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[2021] WASC 354
General information, not legal advice.
Supreme Court of WA
2022-06-23
Black J
Original judgment source is linked above.
Paladin Energy Ltd (subject to Deed of Company Arrangement) [2018] NSWSC 11
Re BCD (Operations) NL (subject to deed of company arrangement) [2014] VSC 259
Re Kupang Resources Ltd (subject to Deed of Company Arrangement) (Recs and Mgrs Apptd) [2016] NSWSC 1895
Re Ten Network Holdings Ltd (subject to Deed of Company Arrangement) (Recs and Mgrs Apptd) [2017] NSWSC 1529
Weaver v Noble Resources Ltd [2010] WASC 182
1 By originating process filed 23 April 2021, the plaintiffs sought orders under s 444GA of the Corporations Act 2001 (Cth) (Corporations Act). The background to the making of the application is set out in the affidavit of Robert Michael Kirman sworn 23 April 2021. On 5 November 2020, Mr Kirman and Robert Conroy Brauer were appointed as administrators of Tiger Resources Ltd (Tiger). On 19 February 2021, Tiger and the administrators executed a Deed of Company Arrangement (DOCA) with Yingkou Yangzhou Trade Co Ltd (YYT). It was one of the preconditions of the DOCA that the plaintiffs make this application to transfer all of the shares in Tiger to YYT. Kipoi Holdings Mauritius Ltd (KHML) opposed the plaintiffs entering into the DOCA with YYT. After the DOCA was entered into between the plaintiffs Tiger and YYT, KHML applied to have it set aside. That application was unsuccessful. KHML, as an interested party, now opposes the making of the orders sought by the plaintiffs. YYT and Jinji Resources Finance Pty Ltd (Jinji) support the orders sought by the plaintiffs.
2 Section 444GA is in the following terms:
(1) The administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained:
(a) the written consent of the owner of the shares; or
(2) A person is not entitled to oppose an application for leave under subsection (1) unless the person is:
(3) The Court may only give leave under subsection (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.
3 Most of the decisions concerning this provision have been made by Black J in the Supreme Court of New South Wales. In the matter of Paladin Energy Ltd (subject to Deed of Company Arrangement) [2018] NSWSC 11, his Honour set out at pars [27] - [35] the applicable principles. He did so by reference to his decisions in Re Kupang Resources Ltd (subject to Deed of Company Arrangement) (Recs and Mgrs Apptd) [2016] NSWSC 1895 and Re Ten Network Holdings Ltd (subject to Deed of Company Arrangement) (Recs and Mgrs Apptd) [2017] NSWSC 1529. His Honour also made reference to the decision of Martin CJ in Weaver v Noble Resources Ltd [2010] WASC 182 and the decision of Digby J in Re BCD (Operations) NL (subject to deed of company arrangement) [2014] VSC 259. I would adopt what his Honour has to say without qualification.
4 There was no difference between the parties to this application as to the legal principles. The battle lines were clearly drawn. The plaintiffs and YYT maintained the shares in Tiger had no value and accordingly transfer of those shares to YYT could not prejudice the present shareholders. KHML maintained the shares did have residual value and accordingly an order should not be made. This was a straight valuation case. There were no other factors which might lead to an exercise of discretion which is undoubtedly embodied in the section.
5 Five experts gave evidence. Jason Harvey Hughes and Hayden Leigh White were called by the plaintiff. Mr Hughes is a valuer and Mr White is a liquidator. KMHL called Campbell Jaski and Dermott McVeigh. Mr Jaski is a valuer and Mr McVeigh is a liquidator. YYT called Matthew James Donnelly. Mr Donnelly is a liquidator. All parties agreed that there were two separate but interlocking questions where expert evidence was required. The first question was the value of the assets. Mr Hughes and Mr Donnelly gave their opinion on that issue. The second question was what might be the realisable value of the assets in a liquidation scenario. Evidence on that question was given by Mr White, Mr McVeigh and Mr Donnelly.
6 The approach adopted by the parties was entirely conventional. Later in these reasons I will detail how a realisation process in a case such as this might proceed. But at this point it is worth noting that in any substantial liquidation there are a number of steps which must be taken. One of the steps which is fundamental is that the liquidator must obtain from a suitably qualified individual an opinion as to the value of the assets. That step sets a baseline. The liquidator then undertakes a sale process but it is clearly fundamental to the liquidator's task to know what the underlying value of the assets may be. The process may yield more or it may yield less than the estimated value. But the baseline value allows the liquidator to set some realistic framework within which he can operate.
7 Before turning to the evidence of each of the experts in turn, I should make some general comments about their evidence. First, each of the experts was highly qualified ‑ they are all leaders in their field and each is very experienced. This is not a case where it was possible to choose between the experts based on their experience and expertise. Second, each of the experts approach their task in a highly professional manner. Each was supported by a team, although each expert made it plain that the conclusions were theirs and theirs alone. There was no question of slipshod analysis or errors in the methodology.
8 Third, each of the experts readily acknowledged their limitations. For instance, the liquidation experts were quick to accept they did not have valuation experience; and the valuation experts accepted they were not experts in the liquidation process. Importantly, all of the experts accepted they had no knowledge of the laws of, or the operation of the law in, the Democratic Republic of the Congo (DCR). By way of example, none of the liquidators knew anything of the insolvency regime which applied to trading corporations in the DCR. They were prepared to assume the regime was comparable to that which applies in this jurisdiction. That assumption was not challenged by any of the parties.
9 Fourth, none of the experts had visited the DCR and actually inspected the relevant assets. Even if that course had been practical given the time constraints, it was not an option in these pandemic times. That leads on to the final point - the effect of the pandemic. Each of the experts acknowledged the pandemic had an effect, but none was really in a position to say precisely what that effect might be. So while the pandemic was not ignored, it was not a factor which affected the overall conclusions reached by each of the experts.
10 By agreement between the parties, all of the experts were called to give evidence at the same time ‑ a practice known as 'hot tubbing'. Mr Jaski appeared by video-link; the other four experts were in Perth. Each expert was cross-examined and from time-to-time each expert offered an opinion on the answers given in cross-examination. The 'hot tubbing' process is apt to be confusing - one witness gives an answer to a question in cross-examination and two or three other witnesses comment on the answer. Whether the 'hot tubbing' process is useful with more than two witnesses is, I think, open to question. Be that as it may, in this case, each witness was impressive and each witness answered the questions they were asked carefully and comprehensively. I could see nothing in their demeanour in the witness box or the way they answered questions which suggested one witness' evidence should be preferred over another's.
11 It is important to bear in mind each of the experts offered their opinion based upon established facts and their experience. Thus, the evidence of the expert is an opinion. This important point can be illustrated in this way. It is not uncommon in court proceedings for valuers to offer an opinion as to the worth of a particular property. So in the case of a commercial property, an expert may adopt either a capitalisation rate approach or a comparative sales approach. Both are legitimate valuation techniques. If both were to look at the comparative sales approach, one valuer may see five properties as relevant and the other valuer may see only four properties as relevant. The second valuer may exclude one property on the basis he takes the view it is sufficiently different from the subject property and not to be relevant. Based upon the different approaches and each valuer's view of the relevance of particular properties, they may come to slightly different views - perhaps one will conclude that the value of the property is $1 million and the other will conclude the value is $1.1 million. Weighing the evidence, a court has to accept one or other of these valuations. Suppose then, the court after weighing the evidence, accepted a value of $1 million. If two weeks after a properly conducted marketing campaign, the property sold at public auction for $1.4 million, it does not mean that the court was wrong to accept the value of $1 million. All things being equal, the market value of the property was $1.4 million - that was what a willing buyer was prepared to pay in a perfect (or as close to perfect as possible) market. But it does not mean the court was wrong to accept the evidence of a valuer that the value of the property was $1 million.
