Park, in the matter of Ellume Ltd (Subject to Deed of Company Arrangement) [2023] FCA 133

Federal Court of Australia|2023-02-22|Before: Stewart J

Pursuant to s 444GA(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act), the first plaintiffs (Deed Administrators), being the deed administrators of the second plaintiff, Ellume Ltd (Subject to Deed of Company Arrangement) (ACN 141 767 660) (Company), be granted leave to transfer all of the existing shares in the capital of the Company from the members (as defined in the Corporations Act) of the Company to Hough Consolidated Pty Ltd (ACN 657 651 280) (Hough) or its nominee in accordance with clause 6.3 of the deed of company arrangement dated 22 December 2022, entered into by the Deed Administrators, the Company and Hough (Deed).
Pursuant to s 447A(1) of the Corporations Act and s 90-15(1) of the Insolvency Practice Schedule (Corporations) (IPS) set out in Sch 2 of the Corporations Act, any of the Deed Administrators may, jointly or severally, in their capacity as Deed Administrators: (a) execute share transfer forms and any other documents ancillary or incidental to effecting the transfer of the shares referred to in order 1; and (b) enter or procure the entry of the name of Hough or its nominee into the share register of the Company in respect of all shares transferred to Hough or its nominee in accordance with order 1.
The plaintiffs' costs of and incidental to this application be costs and expenses in the deed administration of the Company. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background 2 The company was incorporated on 1 February 2010 as an unlisted public company limited by shares. It has 84,160,377 ordinary shares on issue and 93 members. 3 The company has two wholly-owned subsidiaries, neither of which is in external administration. One is Ellume USA LLC (Ellume USA), a Delaware limited liability company which operates solely in the United States of America. The other is Ellume NZ Pty Ltd, incorporated in New Zealand. The New Zealand subsidiary has never traded, has no assets or liabilities and has no financial accounts. 4 The company and Ellume USA were operated as a group. 5 During the COVID-19 epidemic, the company developed a COVID-19 home test kit which was approved by the US Food and Drug Administration. That led to a very substantial order on Ellume USA from the US Department of Defence and the commitment of very substantial capital to the manufacture of the test kits. The company obtained substantial funding via unsecured noteholders, as well as funding from Ellume USA. Unfortunately, the kits proved to be defective which led to a recall and substantial losses for the group. 6 On 31 August 2022, the deed administrators were appointed jointly and severally as voluntary administrators of the company in accordance with a resolution of its directors pursuant to s 436A of the Act. 7 On 8 September 2022, the administrators caused the company to enter into a funding agreement to provide the company with short-term liquidity to allow it to continue to trade while the administrators undertook a sale/recapitalisation campaign. On 13 September 2022, orders were made approving the administrators' conclusion of the funding agreement. 8 The sale/recapitalisation campaign involved contacting a large number of potentially interested parties and inviting expressions of interest. Although there was significant interest, and following a process of receipt of non-binding indicative offers and then an invitation for binding offers, only one final binding offer was received. That was from Hough. A joint non-binding offer was received by two other shortlisted bidders. 9 The administrators assessed each proposal and, on 6 December 2022, selected Hough to proceed to the final phase of the sale/recapitalisation process. To the administrators, a critical point of difference between the proposals was that the Hough proposal was binding and was able to address the company's immediate funding needs, which the other offer lacked. 10 The administrators and Hough negotiated the terms of the transaction. This led to the binding agreement (subject to a number of conditions precedent, including the order under s 444GA of the Act sought in this application) for the share transfer through a deed of company arrangement and a subsequent creditors' trust to provide for the payment of creditors. 11 The Hough transaction envisages a proposed deed of company arrangement (DOCA). That involves: (1) Hough acquiring all of the issued shares in the company; (2) the formation of a creditors' trust (of which the deed administrators would become trustees) to meet the claims of creditors in a particular priority; (3) Hough making a contribution of US$38 million to the creditors' trust, inclusive of the interim funding of US$5 million; (4) all employees of the company remaining employed by the company on the DOCA becoming effective and any employees whose employment does not continue having their entitlements paid out in full; and (5) members of the company receiving no payment from the creditors' trust and no other payment in return for the transfer of their shares to Hough. 12 On 12 December 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) and convened the second meeting of creditors. 13 That meeting was held on 20 December 2022. The administrators recommended that the creditors vote in favour of the DOCA proposal on the basis that it would not be in the creditors' interests for the company to be would up as the DOCA would likely provide a greater return than a winding up of the company and carried less uncertainty. The administrators remain of the view that completion of the DOCA is in the best interests of the creditors of the company. 14 The resolution that the company execute the DOCA passed in both number (98.60%) and value (99.23%). 15 The DOCA was executed by the administrators, Hough and the company on 22 December 2022. As mentioned, it is a condition precedent to completion that the deed administrators apply for and obtain the leave that is presently sought. 16 The completion of the restructure of the company involves: (1) a transfer of the shares in the company to Hough pursuant to a s 444GA order; (2) execution of a trust deed to create the creditors' trust fund; and (3) payment of the contribution of US$38 million (less the interim funding) by Hough. 17 Because the company is an unlisted company with more than 50 members, it is also subject to the prohibitions in s 606 of the Act, which has required the deed administrators to seek relief from ASIC from the takeover provisions in Ch 6 of the Act pursuant to the power conferred on ASIC by s 655A(1)(a). 18 On 27 January 2023, the deed administrators submitted an application to ASIC seeking relief from s 606 to facilitate the proposed share transfer. On 16 February 2023, ASIC indicated that it was still considering the application and requested copies of the papers in the application to court for approval and confirmation as to whether any interested persons had indicated that they may lodge a notice of appearance to oppose the application. I understand that that request was complied with. 19 By letter dated 21 February 2023, ASIC has indicated a decision in principle that it will grant the relief sought in the application to it. ASIC has said that it proposes to execute the formal instrument of relief if and only if the Court grants leave to the deed administrators under s 444GA of the Act to transfer all of the existing shares to Hough pursuant to the DOCA. ASIC has not raised any reason why the Court might not grant the s 444GA relief and has not indicated any opposition to the granting of that relief.

