able to sell the group's assets. The principal assets were sold to a subsidiary of Silex Systems Ltd (Silex), a public company whose shares are listed on the ASX. Silex is involved in the development and manufacture of isotopically engineered material, translucent technologies and advanced solar systems' cells and panels. While the sale agreement was entered into while the group companies were under administration, the sale was completed after the liquidations had commenced. 8 The consideration for the sale to Silex comprised (a) a deposit of $1 million; (b) shares in Silex to the value of $13 million, to be issued on completion; and (c) $5 million in cash or shares in Silex to the value of $5 million, payable by monthly instalments for the first five months following the completion of the sale. 9 On completion of the sale, Silex, as required by the sale agreement, issued shares in the Silex companies, having a total value of $13 million. The issue was in two batches of 1,098,099 shares. The shares are subject to an escrow arrangement. In summary, the arrangement is that (a) the first parcel of shares cannot be disposed of until 15 March 2011; (b) the second parcel cannot be disposed of until 15 March 2012; (c) all shares are subject to a "holding lock" that prevents the shares being traded on the ASX prior to the date upon which they may be disposed (see ASX Listing Rule 9.5(b)); (d) notwithstanding the restrictions on disposal, a transfer to facilitate a distribution to creditors of a Solar company is permissible; and (e) in the event of such a transfer, the transferee must agree to a "holding lock" being placed on the shares until the end of the escrow period. 10 The liquidators chose to take shares in lieu of $5 million in cash. The liquidators eventually realised those shares for $4,882,086.20 (net of brokerage, etc). The liquidators sold other assets of the group for $550,000 to Power & Water Corp of the Northern Territory. 11 The financial position of each solar company (as at 18 October 2010) was as follows: Solar Systems had $1,516,829 cash, SPSA had $165,687 cash and SSG had no assets. The liquidators estimate that after paying additional costs and unfulfilled liabilities there will be approximately $1.1 million in cash to distribute in addition to the Silex shares. Mr Longley says there are no insolvent transactions or other conduct which require investigation. 12 At this point, then, the liquidators have completed their work. All that remains to be done to enable the liquidations to be finalised is the payment of the final dividends. If the liquidators are able to distribute the Silex shares in specie then the liquidations can be finalised quickly. If it is necessary for the liquidators to wait to sell the shares before declaring the final dividend, the liquidations will continue until March 2012 and, in the meantime, further costs will be incurred by the liquidators complying with the statutory requirements placed upon them: eg maintaining accounts, filing annual returns, etc. 13 Thus, the liquidators and the secured creditors think it preferable, if it be permissible, to distribute the shares in specie. Mr Longley says that the priority creditors (in the main employees) will not be adversely affected by an in specie distribution. The floating charge proceeds were insufficient to meet their claims. The employees have been paid some of their entitlements under GEERS with the remainder of their claims comprising unsecured claims against the companies. Mr Longley also said that the Commonwealth (via its subrogated claim for payments through GEERS) will not be adversely affected by an in specie distribution because the floating charge proceeds have been used to meet the expenses of the administrations and liquidations. I do not have sufficient information to determine whether the liquidators have applied the floating charge proceeds in accordance with the statutory requirements and the s 447A orders they obtained when the Bridge Loans were approved. If they have not (eg if they have used the floating charge proceeds to satisfy the general expenses of the liquidations), they would be required to make appropriate adjustments prior to making an in specie distribution. 14 It is clear that the unsecured creditors will not be prejudiced by an in specie distribution for there is no prospect that the Silex shares will be worth more than the principal and interest due under the secured loans. The share price would have to increase by 631% by March 2011 (based on the 8 October 2010 price) and remain at that price until March 2012 simply to cover the principal. If interest due on the loans is brought to account the increase would need to be greater than 631%. 15 If a direction that the liquidators are justified in making in specie distributions is made, the liquidators have proposed, and all secured creditors have agreed, to distribute the Silex shares in the following way. First, the liquidators will distribute sufficient cash and Silex shares to the First Bridge Lenders to enable that loan to be repaid. There is approximately $2.1 million owing to them. Under the regime established by the Priority Deed, this loan has priority over the other outstanding secured loans. Then the liquidators will distribute the remainder of the cash on hand and the balance of the Silex shares to the lenders under the Second Shareholder Loan. There is approximately $19.5 million owing under that loan. The cash and remaining shares (at their current value) will be insufficient to discharge this debt. When these distributions are made, the liquidators will lodge their final accounts with ASIC and deregister the companies. 16 There are, I apprehend, two unrelated reasons for going along with the liquidators' proposal. The first is that a distribution in specie is permissible. The reason is based on two rules. One rule is that a creditor in a winding up has no right to an individual share of the assets of the corporation, only a right to participate in the proceeds of a sale. This is made clear by the recent rejection by the High Court in Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 200 CLR 592 of the House of Lords' decision in Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167. The other rule is that where a sum of money is due, the parties (debtor and creditor) may, by agreement, substitute a different obligation from the obligation to make the payment. Thus the obligation to pay a debt may be satisfied by the creditor agreeing to take property in lieu of cash: Hands v Burton (1808) 9 East 349; 103 ER 606; Saxty v Wilkin (1843) 11 M & W 622; 152 ER 954; and Smith v Battams (1857) 26 LJ Ex 232. 17 There is, in my view, no reason in principle why creditors could not unanimously agree to have transferred to them all the assets of a company in liquidation instead of the proceeds of the sale of those assets, provided the rights of contributories are not prejudiced. Those rights would not be prejudiced if the assets transferred to the creditors have a market value which, when taking into account the costs and expenses of a sale, is less than what is due to the creditors. Moreover, there is nothing in the Corporations Act that would render an in specie distribution invalid or contrary to public policy. 18 In this regard it is of interest to remember that prior to 1 July 1998 the articles of association found in Schedule 1, Table A of the Corporations Law, and prior legislation, provided a model set of regulations for the internal management of companies. Table A contained provisions that applied when the company was being wound up. Article 112 permitted, with the sanction of a special resolution, a distribution in specie to contributories. There was no parallel provision permitting a distribution in specie to creditors, but, presumably, this was because the circumstances in which there was a need for such action were rare. 19 The second reason for going along with the liquidators' proposal is that the distribution in specie is to be made to secured creditors. Those creditors hold an equitable interest in the cash and Silex shares because, by reason of their security interest over the companies' assets, they are entitled to trace the value of their claims over those assets into the new (substitute) assets that have come into the hands of the liquidators. The secured creditors could seek foreclosure (ie extinguishing the mortgagor's equity of redemption). What is proposed here is, in effect, foreclosure by consent. 20 I will make a direction that the liquidators are justified in distributing the Silex shares in specie to the secured creditors. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.