Preston, in the matter of Hughes Drilling Limited (Administrators Appointed) [2016] FCA 1175

Introduction 1 The first plaintiffs are the joint and several voluntary administrators of Hughes Drilling Limited (administrators appointed) (HDL) and each of its thirteen Australian-based subsidiary companies (which, together with HDL, are also plaintiffs) (the corporate plaintiffs). The first plaintiffs were appointed on 22 September 2016. 2 The first plaintiffs seek orders pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act) as to how Pt 5.3A of the Act is to operate in relation to the corporate plaintiffs in connection with a funding arrangement into which the first plaintiffs seek to enter with Westpac Banking Corporation (Westpac).

Background 3 HDL is a public company, incorporated and operating in Australia. It was previously listed on the Australian Securities Exchange. Since 27 June 2016, it has been voluntarily suspended from official quotation. 4 HDL is the ultimate holding company of the thirteen Australian-based subsidiary companies and another company which was incorporated in the United States of America. It is convenient to refer to HDL and its subsidiary companies as, simply, the Group. 5 The Group's principal activities consist of providing drilling services to the mining industry, with a focus on niche services for production, delineation and mining companies that do not have specialised equipment or qualified personnel to perform the necessary work themselves. The Group also supplies manufactured drill rigs and spare parts. 6 The Group's key assets comprise drilling rigs valued at approximately $67.7 million (as at 30 April 2016). Other assets include drill compressors, land and buildings, support vehicles, light vehicles, other plant and equipment and certain intangible assets (intellectual property) with a total value of approximately $18.5 million (as at 30 April 2016). 7 Companies in the Group are also party to approximately 20 service contracts with major mining companies such as BHP Billiton Ltd, Fortescue Metals Group Ltd, Downer EDI Ltd and Yancoal Australia Ltd, servicing mines across the east coast and west coast of Australia. These contracts (the service contracts) together generate approximately $6 million in monthly revenue for the Group. 8 As at 22 September 2016, HDL and the Australian-based subsidiary companies had a drawn overdraft balance of $11,601,145, but with only $49,398 in cash at bank. Westpac was the principal secured creditor. At that time it was owed approximately $47 million under existing debt facilities. Other secured creditors include suppliers with retention of title arrangements and lessors with registrations on the PPSR. The Group has a potential taxation debt of $19 million (including a superannuation guarantee charge of approximately $4.3 million). The Group has approximately 450 trade creditors (approximately $7 million) and accrued employee entitlements (approximately $4.6 million). In this latter connection, the Australian-based subsidiaries together employ over 300 employees, although most of these employees are employed by two companies in the Group which provide drilling and drilling-related services to customers under the service contracts. Some of these employees are paid weekly. Some are paid fortnightly. Others are paid monthly. The next tranche of wages ($715,094 inclusive of superannuation and tax) is due on 28 September 2016. The first plaintiffs' forecast that a total amount of $9.7 million will be payable to employees over the next 13 weeks. 9 Since their appointment, it has not been possible for the first plaintiffs, in the limited time available, to investigate comprehensively the affairs of the Group. They have, however, formed the view that there are advantages in the Group continuing to trade as a going concern so as to enable them to explore either a sale or rehabilitation of the Group's business. The first plaintiffs forecast that the following payments will need to be made: approximately $3.3 million by 30 September 2016, of which $0.9 million represents wage payments; approximately $5.8 million between 1 October and 28 October 2016, of which $3.7 million represents wage payments; approximately $7 million between 29 October and 25 November 2016, of which $3 million represents wage payments; and approximately $4.9 million between 26 November and 16 December 2016, of which $2.1 million represents wage payments. 10 It will also be necessary to value the Group's business and assets. The first plaintiffs estimate that this will cost between approximately $50,000 and $60,000. 11 The Group has insufficient liquidity to make the payments summarised above, as and when those payments will fall due. The first plaintiffs are concerned that if wages are not paid on time, it is very likely that the employees of the Australian-based subsidiaries will cease to perform the work required to complete or otherwise comply with the service contracts. The first plaintiffs are concerned that non-compliance with the service contracts will trigger events of default and the likely termination of those contracts by the relevant customers. This would, in turn, preclude or complicate recovery of existing debts coming out of the service contracts and could remove the key source of future income for the Group. 12 So as to avoid the risk of adverse consequences arising from the failure to make the relevant payments as and when they fall due, and to maintain the day-to-day trading of the Australian Group companies, the first plaintiffs have negotiated an interim funding arrangement with Westpac which involves borrowing approximately $4 million (the funding arrangement). It is envisaged that, on drawing down these funds, HDL will provide intercompany loans to each subsidiary to enable each subsidiary to meet its payments to employees and suppliers. 13 The funding arrangement provides that if the funds received by the first plaintiffs as administrators to which they have recourse pursuant to s 443F of the Act are not sufficient to repay the money borrowed under the funding arrangement, then Westpac agrees to release, and covenants not to sue, the first plaintiffs in respect of their personal liability to repay the borrowed money to the extent of that insufficiency. In short, Westpac is prepared to lend the $4 million on a limited recourse basis. The reason for the present application is that, despite the agreement between Westpac and the first plaintiffs, s 443A(1) of the Act will continue to subject the first plaintiffs to personal liability to repay the borrowed money and interest in respect thereof: s 443A(2) of the Act. Understandably, the first plaintiffs are unwilling to allow the funding arrangement to be entered into if there is a risk that they might be subject to substantial personal liabilities arising from their efforts to promote the interests of the Group companies and their creditors. There is, therefore, a need to modify the operation of s 443A pursuant to s 447A of the Act. 14 The first plaintiffs seek orders pursuant to s 447A of the Act to the effect that: any moneys advanced by Westpac to HDL under the funding arrangement be treated as debts incurred by the first plaintiffs (in their capacity as administrators of HDL) in the performance and exercise of their functions and powers as administrators under s 443A(1) of the Act; the operation of s 443A(1) of the Act be modified so that, if the property of HDL is insufficient to satisfy the debts incurred by the first plaintiffs under the funding arrangement for which the right of indemnity exists under s 443D of the Act, the first plaintiffs (in their capacity as administrators of HDL) will not be personally liable to repay such debts to the extent of that insufficiency; and the operation of s 443A(1) of the Act be modified so that the personal liability of the first plaintiffs (in their capacity as administrators of HDL and each of the other corporate plaintiffs) under s 443A of the Act exclude any liability for any loans or advances from HDL to those corporate plaintiffs and for any loans, advances or other debts between two or more companies in the Group. 15 In an affidavit read in support of the present application, Mr Preston, one of the first plaintiffs, has deposed that it is the first plaintiffs' intention to continue to operate the Group's business in a way which, to the greatest extent possible, will preserve the value of the assets of the Group companies. He has deposed that the funding arrangement is the only viable and immediately available option to achieve this. He said that the funding will maximise the chances of the Group companies continuing to trade as a going concern, the effect of which would be to: preserve the value of the Group companies' assets for the benefit of creditors; maximise the potential proceeds of a sale process; and conversely, avoid the potential discount to the amount that the Group companies might receive on a sale of the business or their assets in a liquidation.