The Court's power and relevant legal principles 20 Section 444GA(1) of the Act provides that the administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained the written consent of the owners of the shares or the leave of the court. It is that leave that the plaintiffs now seek. 21 Section 444GA(2) provides that a person is not entitled to oppose an application for leave under sub-s (1) unless the person is a member of the company, a creditor of the company, any other interested person or ASIC. 22 Section 444GA(3) provides that the court may only give leave under sub-s (1) if "it is satisfied that the transfer would not unfairly prejudice the interests of members of the company". That is accordingly the critical consideration at the centre of the question of whether leave should be granted. 23 I am grateful for a summary of the applicable principles, with detailed reference to prior authority, recently set out by Cheeseman J in Park, in the matter of Collection House Ltd (Subject to a Deed of Company Arrangement) [2022] FCA 1244 at [4]-[7]. I adopt that summary as follows: (1) 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; (2) that the transfer of shares is to occur without compensation to members is not sufficient, in itself, to establish unfair prejudice; (3) 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; and (4) 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. 24 It has been consistently held that, if liquidation is the only realistic alternative to a proposed transfer of the shares, and the shares would have no value in a liquidation, then there is no prejudice, or no unfair prejudice, to the interests of members if the transfer of shares is to occur without consideration: Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 9) [2020] FCA 1652; 148 ACSR 648 at [34] (Middleton J), citing In the matter of OrotonGroup Ltd (Subject to Deed of Company Arrangement); Application of Strawbridge and Kanevsky [2018] NSWSC 1213 at [37] (White J).

Notice to interested persons 25 On 31 January 2023, the deed administrators were granted orders that they would be justified in providing notice of the application to all creditors and members of the company in the manner set out in those orders. Subject to one exception, I am satisfied that that notice was effected by 3 February 2023, by providing all creditors and members with a copy of an explanatory statement containing a description of the proposal, and details of how to obtain any of the court documents. 26 The exception is that, contrary to the requirement of those orders, those creditors and members for whom the administrators did not have an email address were not posted a copy of the explanatory statement. There were very few in number of such members and creditors. 27 There were seven creditors for whom the deed administrators did not have email addresses so they were sent notice by post, and then a further 19 in respect of whom bounce-back emails were received. The latter were then also sent notice by post. The notice that was sent included a circular to creditors and members dated 3 February 2023. The circular made it plain that the explanatory statement enclosing the independent expert's report and court documents forming the s 444GA application had been uploaded to the administrators' website with a specific portal for this administration and the website address was given. It was said that the documents can be provided via email upon request. It was also stated that if any party wished to appear or intended to oppose, they had to do so in accordance with the timeframe set out in the orders that had been made. There was also an invitation to anyone with any queries to contact the administrators, and a telephone number and an email address were given. 28 In respect of members of the company, one did not have an email address and there were two bounce-back emails. Those three members were then sent the same circular I have already discussed. So, although the explanatory statement was not posted to those creditors and members to whom it was strictly in accordance with the orders of 31 January 2023 required to be posted, I am nevertheless satisfied that they were given adequate notice of this proceeding and of the availability to them of the explanatory statement in the event that they had any interest in receiving it and reading it. 29 Pursuant to orders 3 and 4 of the orders made on 31 January 2023, any interested person wishing to oppose the application was to file a notice of appearance indicating grounds of opposition and/or apply to be joined as a respondent by 4.00pm on 13 February 2023. No person has taken such steps to formally object to, or otherwise be heard on, the application. When the application was called, there was no appearance by anyone seeking to object to the relief. As I have indicated, ASIC has full notice of the application and has in the way I have described indicated its non-opposition to any relief that the Court may grant. 30 The only correspondence received by the administrators from interested persons in response to notice of the application does not identify any formal objection to the application. The communication by email expresses some frustration with the outcome of the administration, but it does not allege, let alone establish, any unfair prejudice to members of the company.

