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[2018] VSC 345
Supreme Court of Victoria
2018-06-22
SLOSS J
Original judgment source is linked above.
CORPORATIONS - Management and administration - Meetings - Application for extension of convening period for second meetings of creditors pursuant to ss 439A(6) and 447A of the Corporations Act 2001 (Cth) - Whether extensions in best interests of companies' creditors - Whether prejudice may be caused to any creditor or third party.
CORPORATIONS - Voluntary administration - Corporate group of companies in administration - Application by administrators for directions under s 90-15 of Schedule 2 to the Corporations Act 2001 (Cth) (the Insolvency Practice Schedule (Corporations)) - Where operating company in group of companies has amounts of monies imminently due - Whether administrators would be justified in procuring the holding company to lend monies to the operating company under intercompany loan agreements.
CORPORATIONS - Management and administration - Orders sought for modification of operation of s 443A of the Corporations Act 2001 (Cth) for limitation of administrators' personal liability in respect of relevant borrowings - Where administrators exposed to personal liability for proposed intercompany loan agreements - Whether interests of companies' creditors best served by administrators' proposed actions - Whether creditors of companies may be prejudiced or disadvantaged by order sought.
1 On 12 June 2018, Mr Keith Alexander Crawford and Mr Robert Bruce Smith were appointed as administrators of four companies in the 'Unlockd Group', as follows:
I will refer to those four companies together as 'the Administered Entities'.
2 Each of Mr Crawford and Mr Smith is a chartered accountant and registered liquidator, practising as a partner at the firm of McGrathNicol. Each has many years' experience in insolvency related matters. Mr Smith practises in the restructuring team. Mr Crawford has led numerous complex restructuring assignments.
3 The Unlockd Group is a 'startup': it is a new venture with a business that generates meaningful revenue. It commenced in 2014, but in its four years of trading it has not yet achieved profitability. Nevertheless, the Unlockd Group has attracted significant interest in the marketplace, with some $50 million in capital having been subscribed to the holding company, Unlockd Limited.
4 The Unlockd Group operates a global technology business, which is headquartered in South Melbourne and with operations in Australia, the United States of America, the United Kingdom, and India. The group's technology is centred around a mobile phone application known as the 'Unlockd App'. As a practical matter, the Unlockd App relies on access to technology platforms for advertising (AdMob) and application distribution (Play Store) owned and operated by Google LLC and related entities. When installed, the Unlockd App displays advertising on a user's mobile telephone screen every time the phone is 'unlocked'. Users receive consideration or incentives for viewing the advertisements in the form of mobile telephone credit, subsidised content streaming services or 'points' in consumer loyalty programmes. The group generates revenue from advertisers and content publishers and pays rebates to the providers of the consideration.
5 Prior to the appointment of the administrators, Unlockd Limited and certain other members of the Unlockd Group commenced proceedings in the High Court of Justice in the United Kingdom (on 9 May 2018) and in the Federal Court of Australia (on 31 May 2018) against Google LLC and related parties (Google), following threats made by Google to remove the Unlockd App from the Google Play Store and to disable the Group's access to AdMob-generated advertising content (Google Litigation). Access to the Google Play Store and Google's AdMob services is critical for the Group's current business model. Interim injunctions were granted in the United Kingdom on 9 May 2018 and in Australia on 31 May 2018 (extended on 8 June 2018), although the administrators have since given notice to the relevant Google companies that they intend to discharge the injunctions in the Australian proceedings. In both the Australian and UK proceedings, the matter has been set down for trial on dates in September 2018.
6 The Administered Entities to which Mr Crawford and Mr Smith were appointed as administrators undertake specific roles and tasks within the Unlockd Group and conduct the group's operations as set out below:
(a) Unlockd Limited, which is the group's holding company, is the sole shareholder of the other three Administered Entities and it also holds key intellectual property assets including the group's patent portfolio;
(b) Unlockd IP owns the group's trademark registrations;
(i) engages the group's Australian staff (34 employees and consultants at the time of appointment, of whom 14 have been let go and 3 re-engaged as consultants by Unlockd Limited);
(ii) holds certain intellectual property rights under employee and consultant agreements; and
(iii) is party to an agreement with Loyalty Pacific Pty Ltd, which supplies 'Flybuys points' provided by the group to Australian users of the Unlockd App in exchange for those users viewing advertising; and
(i) is the Australian trading company in which advertising revenues are recognised; and
(ii) holds the benefit of undertakings provided by individual consultants in relation to confidential information.
7 The first meetings of the creditors of the Administered Entities are due to be held today, Friday 22 June 2018.
8 In advance of the first meetings of creditors taking place, the administrators have made an urgent application to the Court, by filing a RedCrest originating process and affidavit in support of Mr Robert Bruce Smith, affirmed on 20 June 2018, together with its exhibits RBS-1 ff (the Smith affidavit). An urgent hearing has been sought at least in part because of the perceived immediate need for funding to pay expenses that are payable imminently. The originating process and the Smith affidavit have been served on the Australian Securities & Investments Commission (ASIC), but it is said that the pressure of time has made it practically impossible to serve the application on any of the creditors.
