Park, in the matter of Collection House Limited (Subject to a Deed of Company Arrangement) [2022] FCA 1244

Introduction 1 These reasons concern an urgent application for relief under s 444GA(1)(b) of the Corporations Act 2001 (Cth) filed by the applicants, Collection House Limited (subject to deed of company arrangement) (Collection House or the Company) and the administrators of its deed of company arrangement (DOCA), John Richard Park, Benjamin Peter Campbell and Kelly-Anne Lavina Trenfield (together, the Deed Administrators). I heard the application in the Commercial and Corporations Duty List on 19 October 2022 and made orders substantially in the form sought by the applicants that day. The date for satisfaction of the conditions precedent in the DOCA was due to expire on 20 October 2022, having been extended from 14 October 2022. Obtaining leave to effect the transfer was one of the conditions precedent. 2 On 19 October 2022, I gave leave to the applicants to transfer all of the shares in Collection House to Credit Corp Group Limited, or its nominee, pursuant to s 444GA(1)(b) of the Act. The proposed transfer of shares to Credit Corp (Share Transfer) was to give effect to the completion of a restructure of Collection House following its external administration under Part 5.3A of the Act. I also made machinery orders under s 447A of the Act to permit the Deed Administrators to give effect to the proposed Share Transfer. My reasons for doing so are as follows.

LEGAL Principles 3 Section 444GA(1)(b) permits a deed administrator to transfer shares in a company if the administrator has obtained leave of the Court. 4 The critical issue is the Court's assessment of whether the share transfer results in any "unfair prejudice" to the members of the company: s 444GA(3). Whether a transfer is unfairly prejudicial is to be determined having regard to all the circumstances of the case and the policy of the legislation: Re Habibi Waverton Pty Ltd (in liquidation) (administrator appointed) (2021) 154 ACSR 701; [2021] NSWSC 1443 at [31]. 5 The applicable legal principles with respect to the assessment of unfair prejudice in the present context are well settled and were canvassed in detail in: Re Paladin Energy Limited (Subject to Deed of Company Arrangement) [2018] NSWSC 11 at [28] to [35]; Tucker, in the matter of Black Oak Minerals Ltd (Subject to a Deed of Company Arrangement) (in liq) (2019) 134 ACSR 472; [2019] FCA 293 at [31] to [37]; and Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 9) (2020) 148 ACSR 648; [2020] FCA 1652 (Virgin (No 9)) at [29] to [35]. 6 That the transfer of shares is to occur without compensation cannot on its own establish unfair prejudice: Weaver v Noble Resources Ltd (2010) 41 WAR 301; [2010] WASC 182 at [80]; Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 at [39]; Diverse Barrel Solutions Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 53 at [22] to [23]. In circumstances where the equity in the company has no residual value, the members are unlikely to suffer prejudice, and certainly not unfair prejudice, by reason only of the absence of consideration: Noble Resources at [79]; Diverse Barrel Solutions at [19] and [22]; Virgin (No 9) at [33] to [34]; Habibi Waverton at [31]. 7 Orders in the nature of machinery orders may be made under s 447A of the Act to put into effect the proposed transfer of shares, including orders permitting deed administrators to execute and lodge share transfer documents and to ensure the entry of the acquirer's name on the company's register of members: Black Oak Minerals at [39] to [40]; Virgin (No 9) at [36].