Consideration 16 The Court has a broad power under s 447A of the Act to modify the operation of Pt 5.3A, including s 443A. Orders of the kind now sought have frequently been made where the Court is satisfied that an administrator has entered into a loan agreement or other arrangement to enable a company to trade for the benefit of its creditors: see Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (Administrators Appointed) [2011] FCA 1493 at [23] and the cases there cited. 17 In Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd (admins apptd) (2010) 82 ACSR 142; [2010] FCA 1469, Gilmour J discussed the relevant principles at [30] (citations omitted): The principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A can be summarised as follows: (a) the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Pt 5.3A of the Corporations Act. (b) typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors. (c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement. (d) notice has been given to those who may be affected by the order. 18 I am satisfied that the relief sought by the first plaintiffs should be granted. The funding arrangement is plainly in the interests of creditors and consistent with the objectives of Pt 5.3A of the Act. The simple fact is that the provision of funding under the arrangement will only proceed if the relief sought is granted. It is not to be expected that the first plaintiffs, as administrators, should be expected to expose themselves to substantial personal liabilities in circumstances such as the present: In the matter of Renex Holdings (Dandenong) 1 Pty Ltd (administrators appointed) [2015] NSWSC 2003 at [13]. Further, there is no significant prejudice or disadvantage to creditors that is likely to arise from entry into the funding arrangement. Westpac has agreed to the limited recourse provision. Further, it has been notified of the present application and has stated, through its solicitors, that it has no objection to the application. Westpac will, of course, retain its security for the money to be borrowed under the funding arrangement. So far as the unsecured creditors are concerned, the evidence before me is that they are likely to be better off (and unlikely to be disadvantaged) by the Group business continuing to operate so as to preserve its value. 19 It has not been possible, given the urgent need for funding, to notify all creditors of the making of this application. I note, in this connection, that the first meeting of creditors is not scheduled to take place until on or about 5 October 2016. However, in light of the urgency of the application and the evidence before me, I do not think that this stands as a substantial reason either to refuse or to delay the granting of relief. I will grant liberty to apply to any party affected by the orders to move to modify or discharge them. 20 There is evidence before me that the first plaintiffs have given notice to the Australian Securities and Investments Commission (ASIC) of the making of this application. At the time of hearing the application, they had not received any substantive response from ASIC. Once again, in light of the urgency of the application and the evidence before me, I do not think that this stands as a substantial reason either to refuse or to delay the granting of relief.