9 The administrators propose to provide creditors with a copy of the Court's orders, and have proposed that orders be made preserving liberty to apply to seek to vary or discharge the Court's orders to any person who might be materially affected by them. They also intend to inform creditors of the orders made at the first meetings of creditors on 22 June 2018.
10 As is explained in the Smith affidavit, in the limited time since their appointment the administrators have attempted to familiarise themselves with the affairs of the Administered Entities, but it has not been possible for them to conduct any comprehensive investigation of their affairs. To this point, however, the administrators are of the view that if they are to give the Administered Entities the best chance of remaining in business, or to maximise the returns to their creditors, then as administrators they require: (a) sufficient time to allow them properly to investigate and report on the affairs of the Administered Entities and explore the prospects of a re-capitalisation or sale; and (b) the ability to fund ongoing operations from the group's own assets in the meantime.
11 For those reasons, they have commenced this proceeding, as plaintiffs, seeking:
(a) an extension of the convening period for the second meetings of creditors to 10 October 2018;
(b) a direction that they are justified and acting properly and reasonably in extending loans from the parent company, Unlockd Limited, to the operating company, Unlockd Operations, for the purpose of funding the group's operations during the administration period; and
(c) an order capping their personal liability for the intercompany loans at the extent of the operating company's assets (from which the administrators are indemnified).
12 In accordance with r 2.8 of the Supreme Court (Corporations) Rules 2013 (Vic), the administrators' solicitors served the originating process and Smith affidavit on ASIC on 20 June 2018, at 2.04 pm. By letter dated 21 June 2018, ASIC informed the plaintiffs and thereby the Court that it did not propose to intervene in the application or seek leave to appear before the Court.
Application for an extension of the convening period
13 Unless extended, the convening periods for the second meetings of creditors for each of the Administered Entities will end on 10 July 2018, pursuant to the default period specified by s 439A(5) of the Corporations Act 2001 (Cth) (the Act).
14 The plaintiffs seek an order pursuant to s 439A(6) of the Act extending the convening periods by three months, and a 'Daisytek order'[1] pursuant to s 447A of the Act allowing the meetings to be held at any time between the date of the order and the date ending five days after the end of the extended convening period.
15 Sections 439A and 447A appear in Part 5.3A of the Act. The object of Part 5.3A, which is headed 'Administration of a company's affairs with a view to executing a deed of company arrangement', is stated in s 435A as follows:
The object of this Part, and Schedule 2[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.
16 Section 439A(1) of the Act requires the administrator of a company under administration to convene a meeting of creditors within the convening period as fixed by s 439A(5), unless extended by the Court under s 439A(6). Further, as provided by s 439A(2), the meeting must be held within five business days before, or within five business days after, the end of the convening period.
17 Subsection 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth) requires an administrator to provide a report to creditors about the company's business, property, affairs and financial circumstances to assist the creditors with making their decision at the s 439A meeting. The provision also prescribes the matters that must be addressed by the administrator in that report.
18 The purpose of the second meeting of creditors required by s 439A is to consider the company's future. Section s 439C of the Act prescribes that, at the s 439A meeting, the creditors may resolve that:
(a) the company execute a deed of company arrangement;
(b) the administration end; or
(c) the company be wound up.
19 Where an application is made under s 439A(6) of the Act for an extension of time, the Court attempts to strike a balance between, on the one hand, the expectation that the administration will be conducted relatively speedily and summarily and, on the other, the need to ensure that undue speed will not prejudice sensible and constructive actions directed towards maximising the return for creditors and shareholders through a properly conducted administration.[3]
20 Section 447A of the Act provides the Court with a general power to make such orders as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company.
21 Relevantly in the present context, s 447A(1) enables the Court to make a 'Daisytek order' enabling the administrators, if they see fit, to hold the second meetings of creditors at any time during or five business days before or after the end of the convening periods as extended by the Court under s 439A(6).
Principles relevant to extending the convening period
22 When s 439A was introduced by Parliament, as part of the measures contained in the Corporate Law Reform Bill 1992, the explanatory memorandum for the Bill made the following comment concerning the power to extend the convening period (at paragraph 507):
The court will be given a power to extend [convening periods] ... though it is not expected that this power would be exercised frequently, since it is an important objective of the new provisions for creditors to be fully informed about the company's position as early as possible, and to have an opportunity to vote on its future as soon as possible.
23 In recent times, however, the extensive body of case law concerning applications for extensions of time under s 439A(6) demonstrates that courts have recognised commercial realities in their approach when responding to those applications where they are made in the context of large or complex groups and companies the proper administration of which requires significant time and effort.