The course of the administration 8 Collection House is a debt collection provider and purchases and otherwise manages receivables on behalf of its customers. The Company's securities are listed on the Australian Securities Exchange (ASX) and, together with its subsidiaries (which are not in external administration), it operates in Australia, New Zealand and the Philippines. 9 On 29 June 2022, the Deed Administrators were appointed jointly and severally as voluntary administrators of Collection House in accordance with a resolution of its directors pursuant to s 436A of the Act (Administrators). 10 During the administration, on 7 July 2022, the Administrators caused the Company to enter into a Funding Agreement whereby it borrowed monies from Westpac Banking Corporation to enable the Administrators to continue to trade the business and to pay employee entitlements and other post-appointment trade debts with a view to selling or recapitalising the business as a going concern. 11 In the evidence before me is an account of the process undertaken by the Administrators with respect to the sale and restructure of the assets and business of Collection House culminating in the entry into the DOCA with Credit Corp on 21 September 2022. By way of summary: (1) in early July 2022, potential purchasers were identified and the Administrators invited expressions of interest for the sale and/or recapitalisation of the Company; (2) between mid and late July 2022, 26 parties were given access to a virtual data room containing documents about the business and financial position of the Company, the Administrators conducted management presentations with certain interested parties, nine non-binding indicative offers were made, and the Administrators formed a shortlist of four preferred parties (Shortlisted Bidders); (3) between 27 July 2022 and 3 August 2022, the Shortlisted Bidders were invited to make best and final offers, four final non-binding offers were made and thereafter assessed by the Administrators, and on 10 August 2022, the Administrators selected one preferred bidder, Credit Corp, to proceed to the final phase of the process; and (4) in the following three weeks, the Administrators and Credit Corp negotiated the terms of a transaction and, on 26 August 2022, entered into a binding agreement (subject to various conditions) for the acquisition of the business and assets of the Company via a DOCA; the proposed Share Transfer; and the establishment of a Creditors' Trust Fund to meet creditors' claims (Credit Corp Transaction); and (5) on 29 August 2022 (the next business day), the Administrators made an announcement of the Credit Corp Transaction to the ASX. 12 The Credit Corp Transaction involved the following agreements. First, an implementation deed, which provided that the Administrators would continue to trade the business of the Company pending completion. Secondly, a Funding Agreement, which provided that Credit Corp would provide Interim Funding of $2.2 million to enable the Administrators to continue to trade the business until completion by paying post-appointment debts. The Interim Funding is to be repaid under the proposed DOCA. Thirdly, entry into the proposed DOCA which in turn involved, inter alia: (1) a transfer of the shares in Collection House to Credit Corp (or its nominee) such that Credit Corp would assume control of the business and assets of the Company as a going concern; (2) the retention of all employees until completion of the DOCA and, thereafter, most employees remaining employed (and the others receiving their entitlements in full); (3) the formation of the Creditors' Trust Fund to meet the claims of creditors in a particular priority governed by the terms of the trust instrument; (4) Credit Corp making a cash payment of $11 million (less the Interim Funding Amount) to the Creditors' Trust Fund for the benefit of creditors of Collection House; and (5) Collection House shareholders would not receive any payment for the transfer of their shares to Credit Corp. 13 On 5 September 2022, the Administrators issued their report to the creditors of the Company pursuant to s 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (75-225 Report) and convened the second meeting of creditors (Second Meeting). An ASX announcement was made in this respect which included a link to download a copy of the 75-225 Report. 14 At the Second Meeting, the Administrators recommended that the creditors of the Company vote in favour of the DOCA on the basis that it was in the best interests of the Company and its creditors, would preserve the business and provide continuity of employment for most of the Company's employees, and would provide the greatest return to creditors. The evidence before me demonstrates that the Deed Administrators continue to hold the opinion that completion of the DOCA is in the best interests of the Company and its creditors. Under the DOCA the evidence is that: (1) priority unsecured creditors are expected to receive 100 cents in the dollar; (2) small creditors (whose claims are less than $20,000) are expected to receive up to 50 cents in the dollar; (3) other non-priority unsecured creditors are expected to receive between three and eight cents in the dollar; and (4) there will be no return to shareholders. 15 On 13 September 2022, at the Second Meeting, the creditors passed a resolution that the Administrators enter into the DOCA. The evidence demonstrates that 96.55% of creditors, 97.78% by value, voted in favour of the resolution. Other resolutions were also passed including approval of the Administrators' remuneration. 16 On 21 September 2022, the DOCA was executed by the Administrators, Collection House and Credit Corp. As mentioned above, pursuant to the terms of the DOCA, and as a condition to its completion, the Deed Administrators were obliged to make this application in respect of the proposed Share Transfer.