12 In this case, there were a large number of variables which could effect the realisable value of the asset. After giving careful consideration to all of the written reports and having heard all of the evidence, there was very little to choose between the experts. There were one or two points which persuaded me the evidence supporting the plaintiffs' position was to be preferred. But in reaching that conclusion, I acknowledge the position was very finely balanced.
13 The starting point in the valuation process is the affidavit of Trivindren Naidoo sworn 23 June 2021. Mr Naidoo is the principal geologist of CSA Global Pty Ltd (CSA). CSA provides expert technical reviews, valuation and independent reporting, dealing with the value, risks and opportunities associated with mineral investment. Appearing as attachment 'TN2' to Mr Naidoo's affidavit is what is described as 'Independent Technical Assessment and Valuation Report - Kipoi Project, DRC'. The report covers in detail such matters as; the nature of the tenements in the Kipoi Project, the extent and nature of the mineralisation, the mining techniques employed and a raft of other material. The report was prepared with the input of a CSA Global associate consultant geologist, Dr Simon Dorling. Dr Dorling has visited the Kipoi Project on numerous occasions over the last five years and is familiar with its operation.
14 Neither Mr Naidoo nor Dr Dorling were called to give evidence. The importance of the CSA report is that it provided the foundation - particularly the technical foundation - for the other valuers' reports. Noting that no dispute arose as to any of the conclusions drawn by the report, it can be put to one side.
15 Turning then to M Hughes' report, he concludes as follows:
Prior to entering Administration, Tiger commenced a process for its sale and/or recapitalisation, including for its DRC subsidiaries and the Kipoi Project. This process was not concluded at the time operations at the Kipoi Project ceased and the subsequent appointment of Administrators in November 2020.
Following their appointment, the Administrators requested additional funding from the secured lenders to Societe d'Exploitation de Kipoi S.A (SEK), the 95% owned local DRC entity holding the Kipoi Project, in order to maintain the operations of Tiger and its subsidiaries while the position with interested parties was assessed and, where appropriate, progressed. Ultimately this funding was not forthcoming.
Since that time, the Administrators' received competing DOCA proposals from YYTCL and KHML.
Given this level of interest in the assets of Tiger, in particular the Kipoi Project, we have assessed the residual value of Tiger's equity on the basis of both:
In assessing the residual value of the equity in Tiger we have considered the claims of both prior ranking secured and unsecured creditors against the assets of Tiger and its subsidiaries, and that it was the recommendation of the Administrators' to Tiger creditors prior to the emergence of the YYTCL and KHML proposals that Tiger be wound up.
Whilst we understand the entire balance of secured debts of the group are held within SEK, we are advised that these debts have been cross-guaranteed by Tiger and its other subsidiaries and that the Administrators satisfied themselves as to the validity of this security. Reflecting the secured creditors rights to claim against the assets of SEK and other group companies, we consider that Tiger's equity has a A$nil preferred residual value under both approaches, as summarised in the table below.
Our preferred values represent our best estimate, based on the information available, as to a single point of value.
Our preferred value has been determined based on the aggregate of:
Our approach to valuation and an overview of the key assumptions adopted by us in arriving at our range of values are summarised below and set out in further detail in Section 7 of this report.
We believe adoption of our preferred values as set out above provides neither an aggressive or conservative position, however, depending upon shareholders views as to the prospects of the Kipoi Project, forecast commodity prices and the potential for future exploration success, it is conceivable that some shareholders could potentially form the view that the preferred value of Tiger lies above that assessed by us, and potentially toward or at the high end of our range of values under both a distressed business sale and asset breakup. In considering this, we believe that it is important for shareholders to recognise however that whilst, in theory, it is possible that there could be some residual value in the equity of Tiger, the Company is without funds to recommence operations in its own right.
Furthermore, the distressed business sale scenario effectively assumes a recommencement of operations at the Kipoi Project in the short term. This is not assured. The Kipoi Project was placed into care and maintenance in April 2020 and management and operational staff have been terminated. We are advised since October 2020, payment for the provision of essential goods and services at Kipoi such as for security and electricity has been made on an unsecured reimbursable basis by one of the secured creditors, in order to increase the prospects of a new holder of the Kipoi Project recommencing operations. This ongoing funding is not assured.
Whilst CSA has included a notional ramp-up period and an allowance for additional capital expenditure (Capex) required for recommencement in its Kipoi Project LOM model and we have included an allowance for increased business risk associated with the recommencement, given:
we consider there to be a real prospect any purchaser of the Kipoi Project may seek a deeper discount than that allowed for by us, resulting in a further erosion to our range of assessed distressed business sale and asset breakup values set out above.
Accordingly, whilst, in theory, there could be residual value in the equity of Tiger, we consider this to be unlikely and that, on balance, the preferred residual value of the equity in Tiger is considered to be A$nil.
We assessed the residual value of Tiger's equity on a distressed business sale basis and subsequent winding up to have a value of between A$nil and A$25.9 million, with a preferred value of A$nil, as set out in the table below.
In assessing the value of the equity of Tiger, we have adopted a 'sum-of-the-parts' approach, aggregating the estimated recoverable amounts of intercompany debts due to Tiger, any residual liabilities of subsidiaries guaranteed by Tiger or residual equity interests in its subsidiaries, other assets and deducting net borrowings and non-trading liabilities.
We have assumed for the purpose of our assessment that the Kipoi Project will be able to be realised at the project level as an on-going business proposition following a reasonable, albeit truncated, marketing period and into a market where the distressed nature of the sale is well known.
In arriving at our range of values for Tiger on a distressed business sale basis, we have placed reliance on:
The production, operating cost and capital cost assumptions prepared by CSA were adopted by us. KPMG Corporate Finance was responsible for specific corporate and other matters, including determining various macro-economic and taxation assumptions
We assessed the residual value of Tiger's equity on an asset break-up basis to have a value of between A$nil and A$24.6 million, with a preferred value of A$nil.
In assessing the value of the equity of Tiger, we have assumed assets of Tiger and its subsidiaries will be realised on a break-up basis, in the shortest practicable period into a market where the distressed nature of the sale is well known as summarised in the table below.
16 It can be seen then that Mr Hughes has valued Tiger's equity at nil. That is his conclusion using two different approaches.
17 In section 7 of his report Mr Hughes discusses in some detail the different methodologies he has employed. Relevantly he says:
Accordingly, given we understand that there has been a level of interest in the assets of Tiger, we have assessed the value of Tiger's equity on the basis of both:
18 Mr Hughes goes on to say that in looking at the distressed business sale, he has used what is known as the discounted cash flow (DCF) approach. He explains that approach in this way:
The DCF methodology has a strong theoretical basis, valuing a business or asset on the net present value (NPV) of its future cash flows. It requires an analysis of future cash flows, the capital structure and costs of capital. This technique is particularly appropriate for assets with limited lives, which is often the case with mineral projects dependent upon depleting Ore Reserves. Applications of this technique generally requires a 5-year minimum period of analysis, however for longer dated finite life mineral projects it is common practice to have regard to forecast cash flows over the life of the mine. In addition, a sensitivity analysis of variations in key assumptions adopted needs to be performed.
19 Mr Hughes thereafter undertakes a thorough analysis of all aspects of Tiger's assets and liabilities through its holding in SEK, factoring in secured debt. It is his considered view it is unlikely there would be any return to shareholders and the shares in Tiger have no value.
20 Turning then to Mr Jaski's report, under the heading 'Valuation methodologies', Mr Jaski has this to say:
81 There are three primary valuation approaches available to assess the value of a mineral asset:
82 Under each valuation approach, there are a number of different valuation methodologies. Each approach may be appropriate in certain circumstances. The decision as to which approach and specific methodology to apply generally depends on the nature of the asset being valued and the availability of appropriate information to enable the use of that methodology.