24 In the written outline of submissions filed on behalf of the administrators, counsel has conveniently referred to the leading authorities concerning applications for extension of time under s 439A(6) and set out the relevant principles which inform the exercise of the court's discretion to grant an extension of a convening period in such cases. I reproduce that extract from counsel's submissions below:
Principles relevant to extending the convening period
The function of the Court on an application such as this is, as I see it, to strike an appropriate balance between, on the one hand, the expectation that administration will be a relatively speedy and summary matter and, on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders.
It is well understood that in complex administrations these two objectives can often be in collision. If they are in collision then, in many cases, priority will be given to obtaining sensible information and advice from the administrators to enable the creditors to have the material before them to make an informed decision.
Relevant authorities recognise that strict compliance with the tight timeframes for convening the second meeting (statutorily imposed to avoid the prolongation of the voluntary administration procedure and its concomitant moratorium and impact on rights) may not be feasible in large and complex administrations, if the administrators are to produce informed recommendations based on adequate investigations, and a sufficiently comprehensive and detailed report capable of providing meaningful assistance to the creditors in deciding the fate of the company.
Where the relevant business group is large and complex, or there is a prospect of successful realisation of assets through negotiations with third parties, as in the present case, the administration process is often given more time. There is no place for a predisposition against granting an extension.
The power to extend the time for convening the second meeting of creditors should be not exercised lightly or as of course. But this is not to suggest that juridical parsimony is paramount. Rather, Pt 5.3A should be given a commercial construction and application which reflects the reality of the setting in which both the company under administration and the administrator find themselves. The court must balance the expectation that administration will be a relatively speedy and summary matter against the consideration that undue speed should not be allowed to prejudice constructive commercial actions directed to maximising the return for creditors and potential return to shareholders. The lens to be used to assess that balance should not be so narrow that it focuses merely on some scholastic analysis of the text applied from the usually pessimistic perspective of an insolvency practitioner. After all, a potential outcome of Pt 5.3A may be a restructuring or a trade out which enables the company under administration and its activities to continue to the benefit of creditors and all stake-holders. The court must be commercially astute to facilitating such a potentially positive outcome where it is feasible. The first step in that process is usually the consideration of an application of the present type.
Speed is important because the interests of the body of creditors as a whole may be adversely affected by delay. On the other hand, the interests of the creditors would also be adversely affected if meetings were called only to be necessarily adjourned because adequate information is not available upon which the creditors can make an informed decision.
25 More recent examples of administrations in which extensions of several months have been granted include Re Victoria Station Corporation Pty Ltd [2017] VSC 371, which was a complex administration requiring lengthy investigations by the voluntary administrators to enable compilation of informative reports. Gardiner AsJ considered that the extension sought in that case, of four months, was a reasonable one. In so finding, his Honour noted (at [57]) that when the prospect of applications seeking extensions of the convening period were mentioned at the first meetings of creditors, no objection was raised by the creditors. Similarly, in Reidy, in the matter of eChoice Limited (Administrators Appointed) [2017] FCA 1582, Yates J granted the administrators an extension of a period of approximately three months, to accommodate for difficulties arising due to the Christmas/New Year period and the 10 week period required for a settlement to take place in the event that an offer the administrators received to purchase certain assets of the group were accepted.
26 The factors relevant to the grant of an extension of the convening period are also usefully summarised in counsel's submissions, as follows:
Factors relevant to the grant of an extension
(a) they have done all that they could "taking into account the economics of the situation" to convene the meeting within the prescribed period; and
(b) the extension will more likely than not enable them to clarify the company's position for creditors.
(a) whether there is a lack of any or timely access to financial or other business records;
(b) the level of co-operation of the company's officers or employees in providing useful and timely information to the administrator to facilitate his investigations;
(c) the size and scope of the business of the company or the group (as the case may be);
(f) whether there are substantial international activities;
(e) whether there are a large number of employees with complex statutory and other entitlements relating to rights of redundancy payments, annual leave, long service leave and the like;
(f) whether the administrators are dealing with a complex group structure including significant intercompany loans;
(g) whether there have been complex transactions entered into by the company or the group;
(h) the time needed to effect an orderly process for the disposal of assets in a manner sufficient to maximise the return to creditors;
(i) the time needed for a thorough assessment of a proposal for a deed of company arrangement to enable the company to trade out or to restructure its affairs;
(j) whether any extension would maximise the chances of the sale of the relevant business as a going concern;
(k) the number in quantity, value and type (secured and unsecured) of the creditors and the level of complexity in any securitisation or subordination arrangements;
(l) if receivers have been or may be appointed, any additional complexity involved in the timing and relationship of such receivers' activities as it affects the administration and the options available to the company under administration;
(m) if a group is involved, the investigation of the desirability or appropriateness of "pooling" assets and creditors' claims;
(n) if a group is involved, the investigation of the desirability or appropriateness of one or more deeds of company arrangement;
(o) whether there are any unusual substantial transactions that warrant further investigation in order for the administrator to properly advise creditors concerning potential recovery or other action; and
(p) more generally, whether additional time is likely to enhance the return for creditors.
