Niardone v Clubb

COLVIN J: 1 The applicants are the directors of The Agency Group Australia Ltd (The Agency), a listed entity. On 18 January 2021 Mr Sallway and Mr Clubb were purportedly appointed by MCL 105 Pty Ltd (MCL) as administrators of The Agency. The appointment was said to have been made pursuant to s 436C of the Corporations Act 2001 (Cth). It was based upon a claim by MCL that it was entitled to a security interest in respect of upfront fees under the terms of a letter of offer agreed in February 2020 between The Agency and MCL (Letter of Offer) for the provision of finance by MCL to The Agency. 2 The day after the purported appointment, the directors sought urgent relief restraining Mr Sallway and Mr Clubb from acting or purporting to act as administrators. The relief was sought on the basis of the directors' contention that they had a strong case to the effect that no upfront fees were payable to MCL and that the arrangement in the Letter of Offer had been terminated by MCL in May 2020. The affidavit evidence in support of the application also included a statement by a director of The Agency to the effect that the company was able to pay its debts as and when they fell due and that it had not paid the monies claimed by MCL because the claim was disputed. It also indicated a willingness to pay the disputed amount into Court pending the resolution of the proceedings. 3 Upon the return of the urgent application, Mr Sallway and Mr Clubb indicated that they would abide by any orders made, but wished to be heard as to the precise terms of any orders. MCL opposed the application. The application was adjourned to be heard on 20 January 2021. The Agency was also named as a respondent to the application and solicitors acting for Mr Sallway and Mr Clubb also appeared for The Agency. 4 In the result, the following day, orders for an injunction were made with the consent of Mr Sallway, Mr Clubb, MCL and The Agency. I note that in Re MROC Car Wholesalers Pty Ltd [2017] NSWSC 287, orders of a similar kind were made by Gleeson JA in similar circumstances to those advanced by the directors in the present case. The consent orders in the present case also included an order that The Agency pay the sum of $400,000 (being an amount in excess of the upfront fees claimed by MCL) into Court by 22 January 2021. 5 However, at the time that those orders were made by consent, the making of a further order to the effect that the administration end upon payment of the amount into Court was opposed by MCL. 6 Instead of the order sought by the directors and opposed by MCL, I determined that in addition to the orders to be made by consent, orders should be made to the following effect: (1) The administration end on 1 February 2021. (2) Notice of the order that the administration will end on that date be given as soon as possible to creditors of The Agency and any interested party by publication on the ASX platform. (3) There be liberty to any creditor or other interested party to apply to vary or discharge the order that the administration end. (4) Any application to vary or discharge the order that the administration end be heard on 1 February 2012. 7 These are my reasons for making those additional orders.

Factual background 8 Mr Mitchell Atkins, the sole director and company secretary of MCL, provided an affidavit in opposition to the application for urgent relief. Relevantly for present purposes, the terms of that affidavit show: (1) Mr Atkins was introduced to The Agency in July 2019. (2) He operates a business known as Magnolia Capital. (3) Between July and September 2019, Mr Atkins arranged for related entitles of Magnolia to subscribe for $3,329,632 in shares in The Agency which represents 17.9% of the total shares on issue by The Agency. (4) Mr Atkins became a director of The Agency on 1 October 2019. (5) At this time and for some time thereafter, The Agency was seeking required capital and to negotiate extensions of time with its principal lender Macquarie Bank. (6) The Agency negotiated an extension of its facilities with Macquarie Bank to April 2020. (7) In late January, Mr Atkins was asked whether Magnolia Capital would source funds to refinance Macquarie Bank and provide The Agency with working capital. (8) Shortly thereafter, the Letter of Offer was issued by MCL to The Agency. (9) The Letter of Offer provided for fees of a kind that were said to be typically required because Magnolia Capital 'incurs costs considering investments, promoting opportunities amongst its network and raising the required funds necessary to provide loans'. (10) The board of The Agency resolved to accept the offer (being a resolution in which Mr Atkins did not participate given his relationship with Magnolia Capital and MCL). (11) The provision of finance by MCL was delayed because information was not provided by The Agency. (12) The Agency secured forbearance terms with Macquarie Bank in or around April 2020 by securing funds through a third party