21 Under the sub‑heading 'Selection of valuation methodology', Mr Jaski says:
87 I have reviewed the Naidoo Report and the appropriateness of the methodologies utilised to assess the values of the mineral assets of SEK and SASE.
88 The Naidoo Report adopts the following valuation methodologies:
89 In my opinion the valuation methodologies adopted in the Naidoo Report are appropriate based on my experience and having regard to the guidance set out in the VALMIN Code, refer Figure 7 and Table 3.
90 Given the limited time available to undertake a separate valuation assessment, I have chosen to substantially rely on the valuation assessments undertaken in the Naidoo Report, with some small adjustments to align the values with my Valuation Date.
91 The transaction multiples in the Naidoo Report were 'normalised to the 31 March 2021 copper price of US$8,788/t to account for changes in the copper price during the period over which the transactions occurred.' The Naidoo Report also relied on the 31 March 2021 copper price of US$8,788/t for the Yardstick Order of Magnitude valuation cross-check.
92 The copper price has increased by 10.4% since 31 March 2021 to US$9,701/t as at the Valuation Date. Accordingly, for the purpose of my assessment I have adjusted the values assessed in the Naidoo Report to reflect the copper price on the Valuation Date.
93 I have cross-checked the valuation results from SEK's primary asset, the Kipoi Project, using the DCF methodology. In my opinion, although the DCF methodology may be an acceptable valuation methodology to apply to the Kipoi Project, I consider the comparable transactions methodology is a more reliable primary valuation methodology based on the following:
22 Using that methodology Mr Jaski concludes as follows:
94. My assessment of the residual value of the shares in Tiger as at the Valuation Date is summarised in Table 4.
23 The two valuers then come to substantially different conclusions. Mr Hughes concludes that Tiger shares have nil value. Mr Jaski concludes the shares have a residual value in the region of $61 million. It is also clear that the two experts favour different valuation methods. Mr Hughes favours the DFC methodology and Mr Jaski favours the Asset Value approach. Both acknowledge the use of either method is proper and appropriate and both have cross-checked their analysis using the Alternate Valuation Method.
24 The opinion of Mr White is brief and to the point. He has sworn an affidavit on 23 June 2021. Relevantly, that affidavit reads as follows:
6 I was asked by Jason Hughes to consider what discounts, if any, typically may apply to asset values in a mining project sale transaction, having regard to the distressed nature of any sale in a liquidation scenario.
(a) previous engagements where valuations of fixed assets and plant and equipment were obtained, and
(b) mining project sale transactions
I consider that a discount attributable to the values of a mining project's inventories, mining infrastructure, plant & equipment assets and mining tenements in the order of 25-35% in an orderly realisation scenario is not unreasonable.
However, the actual discount could be higher or lower and would be dictated by the specific circumstances as part of any sale transaction in a winding up.
(a) previous engagements where valuation of fixed assets and plant and equipment were obtained,and
(b) mining project sale transactions
I consider that a distressed sale discount attributable to the values of a mining project's inventories, mining infrastructure, plant & equipment assets and mining tenements in the order of 40-60% in an immediate winding up scenario is not unreasonable. However, the actual discount could be higher or lower and would be dictated by the specific circumstances as part of any sale transaction in a winding up.
25 Mr Donnelly, although a liquidator and not a valuer, does take issue with the valuation approach of Mr Hughes. He summarises his position as follows:
3.2.1 KPMG's Report has provided a range of values predicated on two methodologies. Firstly, a whole of business valuation or 'distressed business sale' (utilising a discounted cash flow (DCF) method for the Kipoi Project), and secondly, a sum of the parts/ breakup valuation. These two values have been further discounted based on advice provided by KPMG's internal Restructuring Services team in order to determine the residual equity value. A summary of KPMG's conclusions is displayed in Table 1 below:
3.2.2 The majority of Tiger's value is the intercompany receivables owing by its subsidiaries who have legal ownership of the Kipoi Project mineral assets, other exploration rights and plant and equipment.
3.2.3 In KPMG's view, there is no residual value (under either methodology, on a preferred basis) in the event of liquidation. I agree with this conclusion, though I make some qualifying comments about the utility of the DCF methodology.
In my opinion, a DCF is not an appropriate method to value the residual equity in Tiger for the following key reasons:
a) Tiger is insolvent and subject to external administration, and its Kipoi Project has been on C&M since April 2020. A DCF is a valuation of future events and, in this case, must assume on-going funding. Tiger is not a going concern, and is reliant on funding to preserve its interest in SEK and the Kipoi Project, as well as funding to recommence operations.
b) There are substantial costs to restart operations, and significant operational and commodity risks, which cannot not be appropriately quantified. The CSA valuation relies on a LOMP developed and refined in 2019. The mine infrastructure has likely deteriorated since this time and further analysis ought to be undertaken to determine the relative assumptions that would inform the basis of the DCF (rather than reliance on analysis undertaken in 2019).
c) Going concern values for companies subject to external administration are hypothetical and the Court does not require a going concern valuation for the purposes of granting leave under section 444GA(1)(b) once the Court is satisfied that the only alternative is liquidation.
d) The underlying assumptions in the DCF model are highly subjective, difficult to accurately estimate and extremely sensitive to change. This is discussed further in section 7 .1 of this Report.
a) I agree with the methodology utilised by KPMG with respect to the asset breakup/ sum of the parts valuation, however, this assumes the liquidator is funded and able to undertake a sale process.
b) I agree that a discount should be ascribed to this methodology, however, no detail is provided by KPMG as to why these discount ranges are appropriate.
c) In circumstances where C&M funding was withdrawn by Jinji, SEK would have insufficient funds to continue to maintain the current state of the Kipoi Project. This would likely result in a further deterioration of the mine infrastructure, which in my view, would negatively impact the value.
d) Further, if a liquidator did not have access to funding to conduct a sale process, he may be forced to abandon the in-country assets.
In my opinion, the residual value of equity in Tiger is negative, as summarised below:
a) I assume the following with respect to the above scenarios:
Low - No funding available to the liquidator to undertake a sale process.
Mid, High and Preferred - Funding is available to the liquidator to conduct a sale process as well as for C&M costs.
b) My additional adjustments to the value of Tiger's residual equity are detailed in section 8.4 of this Report.
3.3.4 I am of the opinion that there is negative residual equity for the following key reasons:
a) Tiger, SEK and the Kipoi Project are completely reliant on C&M funding from Jinji.
b) There is no commitment that funding is available to the Liquidators to conduct a sale process.
c) Tiger previously undertook a pre-appointment sale process (April 2020 to November 2020). Three non‑binding indicative offers were received. None of these offers were sufficient to repay the senior lenders' indebtedness and the highest offer was US$102.6m.
d) In order for equity to be available to shareholders of Tiger, the liquidators would need to monetise the Kipoi Project and funds to flow through the SEK intercompany loan at the extreme upper end of the CSA valuation. I consider this unlikely.
26 Mr Donnelly further expands on his views as to methodology and value in sections 7 and 8 of his report. They read as follows:
7.1.1 I have reviewed KPMG's DCF model used to determine the estimated value of the Kipoi Project.
7.1.2 Tiger is insolvent and subject to external administration, and the key underlying assets have been in C&M since April 2020. Accordingly, and in my opinion, a DCF is not an appropriate method to value the residual equity in Tiger. A DCF valuation is an appropriate method to value an on-going business. Tiger is wholly reliant on funding from an external financier which may be withdrawn at any time. There is no certainty a Liquidator could obtain funding to facilitate a sale which may necessitate the abandonment of the assets. With this significant and insurmountable uncertainty I do not believe assuming the business is, or can be, on-going is reasonable.