The cases show that where a substantial issue in any of these categories is established (and a fortiori where the facts fit into more than one category), the court tends to grant an extension, and the extension tends to be for the time sought by the administrator provided that the evidentiary case has been properly prepared, there is no evidence of material prejudice to those affected by the moratorium imposed by an administration, and the court is satisfied that the administrator's estimate of time has a reasonable basis.
27 The administrators depose, through Mr Smith, as to the complexity of the affairs of the Unlockd Group and the business operations that are conducted in unison by the Administered Entities. The steps taken by them to advance the administrations since their appointment on 12 June 2018 are also outlined and discussed at some length in Mr Smith's affidavit.
28 In summary, the administrators are in the process of considering how best they might preserve or realise value for the creditors of the Administered Entities, including by one or more of sale or re-capitalisation, continuation of the Google Litigation and continuation of trade.
29 To that end, the administrators have initiated a sale process which is designed to be completed by the end of September 2018.
30 The administrators have engaged Adara Partners[4] to conduct a sale process in respect of the Administered Entities or their assets as soon as practicable. This may involve a sale of business assets or intellectual property, or alternatively a sale and/or re-capitalisation of one or more of the Administered Entities via deed of company arrangement (DOCA).
31 Prior to the second meetings, the administrators anticipate that they need to:
(a) undertake the sale or re-capitalisation process;
(b) assess the Administered Entities' options regarding ongoing conduct of the Google Litigation and implement a value preservation or realisation strategy in respect of that litigation;
(c) explore the possibility of obtaining further third party funding to improve the trading, sale and re-capitalisation options open to the Administered Entities; and
(d) complete investigations into the circumstances of the Administered Entities' failures and any claims that might be open in a liquidation of the companies -
in addition to the usual tasks that must be completed in a voluntary administration.
32 In his affidavit, Mr Smith deposes as to the reasons why the administrators will likely not be capable of providing the creditors with an informed basis on which to make the decision required of them by s 439C of the Act at the second meetings of creditors if those meetings were to proceed on the 'default date' of 10 July 2018. In his view, it would be in the interests of the creditors of each of the Administered Entities for the convening periods for the second meetings to be extended for a period of three months, for the following reasons (at [77] of the Smith affidavit):
(a) The administration of the Companies is complex. The Administrators are still in the process of:
(b) As matters currently stand, Mr Crawford and I would be unable to make an informed recommendation in accordance with our obligations under section 439A(4) of the Corporations Act.
(c) In my opinion, it is in the best interests of the creditors of the Companies that the administrations continue so as to preserve flexibility in respect of any sale or recapitalisation proposals and to allow sufficient time for a suitable sale process to be conducted. Having regard to the nature of the business and assets of the Companies and identities of potential purchasers which include a number of foreign parties, it is my opinion that an executable sale transaction or DOCA proposal could not be produced at an acceptable value within the statutory convening period.
(d) If the administrations of the Companies were to end on 10 July 2018, it is my opinion that the financial condition of the Companies would deteriorate and that may, in turn, jeopardise the position of the employees, the disposal of the business or assets, and future distributions to creditors.
33 In other words, at this point in the administration, the administrators are of the view that they simply could not organise a sale of the Unlockd Group or its business, or a re-capitalisation, that could be completed within the default period.
Factors that justify an extension in these circumstances
34 During the course of oral submissions, counsel for the administrators explained that one of the principal factors informing the administrators' assessment of timing and the extension required by them is the inherent 'complexity of the business'. First, it was said the business operated by the Unlockd Group is a highly technical one and its principal asset is a piece of technology that is not immediately understandable by everyone in the marketplace. To date, that technology has been run on (and been dependent upon) one platform, operated by Google, but Google has now threatened to withdraw access to its platform. As a practical matter, any prospective new owner would likely have to spend time understanding how it could use and exploit the Unlockd technology without a dependence on the Google platform. Accordingly, the due diligence process associated with any sale process has to allow for the potential for the asset to be seen and appreciated by people with technical expertise advising prospective purchasers, and the due diligence period will have to allow for that potential to be explored and understood by them. The proposed indicative timetable for that sale process, based on advice received from Adara Partners, provides for expressions of interest to close on 22 June 2018, detailed due diligence to commence on 2 July 2018, receipt of final binding offers by 3 August 2018, and with a financial close/settlement at the end of September 2018.
35 Secondly, because of the ingenuity of the asset, it is potentially of interest to an international audience. The sale process will see the technology asset marketed to a targeted audience, but one that is located across a range of countries. In those circumstances, it is said that the sale process will take longer than would ordinarily be the case, not only because of the breadth of the market but also because of the prospect of receiving bids from companies in non-English speaking countries (which would effectively delay any due diligence process). To be effective, the marketing campaign will need the support of staff currently working within the Unlockd Group. That is because they understand the technology, and can assist prospective purchasers to better understand and explore its potential.
36 Thirdly, there is a web of inter-company arrangements in place between the Administered Entities, and between them and overseas entities within the Unlockd Group, which makes it more difficult for the administrators to assess and report to creditors on an informed basis by the deadline of 10 July 2018.