without the consent of Magnolia Capital. (13) There was a board meeting of 1 May 2020 and the events that occurred at that meeting are in dispute between Mr Atkins on the one hand and the other directors. It is the meeting at which the directors who bring the application contend that the agreement recorded in the Letter of Offer was terminated. (14) Thereafter, MCL provided no funding to The Agency. (15) On 1 May 2020, even though MCL had provided no funding, it registered a claimed security interest on the Personal Property Securities Register (PPSR) against The Agency (and a considerable number of its subsidiaries). (16) On 8 May 2020, Mr Atkins resigned as a director of The Agency. (17) Since then Peters Investments Pty Ltd has subscribed for convertible notes in The Agency in two tranches being $1 million in May 2020 and $5 million in October 2020. 9 Other evidence before the Court in support of the urgent application is to the following effect: (1) Financial close was contemplated by the Letter of Offer to occur on 31 March 2020, but did not do so by reason that Magnolia Capital and MCL were still seeking funds from investors. (2) Between May and November 2020, correspondence was exchanged between the parties in which claims by MCL that The Agency had breached exclusivity provisions in the Letter of Offer and other matters were debated. (3) Eventually, MCL released its PPSR registrations. (4) On 26 November 2020, solicitors acting for MCL for the first time demanded payment of various fees alleged to be due under the terms of the Letter of Offer (described as establishment fee $300,000, due diligence fee $9,090.91, early withdrawal fee $24,750, legal fees $15,478.90 and search fees $200.18). (5) On 4 December 2020, Magnolia Equities III Pty Ltd informed The Agency that it intended to made a takeover bid for the company. (6) On 16 December 2020, an application was made to the Takeovers Panel by Magnolia Equities III. (7) On 4 January 2021, Magnolia Equities III lodged its bidder's statement. (8) On 18 January 2021 (the day before the purported appointment of administrators to The Agency), payment of the fees alleged to be due was demanded by 5 pm that day. (9) On 19 January 2021, a solicitor acting for Magnolia Equities III sent an email to the Takeovers Panel referring to the alleged appointment of Mr Sallway and Mr Clubb as administrators of The Agency and advised that Magnolia Equities III would rely upon the appointment as a triggering defeating condition for its bid and would not be sending out offers to The Agency shareholders. (10) The Agency has secured refinancing and has reduced its indebtedness to Macquarie Bank.

The Letter of Offer 10 The Letter of Offer comprises a letter, Annexure 1 - Term Sheet and Annexure 2 - Standard Terms and Conditions. 11 The letter stated that Magnolia Private Capital Pty Limited via MCL 'is pleased to advise you that your application for finance has been approved on the terms detailed within this Letter, the attached Term Sheet and its Annexures (Offer)'. It then said: You should note that whilst the primary terms of this Offer will be detailed below, after you have accepted this Offer and the loan has been arranged, our lawyers will provide you with the formal loan and security documentation which will detail the full terms and conditions of the loan. If you or your solicitor do not understand anything contained within this Offer, please write to us prior to its execution. Once this Offer has been executed, you will be bound by the terms but note that we will not have any obligation to provide any finance until and unless the formal loan and security documentation have been executed and all obligations under those documents have been complied with. 12 The Term Sheet specified 'Loan Fees and Charges'. Those charges included: Establishment Fee - a fee to be paid by the Borrower to the Lender as an establishment fee for this loan. The Establishment Fee is due and payable by the Borrower on the occurrence of Financial Close. The Establishment Fee is to be capitalised at the commencement of the initial term of the loan. … Early Withdrawal Fee - a fee to be paid by the Borrower in the event the Borrower does not proceed with the loan after the Offer is accepted in accordance with clause 9 of Annexure 2. 13 The Establishment Fee was specified as '2.0% of the Facility Limit'. The Early Withdrawal Fee was specified as '0.5% of the Facility Limit'. 14 The Standard Terms and Conditions that formed Annexure 2 contain provisions as to when fees are payable. They use the expression 'Upfront fees' which is defined to mean 'Establishment Fee, Due Diligence Fee and Risk Fee'. They contain various provisions that bear upon the circumstances in which fees are payable. 15 The parties are in dispute as to how the language of the letter and the two annexures should be construed in determining whether the fees claimed by MCL are due and payable. Those are matters that will fall for later determination.