7.1.3 The underlying assumptions in the DCF model are highly subjective, difficult to accurately estimate and extremely sensitive to change.
7.1.4 Further, the assumptions which I consider to be particularly sensitive and subject to change, which would materially and negatively impact the NPV calculation, include:
a) Price - The copper spot price has rebounded from March 2020, and recently achieved a new high on 10 May 202l7. However, as noted earlier, at the time of writing this Report the copper price had since declined approximately US$1,300 p/t, demonstrating a short-term volatility
b) LOMP - The LOMP was last updated in full in 2019, and utilises operational cost data from 2017. Whilst CSA have reviewed the LOMP model inputs (which in turn formed the basis of the inputs for KPMG's DCF model) and consider in the most part the inputs are reasonable, utilising aging/outdated data is problematic. Further work and analysis should be undertaken in order to better define the current cost profile.
c) Key Suppliers - Sulphuric acid is a key reagent in the processing chain. In KPMG's DCF, sulphuric acid equates to approximately 55% of the total processing costs (or US$161m). Further, CSA (section 8.2.4 of their report) describes the supply and price risks associated with sulphuric acid, and that Tiger has entered into a short-term supply contract to mitigate the same. Notwithstanding, there is no moratorium on creditor claims in SEK. In my opinion, there is a risk that the counterparty (i) withdraws supply over unpaid amounts; {ii) in circumstances where there is a shortage of supply, provides that product to other copper producer(s) at a higher price; or (iii) fails to procure adequate supply altogether which would halt processing.
d) Restart Costs - CSA have estimated restart costs at US$15m. These are tabled below:
In my experience, restart costs are a point in time analysis, and require appropriate planning and project management to maintain the initial budget (these costs were estimated by Tiger before the appointment of Administrators). Revising these estimates necessitates experienced management and a procurement team. SEK and Tiger do not have these personnel and as a consequence it is possible that these costs will substantially increase, particularly where there may be timing delays associated with getting equipment and staff on site.
e) Developing and Sustaining Capex - The current capex estimates utilised in the DCF are outdated. They are predicated on an operating mine. In 2018 Tiger commissioned an Option Selection Report by an external mining consultant. This report identified US$136.7m in capex to improve profitability (section 1.11.2). However, the CSA Report (section 8.1.5) notes that only US$51.5m of the suggested improvement capex has been built into the LOMP. This demonstrates, in my opinion, that not all of the relevant capex may have been incorporated into the DCF and that further work and analysis ought to be undertaken.
f) Production output - The mine has been on C&M for nearly 18 months, and it is uncertain when production may recommence. It is therefore difficult, in my opinion, to have confidence as to the production schedule over the short term. SEK may experience delays to both recommencement of mining and processing, as well as possible mechanical breakdowns. Any purchaser may consider this downside risk and factor into their price. Further, the mine operations have historically been subject to periods of prolonged, intermittent weather which has significantly reduced or stopped production, and therefore timing of when operations recommence may also be further delayed or hampered depending on the weather conditions at that time.
g) Workforce - recommencement of operations is predicated on procuring and standing up an appropriate qualified workforce. The workforce as of 31 May 2018 comprised of 731 full time employees and contractors. In my view, SEK may experience challenges procuring such a large skilled and unskilled workforce in a short space of time.
7.2.1 I have reviewed KPMG's asset breakup scenario, being the sum of the liquidation value of the underlying business assets. This approach involved utilising CSA's valuation range (low, high and preferred) of the mineral assets, to arrive at an expected value of all intercompany loans owing to Tiger.
7.2.2 CSA have utilised comparable transactions, yardstick and geoscientific approaches in order to arrive at their valuation ranges.
7.2.3 I agree with this methodology in these circumstances (assuming the liquidators are funded to undertake a sale process, including the costs to preserve the assets during the process).
7.2.4 I consider this valuation methodology to be a more appropriate than a DCF model because:
a) Tiger is insolvent and subject to an external administration; and
b) SEK is not a going concern.
7.2.5 Further, Jinji is funding the C&M costs of approximately US$0.25m to US$0.Sm per week on a reimbursable basis. There is no certainty that Jinji will continue to provide such funding, and in these circumstances, SEK would have insufficient cash to continue to preserve the site.
7.2.6 A liquidator may have no funding to conduct a safe process. Accordingly, the liquidator of Tiger may be forced to abandon the in-country assets.
8.1.1 I agree with KPMG's overarching conclusion that the residual value of equity in Tiger is nil.
8.1.2 KPMG's valuation range, on an asset break up basis, provides that there is between negative A$90.0m and positive A$24.6m residual equity, with a preferred value of negative A$37.7m.
8.1.3 In order for equity to be available to shareholders of Tiger, the liquidators would need to monetise the Kipoi Project and funds to flow through the SEK intercompany loan at the extreme upper end of the CSA valuation.
8.1.4 I consider this unlikely for the following reasons:
a) The high scenario is geared towards an orderly realisation process being conducted by a funded entity not subject to external administration.
b) The best offer received prior to the appointment of Administrators was in the amount of US$102.6m, which was insufficient to cover the secured loans of US$119.1m.
c) There are significant restart costs associated with the Kipoi Project. These estimates were prepared prior to the appointment of Administrators, and accordingly, require revision.
d) SEK is without funds. Jinji provides C&M funding to SEK on a reimbursable basis. There is no certainty, particularly if the DOCA does not complete, that funding will be available to SEK for C&M costs.
e) The withdrawal of C&M funding would likely result in further deterioration of the Kipoi Project assets and infrastructure.
f) In the absence of funding being available to a liquidator to preserve the assets and undertake a sale process, the liquidator may need to abandon the in-country assets.
8.2.1 I do not agree that a DCF is an appropriate valuation methodology for an insolvent company subject to external administration, which has been on C&M since April 2020. A DCF is a valuation of future events prepared on an on-going basis. Tiger is not a going concern and has no certainty of future funding (C&M and restart costs). Therefore, I do not believe it is reasonable to assume the contrary.
8.2.2 I agree with the asset breakup methodology (assuming the liquidator is funded to undertake a further sale process and C&M funding is also available).
8.3.1 My opinion as to the negative equity value Is displayed in Table 20 below:
8.3.2 The intercompany loan asset balance from SEK has been calculated on the following basis:
8.3.3 The intercompany loan asset balance from SASE has been calculated on the following basis:
a) I assume the following with respect to the above scenarios:
Low - No funding available to the liquidator to undertake a sale process.
Mid, High and Preferred - Funding is available to liquidator to conduct a sale process as well as for C&M costs.
b) My additional adjustments to the value of Tiger's residual equity are detailed in section 8.4 of this Report.