37 Other factors arising in this proceeding that have been identified in the authorities as relevant to the grant of an extension are set out below:
(a) The administrators have not yet had the benefit of reports as to the companies' affairs (having extended the period for the directors to provide those to 22 June 2018).
(b) The companies' affairs are conducted across four continents and involve complicated technology systems that are the subject of litigation against well- funded and sophisticated litigants.
(c) There is a complex (although not large) group structure with complicated and erratic intercompany loan arrangements.
(d) More than two months' time is required to properly pursue a sale or re-capitalisation strategy.
(e) Principally due to the litigation and the sale strategy, significant time is needed for a thorough assessment of any proposal for a deed of company arrangement or a sale.
(f) It is therefore the case that an extension would increase the chances of the sale or re-capitalisation of the business as a going concern.
(g) A further allowance should be made for the time required to investigate the desirability or appropriateness of pooling assets and creditors' claims in a liquidation scenario.
(h) The administrators' view is that the proposed extension of the convening periods will not unduly prejudice creditors.
(i) All known creditors have been notified of the administrators' intention to seek the extensions of time and none has notified the administrators of any objection.
38 The administrators view, informed by their extensive experience, training and skill, is that the interests of creditors are best served by granting the extension sought. I accept the evidence adduced on behalf of the administrators to the effect that:
(a) in the absence of a suitable period of extension of the duration sought, they would be unable to make an informed recommendation in accordance with their obligations under subsection 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth); and
(b) in their opinion, it would not be possible for an executable sale transaction or DOCA proposal to be produced at an acceptable value within the default convening period.
39 I am satisfied that the extension sought would allow the administrators the time they need to properly investigate the Unlockd Group's affairs, sensibly deal with its extant litigation with Google and exploit so far as is possible the potential to re-capitalise or sell the business. While such an extension would result in an extension of the statutory moratorium and thus impact on creditors' rights, it is nevertheless desirable that the timing for the second meetings be one that is workable. Based on the material before me, it seems clear that if the second meetings were called within the default period, the inevitable result would be that an adjournment would be required.
Application for a direction concerning the loans to be provided by Unlockd Limited to Unlockd Operations during the administration period
40 The administrators are seeking a direction from the Court that in the administrations they are justified and acting properly in extending loans from the holding company, Unlockd Limited, to the operating company, Unlockd Operations, for the purpose of funding the Unlockd Group's operations during the administration period.
41 Mr Smith deposes that from inception through to the present day, the Unlockd Group's business (including the Australian business) has primarily been funded by capital injections from the shareholders of Unlockd Limited, which have been on-lent to members of the Group based on the cash flow requirements of the operating entities to fund the running of the operations in each region. In Australia, the Administered Entities have effectively conducted the Australian business as a consolidated entity using the assets of each company to deliver the Unlockd App to the Australian market.
42 The financial position of the Administered Entities is further complicated by the fact that expenses do not appear to have been recharged or allocated between them on a consistent basis. Mr Smith explains that the corporate group structure adopted has led to a position where the entity in which the majority of the expenses of the Australian business have been formally incurred (Unlockd Operations) has limited assets available to meet those expenses. Prior to the appointment of the administrators, Unlockd Operations was routinely funded by intercompany loans from Unlockd Limited such that as at the appointment date, the Group's books recorded an intercompany loan payable from Unlockd Operations to Unlockd Limited of more than $28 million. Mr Smith deposes that without ongoing support from Unlockd Limited, Unlockd Operations has insufficient assets to meet the ongoing expenses which are necessary to enable the Australian business to earn income and to maximise value in the Australian business for the benefit of each of the Administered Entities during the administration period.
43 Mr Smith deposes (at [67]) that, in his opinion, the continuation of the administrations and trading of the Companies during the sale process is in the best interests of creditors as it will enable the administrators to maintain flexibility in the sale process by allowing interested parties to submit offers in respect of the Administered Entities or the continuing business via a DOCA proposal. However, for the administrators to be able to continue the business and trade on, they need a means by which to fund Unlockd Operations.
44 In his affidavit, Mr Smith has identified payments totalling some $305,000 plus GST that are due imminently from Unlockd Operations in respect of the Australian operations. During the course of the hearing, and after taking instructions, counsel informed the Court that the administrators have identified further items of expenditure required to be made within the next two weeks or so (comprised of matters including staffing costs, rent, web hosting, IT subscriptions, insurance, legal costs, other general operations costs, and administrators' remuneration) which would bring the total of the short-term funding required to $500,000. Unlockd Operations does not currently have sufficient funds to pay these expenses. The administrators' assessment is that if that sum were loaned to Unlockd Operations, the business could trade on.
45 Unlockd Limited has the liquid assets to pay those expenses, but to pay them would require the two companies to recognise intercompany loan liabilities. If the funding were to proceed in this manner, it would effectively continue the means by which Unlockd Operations funded its trade prior to the appointment of the administrators. Even if third party funding were available, it would likely be a more expensive option.