The nature of the issue concerning the end of the administration 16 The application for urgent relief was framed on the basis that the statutory requirements for the appointment had not been met. In that regard, s 436C(1) provides: 'A person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company's property' may appoint an administrator if the interest has become and is still enforceable. In making an appointment pursuant to s 436C the person claiming to hold a security interest need form no view as to the solvency of the company to which an administrator is to be appointed. 17 Plainly, one of the matters that may bear upon whether injunctive relief should be granted restraining steps being taken in the conduct of the purported administration is whether there was an issue as to the solvency of The Agency apart from the alleged failure to pay which was said to give rise to a right to enforce a security interest. No doubt for that reason the statement was made in the affidavit evidence in support of the application to the effect that The Agency was able to pay its debts as they fell due. 18 As to that aspect, the position adopted by MCL on the urgent application was that it conceded that the balance of convenience would favour the grant of relief if a prima facie case (to use the term adopted in some of the authorities) had been established. Its initial position was that no prima facie case had been established. However, as I have noted, in the result it consented to the grant of interlocutory relief on the basis of orders that included an order for the payment into Court of the amount of $400,000. 19 The application for a further order that the administration end once the payment into Court had occurred gave rise to a different type of question. It was made on the basis that there was no issue as to solvency of The Agency other than that which was raised by the non-payment of the alleged upfront fees and that in the circumstances it was otherwise appropriate because of the consequences for The Agency and interested parties if the administration was allowed to continue in circumstances where the basis for the appointment no longer applied where the amount claimed to be the subject of a security interest was to be paid into Court. 20 For MCL it was submitted that the onus was on The Agency to demonstrate solvency in order to persuade the Court to make such an order on such a basis and on the evidence it was said that there was simply an assertion as to solvency. Further, it was said that the evidence indicated that The Agency had been endeavouring for some time to raise funds and had experienced some difficulty in doing so in 2020. In those circumstances, it was submitted that the Court lacked the power to make the order sought.

The power of the Court to order that an administration has ended 21 Relevantly for present purposes, s 435C of the Corporations Act provides: (1) The administration of a company: (a) begins when an administrator of the company is appointed under section 436A, 436B or 436C; and (b) ends on the happening of whichever event of a kind referred to in subsection (2) or (3) happens first after the administration begins. (2) The normal outcome of the administration of a company is that: (a) a deed of company arrangement is executed by both the company and the deed's administrator; or (b) the company's creditors resolve under paragraph 439C(b) that the administration should end; or (c) the company's creditors resolve under paragraph 439C(c) that the company be wound up. (3) However, the administration of a company may also end because: (a) the Court orders, under section 447A or otherwise, that the administration is to end, for example, because the Court is satisfied that the company is solvent; or … (4) During the administration of a company, the company is taken to be under administration. 22 The key provision for present purposes is s 435C(3) which provides that the administration of a company may end because the Court orders 'under section 447A or otherwise, that the administration is to end'. The example is given of the case where the Court is satisfied that the company is solvent. Significantly, that instance is provided as an example only. Plainly, the provision contemplates that there may be instances where matters other than the demonstrated solvency of the company in administration is the basis for an order that the administration of the company is at an end. 23 Section 447A is in the same Part of s 435C and provides: (1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company. (2) For example, if the Court is satisfied that the administration of a company should end: (a) because the company is solvent; or (b) because provisions of this Part are being abused; or (c) for some other reason; the Court may order under subsection (1) that the administration is to end. (3) An order may be made subject to conditions. (4) An order may be made on the application of: (a) the company; or (b) a creditor of the company; or (c) in the case of a company under administration - the administrator of the company; or (d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or (e) ASIC; or (f) any other interested person. 