8.4.1 I made the following adjustments in my opinion as to value:
a) Low assessed value - I have adjusted the gross mineral asset values to reflect circumstances where funding is not available to the liquidator, and therefore they are required to abandon the assets. This leads to nil asset recovery, and nil return to secured and unsecured creditors.
b) Insolvent trading recoveries - Insolvent trading claims are complex, costly and generally uncommercial to pursue, particularly for such a small quantum. Further, the liquidators are unfunded which would necessitate litigation funding to pursue the claim and further diminish the return to creditors. Accordingly, I have adjusted the insolvent trading recovery value to nil under all scenarios in my opinion as to value.
c) Restart costs - I have included an allowance for the estimated restart costs required for the Kipoi Project. The high scenario adopts CSA's US$15m estimate of restart costs, whilst the mid scenario adopts Tiger's management estimation of US$25m (the preferred value reflects the midpoint of the high and mid values). It is my opinion that any purchaser would discount the valuation for these costs.
d) Discount factor adjustment - See section 8.5 below.
e) Realisation cost% - KPMG have adopted a 10% estimate for realisation costs under all scenarios. In my experience, this value varies subject to the nature of the asset being sold (i.e. specialised nature, remoteness, status), and the current market demand. Whilst 10%appears high to me for a sale commission on a large-scale asset such as this mine, the remote geographical location may justify the high rate. For illustrative purposes, I have instead applied a 5%, 7 .5% and 10% to the high, preferred and mid scenarios respectively which, in my opinion, is more reflective of the likely cost to complete a sale of the assets.
f) SEK's unsecured creditors - As detailed in Table 14 of this Report, KPMG's unsecured creditor value includes US$2.83m relating to Jinji reimbursable costs. Per data room document '111.210518 - Senior Debt', Jinji has provided c.$13.9m of reimbursable costs to Tiger as at 18 May 2021. Accordingly, I have adjusted the unsecured figure to reflect the additional reimbursable costs. Both the low and mid scenarios adopt the value of KPMG's low scenario unsecured creditor figure.
g) Estimated future C&M costs - Given Tiger is currently relying on C&M funding provided by Jinji, funding will need to continue to enable the liquidator to run a sale process. To allow for the required future funding, I have utilised the midpoint of the current estimated weekly C&M costs range of US$0.25m to US$0.50m, as provided by McGrathNicol in data room document '111.210518 - Senior Debt', across a range of timeframes {mid scenario; 26 weeks, high scenario; 13 weeks, preferred scenario; 19.5 weeks). I have included no adjustment for future C&M in the low scenario given it is assumed that the assets are abandoned.
h) Secured debt (current and future) - To allow for future interest accruing on secured debt, I have utilised the daily interest accrual figure of c.US$26.9k, as provided by in an email from Rich Lynn of Law Debenture, across a range of timeframes low scenario; 52 weeks, mid scenario; 26 weeks, high scenario; 13 weeks, preferred scenario; 19.5 weeks). I have also updated the current secured debt figure of $120.6m as at 12 July 2021.
8.4.2 Priority of unsecured creditor payments - I have assumed that the C&M funding {provided on a reimbursable basis) is provided to SEK, and ranks pari passu with other unsecured creditors, that is, equal with other trade creditors and the intercompany loans due to Tiger {as set out in Table 14 of this Report). If my assumption is incorrect, and trade creditors or reimbursable funding is to be paid in priority to the intercompany loans due to Tiger, this would materially impact my analysis.
8.4.3 The impact of my adjustments with respect to KPMG's equity value in an asset breakup are set out in Table 23 below:
I have utilised KPMG's low value for the mid scenario.
KPMG adopted CSA 's preferred value (mid-point of the high and low values) for the Ki poi Project which was seemingly rounded down (US$132.5m down to US$132.0m). This caused a minor variance to my calculations.
The restart cost adjustments do not reflect the full extent of the nominal adjustments described in paragraph 8.4.l(c), given that it is applied to the Kipoi Project asset value before the breakup discount.
8.5.1 I have applied the following sale discounts to the Kipoi Project and other mineral assets held by SEK and SASE:
8.5.2 Based on my experience, a percentage discount in the range of 50% to 60% in an asset breakup is appropriate. This is on the basis that, in this situation, a buyer would discount the value ascribed to the assets for the following key reasons:
a) Tiger is insolvent, subject to external administration, and has been on C&M since April 2020.
b) The current C&M costs are being funded by one of the Secured Creditors, Jinji, on a reimbursable basis. The provision of ongoing funding from Jinji is not certain. If leave of the Court Is not granted under 444GA of the Act, the DOCA cannot complete-and funding may ultimately be withdrawn. Without the provision of sufficient and ongoing funding, the condition of the assets may quickly deteriorate further. This would have a downward impact on asset value.
c) Tiger previously attempted a financial reorganisation by way of a Scheme, which sought to reduce the secured indebtedness to US$100m. However, the Scheme and resultant reduction in secured creditor indebtedness did not prevent Tiger from subsequently appointing Administrators. Accordingly, and in my view, the market will see the Scheme as a failed restructuring attempt, further negatively impacting the perceived prospects of the asset.
d) Tiger has been historically loss making and suffered from undercapitalisation for an extended period.
e) Prospective purchasers' ability to conduct appropriate and sufficient diligence has been limited to date.
f) There is sovereign risk associated with mining licences in Africa. In addition to prior media coverage, there is recent commentary in relation to the DRC imposing an export ban on copper and cobalt concentrates earlier this year.
g) I have been not be instructed that SEK is presently subject to any formal insolvency regime, and as such, there is no mortarium on creditor claims. These creditors are likely required to restart operations. In this regard, there are presently 18 sets of legal proceedings in the DRC which have been commenced against SEK in respect of outstanding debts.
h) Given the passage of time, capital expenditure may be materially greater than estimated. The CSA report relies on capex information prepared by Tiger in 2019.
j) The existing mining fleet is ageing. There are global supply chain issues associated with procuring new yellow goods, and the mine is a substantial distance to port.
k) The production of copper cathode is a sophisticated metallurgical process. A combination of the age of the plant, the period of time in which the plant has been on C&M and the lack of corporate knowledge by management may result in buyers sensitising their valuation in order to account for risk of poor metallurgical recovery and throughput.
8.5.3 Given the low scenario assumes the assets are abandoned and therefore have nil value, no discount applies in this scenario.
27 Finally, there is the report of Mr McVeigh. He concludes that Tiger's shares do have value. He summarises his position as follows:
2.1.4 In my opinion, whilst there is a possibility that Tiger's equity has no value, the preferred equity value of Tiger is between AU$33.3m and AU$35.2m and it could have a value of up to AU$73.7 million.
2.1.5 The following table summarises my conclusions as to the equity value in Tiger compared to the conclusions in the Hughes Report:
2.1.6 The reasons for the difference between my conclusions as to the equity value in Tiger compared to the conclusions in the Hughes Report are:
a) the extent of discount applied to the valuation of assets owned by Tiger's subsidiaries due to the distressed status of the assets (Distressed Asset Discount);
b) The calculation of a liability owed by SEK to Megatron (Megatron Dispute) and the dilutive effect of this liability on SEK's ability to repay a loan owing to Tiger.
2.2.1 In its calculations of the equity value in Tiger, the Hughes Report (section 7.2.3.4 on page 54 and section 7.2.4.2 on page 59 of the Hughes Affidavit) applied a discount to the value of the assets owned by SEK and SASE of between 25% and 35% due to the current operational status of the assets and their unfunded position.
2.2.2 The calculation of the Distressed Asset Discount in the Hughes Report was based on advice from specialists in KPMG's restructuring division and which accords with an affidavit from Mr Hayden White of KPMG.
2.2.3 In my opinion the Distressed Asset Discount adopted in the Hughes Report is:
a) excessive in that it duplicates risk that has already been assessed in the valuation of the relevant assets;
b) not based on any reliable evidence as, in my opinion, the amount of any Distressed Asset Discount depends heavily on:
- the nature of the specific asset;
- the time frame available to market and sell the asset;
- the competitive tension that can be generated from parties interested in acquiring the asset.
2.2.4 It is my opinion that the Distressed Asset Discount applied in the Hughes Report represents a duplication of risk associated with the assets at least to some degree. The Hughes Report adopted the assumption that a capital cost of US$15.0 million be included in the forecast cash flows to reflect the cost of restarting the mine operations (section 7.2 of the Hughes Report). That assumption was included in the CSA Report (page 89 of the Hughes Affidavit) and assessed by CSA Global as a reasonable estimate of the cost to restart the mine (section 8.1.5 of the CSA Report at page 163 of the Hughes Affidavit).