46 Having examined the significant intercompany loan accounts between members of the Unlockd Group (which are summarised in the Smith affidavit at [46]), Mr Smith deposes that Unlockd Limited is the largest creditor of Unlockd Operations by a significant margin, and it also holds significant intercompany claims against other members of the Administered Entities, other than Unlockd IP. Unlockd IP is the largest creditor of Unlockd Limited.
47 It is clear that Unlockd Operations does not have the independent means necessary to repay the funds that the administrators propose to lend to it. Nevertheless, the administrators are of the view that the proposed funding arrangements, by way of intercompany loan, are in the interests of creditors of Unlockd Limited. That is primarily because the proposed funding arrangements will enable the administrators to maintain the operations of the Administered Entities while a sale or re-capitalisation process in respect of the business or assets is completed, and in so doing they are likely to maximise the value of Unlockd Limited's technology and intellectual property assets for the benefit of those creditors. Given the cascading effect produced by the web of intercompany loan indebtedness, Mr Smith deposes that if the administrators' realisation process is successful, he expects that up to $2.6 million of sale and/or litigation proceeds would ultimately be available to meet administration costs and employee claims in Unlockd Operations.
48 The administrators acknowledge that if the business (or assets) was not successfully sold or re-capitalised, the advancing of funds from Unlockd Limited to Unlockd Operations would (at least theoretically) disadvantage the creditors of Unlockd Limited, who would lose the benefit of the assets that were paid away in satisfaction of Unlockd Operations' expenses. But, in their submission, that risk is both contingent and superficial, because it is only if little or nothing was realised in a liquidation scenario that the risk would be realised. If a return were realised from a sale or re-capitalisation, however, some value would have to be realised by Unlockd Operations out of the sale (to recognise that company's contribution to the value of the economic entity), and the intercompany liabilities incurred to Unlockd Limited during the administration would have priority in the liquidation of Unlockd Operations.
49 I am satisfied that there is a real risk that without the injection of funds proposed to be made by way of the loans, the prospect of the administrators achieving a re-capitalisation or sale will be substantially diminished. On the material before the Court, it seems clear that if Unlockd Operations were to cease to trade due to lack of funding, the technology and intellectual property assets may be rendered valueless because:
(a) it is the staff of Unlockd Operations who have the knowhow necessary to exploit the intellectual property rights and related contractual rights held by the Administered Entities, and thus their retention is vital to achieving a price that reflects the real value of the business;
(b) Unlockd Operations is the tenant of the premises from which the business operates; and
(c) Unlockd Operations is the contracting entity for the operational expenses necessary to the ongoing running of the business (including web hosting and IT subscription payments).
50 The expenses proposed to be covered immediately (within the sum of $500,000) are all of a routine nature which were being incurred prior to the administration also. That is to say, none of them are speculative or unwarranted expenses, and there are good reasons to think paying those expenses will promote business continuity.
51 As the creditors have not been given notice of the direction that the administrators seek from the Court, a bespoke form of liberty to apply mechanism has been devised so as to provide a real opportunity for any creditor who perceives it may be adversely affected by the proposed order to apply to the Court in a timely way, in advance of the payments the subject of the loans being effected. The administrators are also required to apprise creditors at the first meetings of the outcome of this application and address any issues of concern raised by the creditors.
52 The order sought by the administrators has been framed appropriately by reference to s 443D, which defines the scope of the debts for which an administrator is entitled to be indemnified.
53 There is a recent precedent for such a direction being given, in circumstances similar to the present. In Re Nexus Energy Ltd [2014] NSWSC 1041 (Nexus Energy), administrators sought to borrow funds in a head company to advance them to subsidiary companies to fund the ongoing operation of the subsidiaries, prevent the subsidiaries entering voluntary administration and allow expenditure on a valuable project held within one of the subsidiaries. There was a pre-existing practice within the group to advance funds from subsidiaries and evidence that the subsidiaries had not and would not likely soon generate funds sufficient to meet their own expenses. The administrators gave evidence that they believed the funding arrangements were necessary to allow the subsidiaries to continue to trade, so as to maximise the prospect that a satisfactory sale price could be achieved for the head company's assets.
54 In that case, Black J reached the view that a direction was justified. His Honour said (at [13]):
It will be the exception, rather than the rule, that the court would be prepared to give a direction under s 447D[5] 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.
55 Similarly, in Re Specialised Concrete Pumping Victoria Pty Ltd (administrators appointed) [2016] FCA 325 (Specialised Concrete Pumping), administrators sought orders under s 447D(1) that they would be justified and acting reasonably in causing a group of companies to continue to trade as a single group and a single business. At paragraph [13], Middleton J accepted that to trade in that manner was 'the only practical way of proceeding, despite raising questions concerning the appropriateness of partially overlooking separate legal personality', and granted the orders sought.