24 It too provides that the solvency of the company under administration may be the reason for an order made in the exercise of the power conferred by that provision. However, the power is not confined to such an instance. It may be exercised 'for some other reason', which I take to be a reason consistent with the evident purpose of Part 5.3A and the power conferred by s 447A. 25 Significantly, s 447A takes the form of a conferral of power to alter the manner in which any of the provisions of Part 5.3A may apply to a particular company. The nature of the power means that, if exercised in a particular instance, the statutory provisions will not operate in the respect specified in the order. Thus, under its provisions, the Court is not exercising a power to grant interlocutory relief pending an adjudication of the rights and obligations conferred or imposed by the legislation. It is altering the way in which the legislation will operate in the particular case. These matters were made clear by the High Court in Australasian Memory Pty Limited v Brien [2000] HCA 30; (2000) 200 CLR 270 at [17]-[19]. 26 There are a number of decisions in which the width of the power conferred by s 447A has been emphasised. Some were noted by Campbell JA (McColl JA agreeing) in BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 at [177]. However, as his Honour went on to state at [178], those views were confirmed to some extent, but perhaps not totally, by the decision of the High Court in Brien. 27 In Brien, the High Court considered some such possible limitations (see [20]ff). For the most part the suggested limitations were not accepted. In particular, it was not accepted that s 447A was exclusive in the sense that the only orders that could be made about the operation of Part 5.3A were those that were authorised by s 447A. Consequently, if the orders made in a particular case were not to be understood as orders as to how Part 5.3A was to operate then 'there is no reason to conclude that s 1322 did not supply the power for their making': at [33]. There being no argument in Brien to the effect that the orders, if supported only by s 1322, were beyond power, the claim as to the suggested limitation was not accepted. 28 Also, as the form of s 435C(3)(a) indicates by the words 'or otherwise', the Court is not confined to the exercise of the power under s 447A when making an order that an administration in a particular case has ended. The Court may make such an order in the exercise of a power other than that conferred by s 447A. 29 Given the form is which s 435C(3)(a) is expressed an issue arises as to whether it is the source of such a power. In the course of submissions by counsel I raised that possibility. I note that in Smolarek v Liwszyc [2006] WASCA 50 (S), the Court observed that if a party was solvent then an application may be made for an order under s 435C(3)(a) that the administration of the party be brought to an end: at 20. However, the reasons given were dealing with when an order made on appeal setting aside an order reinstating a person as a director should be made with effect from a date earlier than its pronouncement and the nature and extent of any power conferred by s 435C(3)(a) was not considered in any detail. 30 It is a point that need not be resolved because the terms of s 447A(2)(c) make clear that an order under that provision may be made for some reason other than demonstrated solvency and the reference in s 435C to s 447A makes clear an intention one type of order that may be made under s 447A is that a particular administration is at an end. 31 Many cases recognise that the manner of exercise of the power conferred by s 447A must be consistent with the objects of Part 5.3A as expressed in s 435A which states: The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 32 For MCL emphasis was placed upon a submission to the effect that The Agency must demonstrate solvency given the way in which it sought to justify the making of an order that the administration was at an end. In that regard, reliance was placed upon the reasoning of Beech J in Flynn v Theobald [2008] WASC 263. In that case, an application was made under s 447A to terminate the administration of a company where the appointment of administrators had been pursuant to s 436C. Three grounds were relied upon: solvency, conflict of interest on the part of the administrators and abuse of the provisions of Part 5.3A. It is to be noted that the first reason advanced was a bare claim that the company was insolvent. There was no reliance, as here, upon a context in which the amount alleged to be the subject of the secured interest was to be paid into Court as part of agreed orders based upon a dispute as to whether there was any secured interest. 33 After considering the nature and extent of the power conferred by s 447A and referring to authorities in which the width of the power was emphasised but that any order must be consistent with and conducive to achieving the objects of Part 5.3A stated in s 435A (at [56]-[57]), Beech J recognised that in the case of an appointment under s 436C no view was formed as to the solvency of company. However, significantly, his Honour then said at [63]: Continuing default by a company in payment for a debt secured against all or substantially all of the company's property tends to indicate insolvency. That was recognised in the ALRC Report [66] (referred to earlier in these reasons) in explaining the power of appointment under s 436C. 34 It was in that context, that his Honour said at [64]: In an application for an order under s 447A, in a case where the administrators were appointed under s 436C, the ability of the company to pay the secured debt which has triggered the right of appointment will be of central significance to an assessment of the company's solvency. However, if, taking that ability into account, the company is solvent, the solvency of the company would, in my opinion, be a circumstance enlivening the discretionary power under s 447A. 35 His Honour then dealt with the application relying as it did on the claim that the company was solvent. In that context, his Honour said at [76]: Insofar as the plaintiff invokes s 447A(2)(a), the plaintiff bears the onus of establishing that the Company is solvent. 