2.2.5 It is my opinion that the valuation of SEK and SASE's assets adopted in the Hughes Report, already recognised that the mine was not operating and this inherently reflects a level of distress and does not warrant further discounting beyond that already included in the valuation.
2.2.6 For more detail of my assessment of the duplication of risk associated with the relevant assets, please refer to section 3.2.2 of this Report.
2.2.7 It is my opinion as a liquidator that it is inappropriate to apply an arbitrary valuation discount across a number of asset groups to reflect a potential Distressed Asset Discount without first taking into account each of the specific issues noted above in relation to each of the specific assets.
2.2.8 I therefore disagree with the application of the Distressed Asset Discount as applied to the value of the assets in the Hughes Report. In my opinion, there is no basis to apply an arbitrary discount of 25% to 35%, the effect of which in certain scenarios is to extinguish the equity value of Tiger.
Effect of adopting a lower Distressed Asset Discount
2.2.9 I accept that in circumstances such as those faced by Tiger's Administrators it is prudent to acknowledge a certain level of risk that valuations provided by industry experts may not be achieved in a sale campaign. It is my opinion however that applying a discount in excess of 10% undermines the basis of the valuation. Where an administrator feels that a discount of greater than 10% from valuation may be achieved, then in my opinion it is reasonable for the administrator to discuss the circumstances with the valuer and request the valuer to revise the valuation if warranted.
2.2.10 In my calculations I have adopted an asset value discount of 10% in the low scenario and no discount in the high scenario. I have adopted an asset value discount of 5% in my preferred scenario.
2.2.11 Adopting a lower distressed asset discount has a material impact on the value of Tiger's equity and is summarised as follows:
2.2.12 It is my opinion that there is no basis to accept the Distressed Asset Discount applied in the Hughes Report.
2.5.1 The Hughes Report also assessed the value of Tiger's equity on the basis that the assets of SEK and SASE were sold on a break up basis in order to confirm that this scenario doesn't result in a value over and above that assessed assuming a distressed business sale.
2.5.2 This assessment resulted in KPMG's estimate of the value of Tiger's equity between nil (due to an asset deficiency of AU$89.9 million) and AU$24.5 million with a preferred value of nil (due to an asset deficiency of AU$37.6 million).
2.5.3 The following table summarises my conclusions as to the equity value in Tiger compared to the conclusions in the Hughes Report in a break up scenario:
2.5.4 My preferred estimate range of Tiger's equity on an asset break up basis is between AU$46.4 million and AU$50.3 million.
2.5.5 The reasons for the difference between my conclusions as to the equity value in Tiger on an asset break up basis compared to the conclusions in the Hughes Report are:
a) the extent of discount applied to the valuation of assets owned by Tiger's subsidiaries due to the break up status of the assets (Break up Discount);
b) The calculation of a liability owed by SEK to Megatron (Megatron Dispute) and the dilutive effect of this liability on SEK's ability to repay a loan owing to Tiger.
2.5.6 I note that my estimate of Tiger's equity value in an assets break up scenario is higher than my estimate of Tiger's equity value in a distressed asset sale scenario.
2.5.7 ASIC's Regulatory guide 111: Content of Expert Reports provides that where a company under administration holds assets that form a business, the expert's report should generally base the assessment on the higher of the business as a whole or the sum of the liquidation value of the underlying business assets.
2.5.8 Accordingly, based on my calculations it is my opinion that the assets break up scenario should be primarily used to determine Tiger's equity value.
2.6.1 In this scenario, the Hughes Report directly adopts the valuation provided in the CSA Report but scaled down to 90% to reflect an expectation that the DRC Government would likely require a 10% free carry interest in the project from any acquiring party (refer section 7.3.2.1 of the Hughes Report).
2.6.2 The Hughes Report then applies a discount to this valuation range (Break up Discount) of between 40% and 60% to reflect that a sale process would likely be conducted by a liquidator in the shortest practicable time and into a market where the distressed circumstances of the project are well known (refer section 7.3.2.2 of the Hughes Report).
2.6.3 I have reviewed Mr White's affidavit which in paragraph 8 states that:
'I consider that a distressed sale discount attributable to the values of a mining project's inventories, mining infrastructure, plant & equipment assets and mining tenements in the order of 40% - 60% in an immediate winding up scenario is not unreasonable. However, the actual discount could be higher or lower and would be dictated by the specific circumstances as part of any sale transaction in a winding up.'
2.6.4 It is my opinion that Mr White's supporting evidence does not provide sufficient grounds for the assumption in the Hughes Report that a Break up Discount of between 40% and 60% be applied to the value of the assets in a break up scenario.
2.6.5 In my opinion the Break up Discount adopted in the Hughes Report is:
a) excessive in that it assesses risk for SASE's assets that may not exist. Specifically, the Hughes Report refers to the operational status of the assets, however SAS E's assets consist predominantly of unmined mineral assets that do not have live operations. It is my opinion that the reference to the operational status of the assets likely refers to assets owned by SEK which had ongoing mining operations until the mining operations were ceased. In my opinion, there is no basis to apply an arbitrary risk rating to SASE's mineral assets that have no ongoing operations;
b) not based on any reliable evidence as, in my opinion, the amount of any Break Up Discount depends heavily on:
- the nature of the specific asset;
- the time frame available to market and sell the asset;
- the competitive tension that can be generated from parties interested in acquiring the asset.
2.6.6 It is my opinion that the valuation provided by CSA Global already considered the operational status of SEK's and SASE's assets (i.e. that the mine had ceased operating) and it contemplated the cost of restarting operations and the associated risks.
2.6.7 I therefore do not agree with the Break up Discount applied in the Hughes Report.
2.6.8 It is my opinion as a liquidator, that it is inappropriate to apply an arbitrary valuation discount across a number of asset groups to reflect a potential Break up Discount without first taking into account each of the specific issues noted above in relation to each of the specific assets.
2.6.9 I therefore disagree with the application of the Break up Discount as applied to the value of the assets in the Hughes Report.
2.6.10 In my opinion, there is no basis to apply an arbitrary discount of 40% to 60%, the effect of which in certain scenarios is to extinguish the equity value of Tiger.
2.6.11 Effect of adopting a lower Break up Discount
2.6.12 I accept that in circumstances such as those faced by Tiger's Deed Administrators it is prudent to acknowledge a certain level of risk that valuations provided by industry experts may not be achieved in a sale campaign. It is my opinion however that applying a discount in excess of 10% undermines the basis of the valuation and where an administrator feels that a discount of greater than 10% from valuation may be achieved, then it is reasonable for the administrator to discuss the circumstances with the valuer and request the valuer to revise the valuation if warranted.
2.6.13 In my calculations I have adopted a Break up Discount of 10% in the low scenario and no discount in the high scenario. I have adopted a Break up Discount of 5% in my preferred scenario.
2.6.14 Adopting a lower Break up Discount has a material impact on the value of Tiger's equity and is summarised as follows:
28 Mr McVeigh under the heading 'Duplication of risk assessment' deals with the question of a discount for the sale of assets in an insolvency. He says:
d) In my opinion and based on my experience, assets sold through a formal insolvency process frequently attract a discount when compared to the value of those assets in the normal course of business and in a going concern scenario. It is for this reason that in my capacity as a liquidator or administrator I frequently engage professional valuers to estimate the value of assets in the context of liquidation where the business may not be a going concern.
e) I have reviewed the CSA Report and I consider that its valuation of the assets already reflect a level of distress and the assets' current operational status, i.e. that the mining operations have ceased.
f) I have reviewed the White Affidavit and whilst I agree in principle with Mr White in relation to the application of discounts to assets in distressed situations, I consider that it is critical to understand that such discounts are measured against the value of assets sold as a going concern in the normal course of business and that such discounts depend entirely on the circumstances.
g) It is my opinion that the CSA Report and ultimately the valuation estimated by KPMG did not estimate the value of SEK's assets as a going concern in the normal course of business but rather recognised the distressed and operational nature of the assets.
h) It is therefore my opinion that the Distressed Asset Discount applied in the Hughes Report represents a duplication of risk associated with the assets at least to some degree.
29 After delivery of their respective reports, there was a conference of experts. The result was a document entitled 'Joint Expert Report Tiger Resources Ltd'. Overall agreement proved not to be possible. Rather, each expert agreed to prepare an individual response in seven key areas. To an extent at least, this joint report crystalised the differences between the experts. It is useful to analyse the differences between the experts by reference to these seven categories.
30 This is a somewhat generic heading and really most of the matters covered by comments made by the experts are picked up in other areas. Mr White and Mr McVeigh did not make any comments under this sub‑heading. Mr Hughes, Mr Jaski and Mr Donnelly all noted Tiger would be selling the assets in a liquidation scenario. They all saw this as reason to provide a discount on the realisable value of the assets. They differed on the extent of that discount and that is reflected in other parts of the report. Overall, it is clear that each of the experts who commented had factored in all relevant matters in reaching their valuation.
31 Only two of the experts commented upon this area and they were Mr Hughes and Mr Jaski. Mr Hughes defended his use of the DCF method and Mr Jaski maintained the asset breakup method was more appropriate. While Mr Donnelly made no comment, it is to be remembered he in his report favoured the asset breakup methodology. Mr Hughes and Mr Jaski both accept the two methodologies are proper and as Mr Hughes comments, the adoption of one or the other is really dependent on professional judgment.
32 The price used for copper is an important element of the valuation of both Mr Hughes and Mr Jaski. The prices used in the CSA report by Mr Hughes and Mr Jaski all differ significantly. Relevantly, Mr Hughes adopted a price as at 31 March 2021, whereas Mr Jaski adopted a price as at 30 July 2021. That meant Mr Hughes used a copper price of US$7,650 per tonne whereas Mr Jaski used a price of US$9,701 per tonne. These were spot prices and no criticism can be made of the experts for adopting a particular price - it had more to do with the timing of their reports than anything else.
33 Mr Donnelly pointed out the volatility in the copper price. Both Mr Hughes and Mr Jaski accepted any potential purchaser would have their own views on what the price of copper might be going forward. There was some discussion in the evidence about predictions made by merchant banks and others as to what the copper price might be 12 months hence, 24 months hence and even five years hence. Beyond saying there was a considerable range in the opinions, it is not necessary to take this point any further. What can be said is that both Mr Hughes and Mr Jaski accepted there was a volatility in a copper price and in the process accepted adopting a particular price was really a matter of personal preference.
34 All of the experts accepted this was essentially unknowable. I have already dealt with the competing evidence from YYT and KHML. Each of the experts commented on this issue; each took a slightly different approach. None changed their opinion after the discussions. Each had their own view and the comments made by each did not diminish the comments of the others.
35 Mr Hughes did not comment on this issue. The other experts were in agreement as to how ideally such a process would evolve. At para 6.11 of his comments in the joint expert report, Mr Donnelly sets out a process which would lead to the eventual realisation of assets. In cross‑examination Mr Jaski was asked about the process and while he gave a 15 step process, there was no real difference between the experts.
36 What is clear is that the process would take around six months. The timing would be dependent on various factors and it could take longer or it might be truncated. As Mr Jaski said in cross-examination, some of the steps to be taken could overlap; thus saving time. However, the liquidation scenario here is not simple and is not as easily controlled as it would be if the assets were located within this jurisdiction - even allowing for the possibility that potential purchasers were based overseas. What is clear from the joint expert report is that an allowance must be made for the time taken to liquidate the assets.
37 Mr Hughes did not comment on this aspect of the evidence. Mr White maintained his position - he was of the view there were a series of factors which would lead to a 25% to 35% discount to market value on a funded sale process, and a 40% to 60% discount on an unfunded basis. Mr Jaski maintained that as what was being sold was mineral assets, not an ongoing concern operation, a discount of between 0% and 10% was appropriate. Mr McVeigh commented on this aspect of the evidence in some detail. However, taken in the overall, Mr McVeigh is of the view that the discount applied by Mr Jaski is appropriate. Mr White refers to such matters; as sovereign risk, the fact Tiger is insolvent, potential difficulties with the insolvency regime in the DRC and a number of other matters. Effectively, he says these can be put to one side, as what is being sold is mining tenements and no significant discount is warranted. Mr Donnelly is aligned with the views of Mr White. He is of the opinion that when the particular features of this liquidation are considered, a significant discount must be applied. It is worthy of note that Mr Donnelly concedes his approach is an application of 'imperfect science': see para 7.2(e) of Mr Donnelly's contribution to the joint expert report.
38 Under this heading the experts discussed two matters. First, there was what is known as the 'Megatron Dispute'. It seems this relates to a dispute between Tiger's DRC subsidiaries and a company known as Megatron in relation to claims attributable to the Kipoi Project. The details are sketchy. Tiger had included a provision for the full amount outstanding to Megatron in its financial statements as at 30 June 2019. However, Tiger considers that an offsetting claim may exist. What the amount of that claim might be and how it would be enforced is unclear. Because of time constraints the parties did not deal with the issue in any detail. The experts agreed this was an issue which required further assessment and it did not influence their ultimate conclusions. For the purposes of this case I have put the issue to one side.
39 The same is true of tax losses which may be available in the DCR. How these tax losses may be of value to a potential purchaser is difficult to know. Any definitive answer to that question would require some understanding of the tax regime in the DCR as it applied to a particular purchaser. Accordingly, while noting this may add some value to the asset pool, it is not a factor which I have taken into account.
40 In my view, the evidence of Mr Donnelly is to be accepted and accordingly, I have concluded the shares have nil value. I do not need to repeat all that I have said about the evidence. In the end, I found Mr Donnelly's analysis of the value and the process to be most convincing. In reaching that conclusion there are two factors which I regard of particular importance.
41 The first relates to the present funding of the Kipoi mine and its preservation on a care and maintenance basis. The plaintiff and the interested parties relied on two affidavits of Aiping Wei, the first sworn 5 July 2021 and the second sworn 21 July 2021. The first affidavit of Ms Wei deals with what she says will be the position of the first and third interested parties if Tiger is placed in liquidation. Paragraph 32 of that affidavit reads as follows:
The position remains the same as at the date of this affidavit. That is, if the DOCA is set aside and Tiger is placed into liquidation, CGM will immediately cease all funding to SEK.
42 Counsel for KHML objected to these affidavits. She made the point that Ms Wei was speculating as to future matters which were, in the end, decisions taken by the Board of YYT. Over counsel's objections I allowed both affidavits into evidence. That said, I accept it is not possible to conclude based upon what Ms Wei said, that were Tiger to be placed in liquidation funding would be withdrawn.
43 This is a matter which exercised the mind of the liquidators who gave evidence. All were of the view that a company in the position of YYT would act in its best commercial interests and that would involve the provision of funding during the liquidation process. While I accept the strength of that argument, there must be a real risk funding would be withdrawn. After all, YYT are in a position to appoint receivers to Tiger's assets. In other words, it would be possible for YYT to bypass the liquidation process. Although they have taken the commercial decision not to take that step at present, it must remain a real possibility.