56 The administrators acknowledge that it might be suggested that the directions sought are as to matters within their commercial judgement: cf Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 (Goldberg J); Re AWA Ltd [2014] NSWSC 249 (Brereton J). But counsel for the administrators submitted that, in the present case, the decision to loan funds involves questions of balancing risks to creditors of different companies against one another, and matters concerning the potential for personal liability. So understood, those questions require the exercise of more than mere commercial discretion, and are more closely analogous to those under consideration in Nexus Energy. In my view, these matters warrant the exercise of the discretion under s 90-15.
57 During the course of the hearing, counsel informed the Court that the administrators had been notified yesterday that the Flybuys participation agreement would be terminated immediately. While this may reduce some of the expenses the Unlockd Group faces, such as those associated with assisting users of the app, it will not eliminate the need for the continuation of operations more generally, due to the need to keep technical people on board for the reasons earlier explained and provide the IT infrastructure and premises for their work to occur.
Application for an order capping the administrators' personal liability
58 If the directions that the administrators seek are granted, they also seek orders under s 447A with the effect that their personal liability for the intercompany debts to be advanced will be limited to the extent of the assets that Unlockd Operations has available to satisfy those debts.
59 In cases where courts are satisfied that administrators have entered into loan agreements or other arrangements to enable companies to trade for the benefit of their creditors, orders are frequently made to limit the personal liability of the administrators.
60 In the leading case of Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (admins apptd) [2011] FCA 1493 (Secatore), Gordon J stated (at [23]):
Section 447A(1) of the Act empowers the Court, in an appropriate case, to modify the operation of s 443A to exclude personal liability on the part of a voluntary administrator, and to provide that a loan taken by the company via the voluntary administrator is repayable on a limited recourse basis. Orders in similar terms have frequently been made in circumstances where the Court is satisfied that an administrator has entered into a loan agreement or other arrangement to enable the company's business to continue to trade for the benefit of the company's creditors: see, for example, Re Ansett Australia Ltd (No 1) at [49]; Re Spyglass Management Group Pty Ltd (admin apptd) [2004] FCA 1469; (2004) 51 ACSR 432 at [6]; Sims; Re Huon Corporation Pty Ltd (admins apptd) [2006] FCA 1201; (2006) 58 ACSR 620 at [12]; Re Malanos [2007] NSWSC 865 at [13].
61 In such circumstances, courts have held that it is not to be expected that the voluntary administrators should expose themselves to substantial personal liabilities: see e.g. Re Renex Holdings (Dandenong) 1 Pty Ltd [2015] NSWSC 2003, [13] (Black J); Preston, in the matter of Hughes Drilling Limited [2016] FCA 1175 (Hughes Drilling), [18] (Yates J). See also Korda, in the matter of Ten Network Holdings Ltd [2017] FCA 1144, [43]-[44] (Markovic J).
62 In Secatore, Gordon J also observed (at [29]) that if orders are made relieving administrators from personal liability in respect of borrowings, it will permit them to make commercial decisions about the ongoing operations by focussing on what is in the best interests of the creditors 'uninfluenced by concerns of personal liability.'
63 In Re Great Southern Infrastructure Pty Ltd [2009] WASC 161 (Great Southern) at [13], Sanderson M observed that:
The material consideration on such an application is whether the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Pt 5.3A of the Act. To put that proposition positively - the question is whether the court is satisfied the proposed arrangements are for the benefit of the company's creditors. To put it negatively - the question is whether the court is satisfied the company's creditors are not disadvantaged or prejudiced by the proposed arrangement. These principles have been confirmed in a large number of cases.
64 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 summarized the principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A as follows (at [30]):
(a) the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Part 5.3A of the Corporations Act: Re Great Southern at [13].
(b) typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors: Re Malanos at [9] and Re View at [17].
(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: Re View at [18], and also Re Application of Fincorp Group Holdings Pty Ltd [2007] NSWSC 628 at [17].
(d) notice has been given to those who may be affected by the order: Re Great Southern at [12].
65 Counsel for the administrators has referred the Court to at least three cases where s 447A has been used to limit administrators' liability for intercompany debt in the administration of groups of companies: see Re View Gold Pty Ltd, View Resources Ltd and View Nickel Pty Ltd; Ex Parte Saker [2008] WASC 241 (Sanderson M) (View Gold), Re Nexus Energy, and Specialised Concrete Pumping.
66 In View Gold, Sanderson M made orders limiting retrospectively the liability of the voluntary administrators for certain debts under a loan agreement with an external lender and for debts under a separate intercompany loan agreement, and prospectively relieving the administrators from liability under a further intercompany loan agreement that formed part of a deed of company arrangement. His Honour made those orders because the agreements against which protection was sought had been entered into with the consent of the creditors of the relevant companies: at [19]-[20].
67 In Nexus Energy, in approving the orders limiting the administrators' liability, Black J held (at [14]):
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.