Disposition 21 Orders, substantially as sought, will be made. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

SCHEDULE OF PARTIES NSD 1640 of 2016 Plaintiffs Second Plaintiff: HUGHES DRILLING LIMITED (ADMINISTRATORS APPOINTED) ACN 124 279 750 Third Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF AUSTRALIAN GAS DRILLING PTY LTD ACN 139 242 890 Fourth Plaintiff: AUSTRALIAN GAS DRILLING PTY LTD ACN 139 242 890 Fifth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF EDMS METALS PTY LTD ACN 146 399 760 Sixth Plaintiff: EDMS METALS PTY LTD ACN 146 399 760 Seventh Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF EVERY DAY MINE SERVICES OPERATIONS PTY LTD ACN 003 949 148 Eighth Plaintiff: EVERYDAY MINE SERVICES OPERATIONS PTY LTD ACN 003 949 148 Ninth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF EXPRESS HYDRAULICS (AUST) PTY LTD ACN 155 845 864 Tenth Plaintiff: EXPRESS HYDRAULICS (AUST) PTY LTD ACN 155 845 864 Eleventh Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF G.O.S. DRILLING PTY LTD ACN 068 520 794 Twelfth Plaintiff: G.O.S. DRILLING PTY LTD ACN 068 520 794 Thirteenth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HD JSW PTY LTD ACN 165 895 072 Fourteenth Plaintiff: HD JSW PTY LTD ACN 165 895 072 Fifteenth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES DRILLING 1 PTY LTD ACN 011 007 702 Sixteenth Plaintiff: HUGHES DRILLING 1 PTY LTD ACN 011 007 702 Seventeenth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES DRILLING 2 PTY LTD ACN 146 399 902 Eighteenth Plaintiff: HUGHES DRILLING 2 PTY LTD ACN 146 399 902 Nineteenth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES DRILLING CORPORATE PTY LTD ACN 146 398 718 Twentieth Plaintiff: HUGHES DRILLING CORPORATE PTY LTD ACN 146 398 718 Twenty-first Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HUGHES EQUIPMENT HIRE PTY LTD ACN 146 398 923 Twenty-second Plaintiff: HUGHES EQUIPMENT HIRE PTY LTD ACN 146 398 923 Twenty-third Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF HYD-ELEC AUSTRALIA PTY LTD ACN 151 316 611 Twenty-fourth Plaintiff: HYD-ELEC AUSTRALIA PTY LTD ACN 151 316 611 Twenty-fifth Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF JSW AUSTRALIA PTY LTD ACN 125 989 791 Twenty-sixth Plaintiff: JSW AUSTRALIA PTY LTD ACN 125 989 791 Twenty-seventh Plaintiffs: JASON PRESTON, WILLIAM JAMES HARRIS AND SHAUN FRASER IN THEIR CAPACITIES AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF REICHDRILL AUSTRALIA PTY LTD ACN 162 841 287 Twenty-eighth Plaintiff: REICHDRILL AUSTRALIA PTY LTD ACN 162 841 287