Steps toward completion of the restructure 17 The completion of the restructure of Collection House involves 3 steps: (1) a transfer of the shares in the Company to Credit Corp or its nominee; (2) execution of a trust deed to create the Creditors' Trust Fund; and (3) payment by Credit Corp of the contribution of $11 million into the Creditors' Trust Fund. 18 Because Collection House is a company whose shares are listed on the ASX, it is subject to the prohibition in s 606 of the Act. For this reason, the Deed Administrators have sought relief from ASIC from the takeover provisions in Chapter 6 of the Act pursuant to the power conferred on ASIC by s 655A(1)(a). By letter dated 19 October 2022, ASIC communicated its "in-principle" decision to provide s 606 relief (conditional on the Court granting the leave sought by the applicants). ASIC's approach in this regard was in accordance with its approach in other applications of this kind: Paladin Energy at [12]; Virgin (No 9) at [21].

The alternative to completion of the DOCA 19 The evidence before me demonstrates that in the event that the DOCA is not given effect, completion of the Credit Corp Transaction will not proceed. Instead, the Deed Administrators will convene a meeting of creditors with the likely outcome that the Company will be wound up in insolvency. If the Company is placed into liquidation, then the likely consequences that follow are that the business of Collection House will cease to operate; assets will be sold, likely on a piece-meal basis, and there is an expectation that realisation costs will substantially exceed sale receipts; and the return to creditors will be substantially lower and necessarily delayed. The Deed Administrators' evidence demonstrates that in a liquidation scenario, save for a possible return to secured creditors, there will otherwise be no return to creditors, including priority creditors. 20 The outcome for shareholders will not change. There is not expected to be any return to the shareholders of the Company in either scenario, namely under the DOCA or alternatively, in a liquidation scenario. 21 The Administrators' analysis is supported by the Independent Expert's Report prepared by Jennifer Nettleton of Korda Mentha dated 30 October 2022. Ms Netteton's ultimate opinion is that, on both a "high case" and a "low case" analysis, there is negative equity in Collection House such that the shares are worthless.

Notice to interested parties 22 The applicants have given notice of this application to all interested parties, including the creditors and members of Collection House. No person has taken steps to formally object to the application or sought leave to be heard on the application. Included in the evidence on this application is correspondence and/or records of other communications from some shareholders. Senior Counsel appearing for the applicants submitted that, notwithstanding that some shareholders had expressed disappointment that under the DOCA they would not receive any consideration for their shares, there was nothing in the communications that demonstrated anything amounting to unfair prejudice to shareholders.

consideration 23 The applicants submitted that the Court should exercise its discretion to make the orders sought because: (1) the Share Transfer will benefit all classes of creditors of Collection House (including secured creditors, priority unsecured creditors and ordinary unsecured creditors) by increasing estimated returns and otherwise by preserving the ongoing business of the Company; (2) the Share Transfer will not prejudice Collection House's current shareholders within the meaning of s 444GA of the Act, or have any financial impact on them, because the equity in the Company has no residual economic value to its shareholders; (3) to do so would result in the continuation of the business of Collection House and advance the objects of Part 5.3A of the Act as embodied in s 435A of the Act; 24 I am satisfied that the applicants' submissions should be accepted.

There is no unfair prejudice to members 25 Collection House is a public company with issued share capital of 141,948,162 and 11,685 shareholders as at the commencement of the administration. 26 I am persuaded that there will be no unfair prejudice to the shareholders upon the transfer of their shares to Credit Corp or its nominee notwithstanding that shareholders will not be compensated for their shares. 27 The evidence on this application establishes that the insolvency of the Company arose in the following context. The Company suffered significant trading losses from the 2020 financial year onwards, primarily flowing from COVID-19 related restrictions impacting its core business model, essentially brought about by its clients engaging in reduced active debt collection activities. This included the Company and its subsidiaries experiencing a net loss before tax of $31.8 million for the financial year ended 30 June 2021 and a further net loss before tax of $13.2 million for the six-month period ended 31 December 2021. In April 2020, Collection House and its subsidiaries entered into a standstill agreement with its secured creditors and thereafter engaged in selling key assets constituted by debtor ledgers. In these circumstances, the Company was unable to obtain longer term financial support from its lenders and/or certain of its major shareholders (notwithstanding it obtained some limited short-term funding from its existing lenders and from asset sales). The Company had excessive lease costs that it was unable to reduce. Eventually, the combination of ongoing trading losses and the failure to obtain further funding led to a shortfall in working capital and an inability to meet debts and other financial commitments. 28 The evidence also demonstrated that, on a balance sheet basis, the Company has a substantial deficiency of assets to meet the debts and claims of creditors. The conclusion in the 75-225 Report was that, in a liquidation scenario, the Company's assets would be insufficient to result in a return to creditors, including priority creditors. Ms Nettleton's expert opinion was to similar effect. On the application, there was no evidence which served to contradict the analysis of the likely outcome in the alternative of a liquidation put forward by the applicants. 29 Ms Nettleton valued the Company's assets at between $3.868 million and $5.037 million and the claims against the Company (inclusive of the costs of the external administration) as between $66.604 million and $77.753 million, leaving an overall deficiency of between $61.6 million and $73.9 million. Collection House and its subsidiaries' accumulated net losses exceeding $200 million in the financial years ended 30 June 2020, 30 June 2021 and 30 June 2022. Collection House's business continued to be loss-making during the external administration. 30 The value of possible recoveries in a liquidation was estimated to be at a maximum of $1.148 million in a high case scenario because, amongst other things, the Administrators considered that the directors would likely have a "safe harbour" defence to any insolvent trading claim against them. 31 On the basis of the evidence of Mr Park and Ms Nettleton I am satisfied that the shares in Collection House have no economic value. The members would be in the same financial position regardless of whether the DOCA is completed or the Company is wound up in insolvency. The members of Collection House do not stand to receive any return from their shareholding in either scenario. It is apt to repeat the observation made in Noble Resources at [79]: "…the notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair…" 32 Accordingly, I am satisfied there is no unfair prejudice to members.

Approval furthers the object of Part 5.3A of the Act 33 Completion of the DOCA is expected to enable the Company to continue to operate. It will also provide a materially better return to creditors in comparison to a winding up. The transaction proceeds on the basis that the business will proceed as a going concern with the $11 million cash contribution from Credit Corp, rather than the assets being sold in a liquidation. Relevant employee liabilities are either assumed as part of the transaction or otherwise do not crystallise because there is no winding up. The costs of a winding up are avoided. These matters strongly militate in favour of the making of orders to permit the Share Transfer to proceed: Virgin No (9) at [55].

Additional considerations in favour of the approval 34 ASIC has granted "in-principle" relief from the takeover provisions in Chapter 6 of the Act. ASIC was provided with the draft Explanatory Statement and has had an opportunity to scrutinise the restructure and raise any objection. The fact that it has not done so provides an indication that there is no principled concern arising with respect to the transaction: Black Oak at [53]; Virgin No (9) at [63]. 35 A description of the proposal has been given to shareholders in the form of the Explanatory Statement (and also in the 75-225 Report) and shareholders have been given an opportunity to appear in opposition to the application: Re BCD Resources NL (Subject to Deed of Company Arrangement) [2018] NSWSC 1605 at [11]; Centennial Mining Ltd (Subject to Deed of Company Arrangement) [2019] WASC 441 at [19]. While some shareholders have corresponded with the Deed Administrators and the solicitors for the Deed Administrators and raised particular issues, no person has sought to oppose the orders sought. In relation to the communications received by shareholders, I accept the submission that those communications, while expressing disappointment or regret that shareholders will not receive consideration for the transfer of their shares, do not establish unfair prejudice to the members of Collection House. The applicants have established compelling reasons in favour of granting the relief sought.

CONCLUSION 36 For these reasons, I made orders substantially in the form sought by the applicants. In addition, I made an order that any personal identifying information disclosed in communications between Collection House and its representatives and shareholders be treated as confidential and prohibited from disclosure to any person aside from the applicants, their legal representatives, and necessary Court staff. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.