Consideration 31 I am satisfied that on the evidence the following findings should be made. 32 In the event that the DOCA is not made effective, completion of the Hough transaction will not proceed. The deed administrators will instead be obliged (pursuant to cl 5.4 of the DOCA) to convene a meeting of creditors and it is very likely that the creditors will resolve to place the company into liquidation. 33 In the event that the DOCA is not made effective in accordance with its terms and the company is instead placed into liquidation, then: (1) the business of the company would cease to operate; (2) its assets would be sold (likely on a piecemeal basis); (3) realisation costs are expected to be substantially greater; and (4) the return to creditors would be substantially lower (and inevitably take longer while the realisation process unfolds). 34 In particular, in the event of liquidation, the deed administrators estimate that there will be no return whatsoever to any creditors other than secured creditors (and for them, in an amount significantly less than what would be received by them under the DOCA and creditors' trust). 35 The same conclusions have been expressed in the independent expert's report prepared by Jennifer Nettleton of KordaMentha dated 25 January 2023. Ms Nettleton expresses her view that, if the DOCA is not completed, in the absence of additional funding the deed administrators would need to cease trading the business of the company due to substantial ongoing trading losses. Also, in the absence of an alternative proposal, creditors would likely vote to place the company into liquidation. I accept those opinions of the administrators and Ms Nettleton. 36 Ms Nettleton values the company's assets on a liquidation basis at between $4.6 million and $8.4 million and values the claims against those assets at between $195 million and $234.1 million. This leaves an overall deficiency of assets of between $186.5 million and $229.5 million. That informs Ms Nettleton's overall conclusion that the shares in the company have no value. 37 The administrators' report under s 75-225 assessed the company's shareholding in Ellume USA at a nil realisable value in liquidation given the impact of liquidation on regulatory approvals necessary to preserve the value of the business. 38 Ms Nettleton's opinion is that, if the company is placed into liquidation, the directors of Ellume USA would likely place it into a bankruptcy process. 39 Although there is unlikely to be any difference for members between a DOCA and liquidation, completion of the DOCA is likely to provide a materially better return to creditors. 40 Completion of the DOCA is also likely to enable the company to continue to operate. The transaction proceeds on the basis that the business will continue to trade as a going concern with the cash contribution from Hough, rather than the assets being sold in a liquidation. Relevant employee liabilities are assumed as part of the transaction. The costs of a winding up are avoided. These matters strongly support the making of orders to permit the share transfer to proceed. 41 I am satisfied that there is no unfair prejudice to members because the equity in the company has no residual value. Liquidation is the only realistic alternative to the proposed share transfer, and the shares of the company would have no value in a liquidation - after payment of the costs of the winding up and the claims of creditors, there is no prospect at all of a residual to be distributed to members. 42 In short, I am satisfied that I should exercise the discretion to grant the relief sought because: (1) the share transfer will not unfairly prejudice the company'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; (2) the share transfer will benefit all classes of creditors of the company (including secured creditors, priority unsecured creditors and ordinary unsecured creditors) by increasing estimated returns and otherwise by preserving the ongoing business of the company; and (3) to do so would result in the continuation of the business of the company and advance the objects of Pt 5.3A of the Act as embodied in s 435A of the Act. 43 I acknowledge counsel's careful submissions which have been of great assistance to the Court. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

Corporations Act 2001(Cth)ss 435A, 436A, 444GA, 447A, 606, 655A(1)(a)

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