68 In Specialised Concrete, Middleton J noted that in order to continue operating the group's business as a going concern, it had been necessary for the administrators to continue a pre-existing practice of using one company's cash resources to pay another company's debts, likely giving rise to intercompany debt. The need to do so had been caused by the way in which the companies had operated prior to appointment of the administrators, including the limitations on their records and bookkeeping systems. In those circumstances, his Honour found it was not reasonable for the administrators to have accepted the personal risk for ongoing trade. To cease the practice, the administrators would have to have stopped trade, which would likely have had a detrimental effect on creditors and not maximised the chances of the business's ongoing existence. His Honour held (at [27]) that the risk that some unsecured creditors might be disadvantaged by continued trade and the administrators being freed from personal liability for inter-group borrowing was outweighed by the adverse consequences of the companies ceasing to trade, including for creditors as a whole. In so holding (at [28]), he noted that creditors would only be disadvantaged in certain limited circumstances.
69 It is preferable that creditors be advised of such applications (and in Secatore at [31], Gordon J held that it was necessary as a 'general rule'), but there are several cases where the orders have been made without such notification. In Hughes Drilling, Yates J held (at [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.
70 Other examples include Woods, in the matter of Paladin Energy Ltd [2017] FCA 836, at [24]-[25] (Barker J), Strawbridge, Re Retail Adventures Pty Ltd v Retail Adventures Pty Ltd [2012] FCA 1368, at [8] (Jagot J), Great Southern, at [12] and Re Malanos [2007] NSWSC 865, at [15] (Hammerschlag J).
71 In the present case, urgency has precluded the creditors being informed of the application in advance of it being made. However, the proposed orders sought by the administrators have been drafted so as to ameliorate any disadvantage that lack of notice may have caused creditors, by requiring the administrators to inform creditors at the first meeting of the application made and provide them with copies of the originating process, and orders of the Court. The funding sought has been capped at $500,000 and the administrators are not permitted to make any payments from that amount before 4 pm on Monday 25 June 2018, and liberty to apply is granted to any person who can demonstrate a sufficient interest to vary or discharge the orders made. I am satisfied that the liberty to apply mechanism provided by those orders offers an appropriate and effective means for any disaffected creditor to raise any concern with the administrators, and apply to the Court should that prove necessary.
72 The plaintiffs seek orders that the costs of the application be costs in the administration of Unlockd Limited. As the holding company of the other three Administered Entities, Unlockd Limited is the entity that will ultimately benefit from the extension of the convening period and from the ongoing trade that will be facilitated by the funding of Unlockd Operations. As a practical matter, it is also the only entity with cash resources available to fund the costs of the application.
73 In the circumstances, I am satisfied that the appropriate order is that the costs of the application be costs in the administration of Unlockd Limited.
KEITH ALEXANDER CRAWFORD AND ROBERT BRUCE SMITH IN THEIR CAPACITY AS JOINT AND SEVERAL ADMINISTRATORS OF UNLOCKD LIMITED (ADMINISTRATORS APPOINTED) ACN 169 872 502, UNLOCKD IP PTY LTD (ADMINISTRATORS APPOINTED) ACN 602 741 355, UNLOCKD AU PTY LTD (ADMINISTRATORS APPOINTED) ACN 602 741 284 AND UNLOCKD OPERATIONS PTY LTD (ADMINISTRATORS APPOINTED) ACN 608 719 375
UNLOCKD LIMITED (ADMINISTRATORS APPOINTED) ACN 169 872 502
UNLOCKD IP PTY LTD (ADMINISTRATORS APPOINTED) ACN 602 741 355)
UNLOCKD AU PTY LTD (ADMINISTRATORS APPOINTED) ACN 602 741 284
UNLOCKD OPERATIONS PTY LTD (ADMINISTRATORS APPOINTED) ACN 608 719 375
[1] Re Daisytek Australia Pty Ltd [2003] FCA 575; (2003) 45 ACSR 446 (Daisytek).
[2] The Insolvency Practice Schedule (Corporations).
[3] Re Diamond Press Australia Pty Ltd [2001] NSWSC 313, Barrett J [10]; see also In Strawbridge, re Custom Coaches (Sales) Pty Ltd (Admin Apptd) [2014] FCA 683, Jacobson J at [22]; Algeri; Re Colorado Group Limited [2011] VSC 260, Judd J at [24]; Re Pan Pharmaceuticals Ltd [2003] FCA 598; (2003) 46 ACSR 77, Lindgren J at [41]-[42]; Re Austcorp Group Ltd [2009] FCA 636, Lindgren J at [18]; Re Midas Australia Pty Ltd [2009] FCA 38, Kenny J at [11]; Re Dimidium Group Pty Ltd [2010] NSWSC 1086, Barrett J at [15].
[4] I note that Adara Partners appear to have some familiarity with the Unlockd Group. Mr Smith deposes that Adara Partners were initially engaged by Unlockd Limited shortly prior to the appointment of the administrators, to investigate a potential trade sale of the Unlockd Group's business and intellectual property assets including to parties who would not be reliant on access to the Google network or platforms. However, that work did not proceed to fruition.
(2002) 115 FCR 409