36 His Honour dealt with the evidence insofar as it concerned the claim that the administration should be brought to an end for the reason that the company was solvent. His Honour began that analysis in the following way (at [86]): Whether the plaintiff has discharged her onus to prove solvency is to be considered against the undisputed fact that for some months, the Company's debts to the NAB in the sum of not less than $580,000 have been due and payable but have not been paid by the Company. The evidence demonstrates that the failure to pay NAB was on account of the Company's inability to do so. 37 As the reasoning reveals, there was no dispute that the debt was due to the NAB. Rather, there was an attempt to demonstrate prospectively that the plaintiff was solvent. 38 I do not take the reasoning of Beech J to mean that in a case like the present that unless solvency is demonstrated by reference to some analysis of the accounts of the company there is no power under s 447A(2) to order that the administration is at an end be invoked. Rather, his Honour was emphasising that default in meeting obligations in respect of a security interest tended to indicate insolvency in a case where the reason advanced for the order was a claim of solvency.

Reason for making order that administration will end in this particular case 39 Here the reason advanced for making the order that the administration will end is different to that considered by Beech J in Flynn v Theobald. It is to the effect that the appointment of administrators was made on the basis of a security interest which, by reason of the orders made, is now accepted to be a disputed matter. Further, an amount that exceeds the extent of the claimed security interest is to be paid into Court and the dispute is to be resolved expeditiously. 40 In those circumstances, it is difficult to see how the continuation of the administration (albeit the subject of the restraint imposed by the consent orders) will advance the purpose of Part 5.3A. On all the evidence, the issue that has led to the administration is the disputed security interest. The evidence as to the circumstances surrounding that dispute do not indicate any concern as to solvency on the part of The Agency. Whatever difficulties may have been faced by The Agency in securing a refinancing those difficulties no longer pertain because, on the evidence, refinancing has been secured. 41 The claim made by MCL has been long in its gestation and follows a considerable period in which the parties have been engaged in a dispute as to whether any upfront fees are payable. The conduct of MCL to date is consistent with the existence of a genuine dispute as to whether the upfront fees are payable rather than a concern about the solvency of The Agency. 42 Until very recently, an associate of MCL has itself sought to obtain control of The Agency by way of takeover, a course that suggests that it considers The Agency to be in control of a business with value. 43 The present case may be distinguished from an instance where the appointment has been based upon a view about insolvency or ongoing factual matters that indicate a concern about insolvency. 44 When the urgent application was advanced, MCL made no claim that The Agency was insolvent despite The Agency relying upon its alleged ability to pay its debts as and when they fell due as a matter bearing upon the balance of convenience as to whether the urgent relief should be granted. 45 Therefore, in this case the basis upon which the purported appointment of the administrators was made falls away if the $400,000 is paid into Court pursuant to the consent orders. As the dispute as to the security interest is the only evident basis for the appointment, the making of the orders by consent in the particular circumstances are a reason for making the orders as to the end of the administration. 46 The submission was advanced for The Agency that third parties who have dealings with The Agency and its subsidiaries should have some certainty about the position of the administration in circumstances where the commercial basis for the appointment of administrators by MCL on the basis that it has a security interest has been removed once the amount of $400,000 is paid into court. At that time, so it was submitted, the issues as between MCL and The Agency will take on the character of a disputed debt. I accept that in the particular circumstances of this case there is force in that submission. 47 The form of order that was made has the advantage of making clear to interested parties that the administration will come to an end on an identified date unless some application is made prior to that date to vary or discharge that order. It means that commercial parties with an interest in The Agency are on notice of that position and can approach their dealings accordingly. If they have concerns about solvency (not indicated by the evidence presently before the Court) then they may raise those matters in support of an application to vary or discharge the order that will operate to bring the administration to an end on 1 February 2021. 48 For those reasons, I made the additional orders described at [6] of these reasons. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin.