Mann v Abruzzi Sports Club Ltd

Judgment - ex tempore 1By Originating Process filed today, 27 June 2014, by leave and made returnable in circumstances of considerable urgency, Mr Matthew Caddy and others as joint and several administrators of Nexus Energy Ltd (Administrators Appointed) ("Company") and the Company bring applications under ss 439A, 447A and 447D of the Corporations Act 2001 (Cth) for orders which broadly fall in three categories. The first is for directions under s 447D of the Corporations Act that they are justified in entering into a particular facility agreement, drawing down under that agreement and procuring the Company in turn to lend monies to two subsidiaries pursuant to two intercompany loan agreements that are in evidence. The second is for orders under s 447A of the Corporations Act that provide that s 443A of the Corporations Act has a modified operation, so that their personal liability in respect of the borrowings is limited to the extent that the assets of the Company are not sufficient to meet the Company's liabilities. The third are orders in common form extending the period within which the administrators may convene the second meeting of creditors of the Company under s 439A of the Corporations Act for a relatively short period, to 4 August 2014, in circumstances where this is plainly a complex administration. 2I have been provided with detailed and helpful submissions by Ms Collins, who appears on behalf of the administrators, and the application is supported by comprehensive affidavit evidence of Mr Jason Preston, who is a partner in an accounting firm and has significant experience as an administrator, a further affidavit of Mr McGrath and exhibits to those affidavits. It will not be possible given the urgency of the application to do justice to summarising the submissions and the evidence which is put, but I should nonetheless outline, at least in a broad way, the basis on which I have reached the views which will shortly be reflected in orders. 3Mr Preston leads evidence which sets out the nature of the Company group which is involved, the Nexus Group, which is engaged in the business of oil and gas exploration and has valuable assets, particularly in two of its subsidiaries, Nexus Energy VICP54 Pty Ltd and Nexus Energy WA Pty Ltd. Mr Preston points to the urgency of the application, which arises because the Company and its subsidiaries have amounts that are overdue or immediately due, including significant amounts due to be paid in three days' time, on 30 June 2014, which include operation on expenditures in respect of a valuable project held within one of the subsidiaries. Mr Preston outlines the nature of the subsidiaries and their activities and points to the valuation which had been attributed to those activities in an expert's report provided to shareholders in respect of a scheme of arrangement, which had been put to shareholders but had not achieved the requisite majorities so as to be approved at the scheme meetings, a matter which in turn appears to have prompted the Company's directors to place the companies in administration. Mr Preston sets out at some length the Company's existing financing arrangements, which include a senior facility as to which the lender is presently Network Investment Holdings Pty Ltd ("NIH") and a bridge facility. The commitments under those facilities have been cancelled now that the Company has been placed in administration. Mr Preston also sets out the position in respect of notes issued by the Company. The trustee for note holders, albeit on the instructions of the majority note holder, which is also NIH, has consented to the proposed transaction. 4Mr Preston gives evidence as to the financial position of the Company and the Company group as it emerges from its most recent audited accounts as at June 2013 and its unaudited accounts as at December 2013 and based on material contained in the scheme booklet, which discloses that, at least on the valuations contained in the financial statements, which were more optimistic than those contained in the expert report in the scheme booklet, the Company has substantial assets, which substantially exceed the total of its liabilities and has a significant positive total equity. Nonetheless, it is plain from the evidence that the Company also faces a significant liquidity crisis, with negative cash flow and obligations which are due in the immediate future which significantly exceed its income. 5Mr Preston's evidence is that the Company has negotiated, or the administrators on its behalf have negotiated, funding arrangements with NIH, which in broad terms provide for the amount of $30 million to be made available to the Company for a term of three months which would be disbursed for expenditures of the Company and its subsidiaries in accordance with a detailed schedule, described as the "Approved Payment Schedule", which is reflected in the relevant funding agreements. The relevant funding arrangements provide for NIH to take security in respect of the new monies that are advanced, as would be expected given the Company's present position. I have, however, been informed from the bar table, and I proceed on the basis that, the transaction does not invite NIH to take security over assets which were not previously subject to security held by it in its capacity as senior lender. No question therefore arises as to whether any advantage which NIH may gain from the transaction, or any detriment which the Company or creditors might suffer, by security being given over assets which were previously not secured. 6To the extent that NIH takes security over assets already secured, to support the lending under the funding agreement, the desirability of that transaction depends upon an assessment of the benefit which the Company will obtain from accessing the moneys that are lent. As will emerge below, the administrators have formed the view, and the evidence supports the view, that the benefit that the Company obtains from that transaction is likely to warrant both the borrowing and the giving of the security that it is required to give in order to obtain that borrowing. 7Mr Preston's evidence sets out the expenditures which are due in respect of the Company and its subsidiaries in the immediate future, and identifies the risk that a failure to make those expenditures, particularly in respect of joint ventures with which the Company is involved, will expose the Company or its subsidiaries to events of defaults and prejudice the value of the assets currently held in the subsidiaries. Mr Preston makes clear in his affidavit that the administrators have had limited time to review the complex documents related to the projects, which is understandable in circumstances that they have been appointed for a short period, but also expresses the view that there are likely to be events of default in the relevant documents which would be triggered by a failure to make such payments. He expresses the view that the entry into the proposed funding arrangements are desirable in order to avoid the real risk of adverse consequences of a failure to make the relevant payments, and the possible destruction of value in the subsidiaries arising from such failures, events of default and, in a worst case, the fact that the subsidiaries also become insolvent and are themselves placed in administration or liquidation. 8Mr Preston gives detailed evidence in respect of the documents constituting the funding arrangement and, in particular, expresses the view that the interest rate, the commitment fee and establishment fee in respect of the funding agreement are commercial and not unreasonable. Nothing in the evidence which I have seen or the Company's circumstances suggest that Mr Preston has not reasonably formed that view. He also refers to the fact that the administrators have not had the opportunity to fully explore funding alternatives, again within a relatively short period, but points to the Company's attempts to raise funds since 2012 in various alternatives, and to the difficulty in providing security to any other lender, where such security would require the consent of NIH. He expresses the view, which seems to me to follow from the evidence which he has given, that if the funding arrangements with NIH do not complete, the consequences that would follow would be that administrators would need to seek alternative funding, which he considers they are unlikely to be able to obtain, and the active subsidiaries of the Company would be placed into voluntary administration if funds could not be obtained. Again, that view appears to reflect the logic of the Company's present position. 9The application is also supported by an affidavit of Mr McGrath, who leads evidence as to the first meeting of the Company's creditors in the administration, which was held three days ago on 24 June 2014. Importantly, notice was given at that meeting to creditors of the nature of the application that is presently being brought to the Court and of the proposed funding arrangements and creditors were advised of the reasons for the administrators taking this approach. It appears no creditors expressed opposition to that approach at that meeting and no creditors have appeared today to oppose the application. At least one of the note holders, it appears, had also been provided with the application itself and the affidavits, but not the exhibits, relied on in the application, and that supports an inference that its not appearing today indicates a lack of opposition on its part to the transaction. The Australian Securities & Investments Commission has also been provided with documents relating to the transaction and has not appeared to oppose it. 10With this background, the administrators point to the practice which appears to have existed within the Nexus Group for the Company to advance funds to its subsidiaries from time to time, and to the evidence that the subsidiaries themselves do not generate, or will not in the immediate future generate, sufficient funds to meet their expenses without financial support from the Company. 11It follows that, in order for a sale process, which the administrators propose to undertake in the near future, it is necessary that the Company be placed in a position that it can support its subsidiaries, to avoid the risk of their failure, to which I referred above, and that in turn requires that the Company has access to additional funding, by means such as the funding arrangements that are proposed, which it presently cannot obtain from its own resources. The administrators lead evidence, which is important in applications of this kind, that, in their view, the entry into the funding agreements is in the best interests of creditors, by permitting the Nexus Group and its subsidiaries to continue to trade, so as to maximise the prospect that a satisfactory sale price will be achieved for the Company's assets. Conversely, that proposition might be put the opposite way, that a failure to take that course is likely to have the inevitable result of the destruction of value in the subsidiaries and the Company if a sale must take place in a situation where the subsidiaries have been placed in administration or liquidation and the maintenance and operation of their interests in the operating projects are in jeopardy. 12Turning now to the applications which are made, the first application is an application for a direction under s 447D of the Corporations Act that the administrators are justified in procuring the Company to enter into, relevantly, the funding agreement, to procure the Company to draw down under the funding agreement, and to procure the Company to loan moneys to the subsidiaries under the two inter-company loan agreements. Section 447D of the Corporations Act provides that an administrator may apply to the Court for directions about a matter arising in connection with the performance or exercise of the administrator's functions and powers. There are well recognised limitations on the circumstances in which such directions are given, which were noted in the decision of the Goldberg J in Re Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; (2002) 115 FCR 409, where his Honour noted (at [65]) that something more than the making of a business or commercial decision is required before the Court will give directions to, or approve, the decision. His Honour also observed that that something more may be a legal issue of substance or procedure or an issue of power, propriety or reasonableness, warranting the giving of such a direction. The value of a direction under that section is to protect the administrator from liability for breach of duty or unreasonable behaviour if full disclosure has been made to the Court, and it has been recognised that the Court may give directions to provide guidance on a matter of law or to protect the administrator from accusations that it has acted unreasonably: Re Green [2011] NSWSC 417; (2011) 254 FLR 324 at [10]. 13It will be the exception, rather than the rule, that the Court would be prepared to give a direction under s 447D of the Corporations Act in respect of arrangements of this kind: compare Systems Advisers Group Pty Ltd (admins apptd) [2013] NSWSC 826. Nonetheless, I am satisfied that in this particular case, the complexity of the issues that the administrator has had to address, including an issue as to dealings with subsidiaries to which I will refer, and the existence of the various classes of creditors to which he has had regard, warrant the giving of such a direction, limited only to the entry into the funding agreement, the drawdowns under the funding agreement, and the arrangements to loan moneys under the intercompany loan agreements. I reach the view that a direction is justified in this case, by contrast with the normal position, because the administrator has in fact had to address legal issues which arise, as to the extent to which borrowings should be made by the Company, so as to preserve values in its subsidiaries, which raise questions as to the legal relationship between companies in the group which are of some complexity. It seems to me that the evidence led by the administrator does warrant the step which he has taken and, in particular, supports the giving of security so as to borrow the relevant amount, so as to obtain the opportunity to preserve value in the subsidiaries' assets. It also seems to me that the entry into the intercompany loan agreements, which raise the particular issue that the Company itself will be fully liable to the lender, although the administrators' liability is limited, and that it has been necessary to limit the subsidiaries' liability so as to preserve their solvency. It seems to me that the approach which the administrators has adopted is again justified in that setting, so as to preserve value in the subsidiaries. However, the complexity of that approach, and the legal issues which it raises, are such that the Court should in this case provide a degree of comfort as to his entry into the transaction, subject of course to the adequacy of the disclosure which has been made to it. For these reasons, I will make the direction under s 447D of the Corporations Act that is sought in respect of those matters. 14The next issue which arises is the limiting of the administrators' liability under s 443A of the Corporations Act so far as the borrowings under the funding agreement are concerned. The administrators' submissions draw attention to the case law in this area, including the often-cited decision in Mentha Re Griffin Coal Mining Company Pty Ltd (admin apptd) [2010] FCA 1469: (2010) 82 ACSR 142 at [30] which set out the relevant principles, in a summary which has been followed frequently both in the Federal Court and this Court, and which I followed in Systems Advisers Group Pty Ltd (admin apptd) above. Turning to the relevant factors in this case, it seems to me that the proposed arrangements to limit the administrators' liability are necessary to the proposed funding arrangements, because they could not be expected to personally accept liability for a substantial borrowing in these circumstances, and the borrowing itself is in creditors' interests and consistent with the objectives of Pt 5.3A of the Corporations Act so far as it seeks to maximise the recoveries that are likely to be made from the sale of the Company's assets, and indeed preserve an opportunity to sell those assets which might otherwise be lost to the Company. It does not seem to me that there is significant prejudice or disadvantage to creditors of the Company from entry into the arrangement. The secured lender obtains security, as might be expected, for the additional moneys that are advanced, but that does not give rise to prejudice to other creditors, so long as those moneys are likely to generate at least the value which is the subject of that security, as is established in the present case so far as they preserve an opportunity for the sale of the Company's assets. It seems to me that notice has been given to those who are affected by the order, both by drawing attention to it at the first creditors' meeting and by a subsequent release to Australian Securities Exchange Ltd, albeit that notice has been given shortly prior to this application, given the urgency of the application. In any event, the administrators have indicated that they have no objection to the Court making an order reserving liberty to other interested persons to apply. 15The final issue arising in respect of the application is an application to extend the convening period for the second meeting. The extension which is sought is a relatively modest one, in the circumstances, and the administrators' submissions draw attention to the case law dealing with the circumstances in which such an extension may be granted. The decisions in Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 at 612 and Re Riviera Group Pty Ltd (admins apptd) (recs & mgrs apptd) [2009] NSWSC 585; (2009) 72 ACSR 352 at [13]-[14] are often cited in this context. In the present case, the factors that support such an extension include the complexity of the Company's business and the relevant corporate structures, the fact that the additional time sought by the administrator is likely to permit them to advance the process of realisation of the Company's assets and in turn allow information to be provided to creditors at the second meeting from a more informed perspective in respect of that process. The evidence before me does not suggest that there is likely to be any significant impact on a person whose claim is affected by the statutory moratoriums under Pt 5.3A from the extension, particularly where the extension is sought for a relatively short period. In these circumstances, where the extension is sought to progress the sale process in the manner I have noted and also for the administrators to better inform themselves as to the complex issues facing the group, it seems to me that orders granting it are warranted in the circumstances. 16For these reasons, I will make orders in accordance with the short minutes of order initialled by me and placed on the file. I will also make an additional order reserving liberty to any interested person to apply upon 72 hours' notice to the first plaintiffs. The orders are to be entered forthwith.