44 In answer to that position, KHML relied upon the affidavit of Claude Holton sworn 17 August 2021. Mr Holton is a director of KHML and the parent company which controls KHML. In his affidavit he makes an offer to fund care and maintenance costs and provides evidence that funds are available to meet the ongoing obligations. With respect, it is difficult to see how this offer is of any value. It would be dependant upon YYT agreeing KHML would have priority with respect to the care and maintenance costs when liquidation took place. There was nothing to suggest YYT would agree to that priority. There was some discussion about the prospect of money being advanced to any liquidator and upon liquidation the liquidator's lien being relied upon to recover, in priority, the care and maintenance costs. While that might be a theoretical possibility, it is a very tenuous basis upon which to advance substantial funds. On balance, I am not satisfied the offer to fund the care and maintenance of the Kipoi Project provides sufficient comfort to offset the risks of YYT withdrawing funding.
45 The second factor which I regard as of significance is the difficulties of undertaking a liquidation process in the DCR. The corporate structure of Tiger, as it relates to its interlocking subsidiaries, makes liquidation a complex process. The difficulties are compounded by an Australian liquidator attempting to deal with liquidators appointed in other jurisdictions. It is not hard to see the matter could degenerate into a logistical nightmare. In my view, that renders the prospect of substantial recovery problematic.
46 In my view, Mr Donnelly's report best deals with these two factors and is to be preferred to the evidence advanced by KHML.
47 For these reasons, I have determined that orders sought by the plaintiff ought be made. On publication of these reasons the parties should file within 14 days submissions as to costs.
48 There is one final matter of evidence which I indicated to the parties during the course of the hearing that I would deal with in these reasons. It concerns an objection made by KHML to the evidence of Mr Donnelly and an objection made by YYT and Jinji to the evidence of Mr Jaski. So far as Mr Donnelly was concerned, it was said he had engaged in inappropriate contact with the solicitors for YYT and Jinji during the preparation of a joint expert report. So far as Mr Jaski is concerned, it was said by YYT and Jinji that Mr Jaski was a partner in a firm which had voted against the DOCA proposal, put forward by YYT. Counsel thought the matter of sufficient importance to hold a voir dire as to the admissibility of the evidence of both witnesses. After each were cross‑examined, both counsel, while maintaining their objection, did so only to the extent that the evidence of both witnesses was to be treated with caution. By the time closing submissions were reached, neither counsel appeared to press the issue. However, for the sake of completeness, I should make it clear that I accepted the evidence of both Mr Donnelly and Mr Jaski without qualification. There was nothing which emerged in cross‑examination that, in my view, would cast any doubt on the evidence of either witness.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CITATION : ROBERT MICHAEL KIRMAN as joint and several administrators of TIGER RESOURCES LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) -v- YINGKOU YANGZHOU TRADE CO LTD [No 2] [2021] WASC 354 (S)
BETWEEN : ROBERT MICHAEL KIRMAN as joint and several administrators of TIGER RESOURCES LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
ROBERT CONRY BRAUER as joint and several administrators of TIGER RESOURCES LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Corporations Act 2001 (Cth)
Crawley Investments Pty Ltd v Elman [2014] WASC 233 (S)
Re David Ireland Productions Pty Ltd [2014] NSWSC 1411
Re DSHE Holdings Ltd (recs and mgrs apptd) (in liq) [2018] NSWSC 275
Re Pan Pharmaceuticals Ltd; Selim v McGrath [2004] NSWSC 129
Re Ten Network Holdings Ltd (admin appted) (recs & Mgrs apptd) [2017] NSWSC 1359
Xat Ky v Australvic Property Management Pty Lltd [No 2] [2007] FCA 1785
Yeo v ASIC [2018] FCA 37
49 These reasons deal with costs. Throughout I will refer to the first named plaintiff and the second named plaintiff as 'the plaintiffs'. I will refer to the first interested party as 'YYT', the second interested party as 'KHML' and the third interested party as 'Jinji'. YYT and Jinji are represented by the same solicitors and they seek the same costs order against KHML. The plaintiffs, independent of YYT and Jinji, also seek costs orders against KHML. It is convenient to begin with the relevant background facts.
50 On 16 February 2021, at a meeting of creditors of Tiger Resources Ltd (Tiger) held pursuant to s 439A of the Corporations Act 2001 (Cth), the creditors of Tiger resolved that it should execute a deed of company arrangement (DOCA). Subsequently, on 19 February 2021, Tiger executed that DOCA and the plaintiffs were appointed as the deed administrators of the company.
51 Pursuant to cl 5.4.5 of the DOCA, the plaintiffs had an obligation to apply to the court for the court's approval pursuant to s 444GA of the Corporations Act. This section allows the administrator of a DOCA to transfer shares without consideration, provided they obtain leave of the court. The DOCA anticipated the transfer of the shares in Tiger to YYT or its nominee. This action was duly commenced by originating process filed 23 April 2021.
52 KHML entered an appearance in the proceedings on 18 May 2021. They were given leave to be heard in the proceedings as an interested party pursuant to r 2.13(2) of the Supreme Court (Corporations) Rules 2004 (WA) (Corporation Rules). In that capacity, KHML acted as the sole contradictor to the application. It opposed the leave being sought by the plaintiffs.
53 KHML was heard at three directions hearings and was represented by Senior Counsel and two junior counsel at the four day final hearing held in August 2021. KHML filed nine affidavits comprising 1,324 pages, four sets of submissions comprising 60 pages and a supplementary tender bundle comprising 1,116 pages. KHML required the plaintiffs to produce various documents. It instructed two experts to give expert evidence at the final hearing and filed two expert reports comprising 115 pages. As can be imagined, there were numerous items of correspondence in connection with the proceedings.
54 In part, the material filed related to a stay application which was subsequently discontinued. The costs of the hearing of the stay application were reserved by Hill J and have now been finally determined. These reasons do not deal in any way with the costs of the stay application.
55 At the hearing, the plaintiffs were successful. The orders sought were made. KHML's opposition to the application was wholly unsuccessful. Accordingly, the plaintiffs now seek their costs and special orders in relation to those costs.
56 Rule 2.13(2) of the Corporations Rules provides that where the attendance of a person to whom leave has been granted has resulted in additional costs for any party, the court may direct the person pay those costs. That then gives rise to two questions. First, were the additional costs in fact incurred as a result of the intervention of the interested party and second, ought the court exercise its discretion to order that the applicant be paid those costs: see Re David Ireland Productions Pty Ltd [2014] NSWSC 1411.
57 It is the plaintiffs' position that KHML effectively acted as contradictor to the application and that their vigorous opposition to the orders sought by the plaintiffs resulted in substantial additional costs being incurred. The plaintiffs say KHML's involvement resulted in a number of additional procedural steps and an extension of the final hearing beyond what would otherwise have been required. The plaintiffs say the matter should be approached by looking at the quantum of additional costs incurred on the application as against the costs that would have been incurred had KHML not participated.
58 The plaintiffs acknowledge in making the application and satisfying the court orders should be made, the following costs would have been incurred even if KHML had not participated:
(a) the preparation of the application, the affidavits filed in support of the application dated 23 April 2021 and the expert reports prepared by Mr Hughes dated 23 June 2021 and Mr Naidoo dated 23 June 2021;
(b) the preparation of the plaintiffs' tender bundle;
(c) the preparation of one set of written submissions; and
(d) attending a final hearing of the application which the plaintiffs estimate would not have taken longer than one hour.
59 The plaintiffs put the costs that would have been incurred at $232,795.50. They then refer to the costs that were actually incurred and which they say directly resulted from KHML's intervention and say the amount incurred as a result of KHML's participation is an extra $446,653.38. Of course, these are the figures put forward by the plaintiffs. I am not being called upon to actually assess the costs. What the plaintiffs have done is produce figures which they say demonstrate the increasing costs as a result of KHML's participation. In doing so, they are dealing with the first limb of the test set out above.
60 The plaintiffs concede the usual position is that a person heard in proceedings under r 2.13 of the Corporations Rules will neither be awarded costs nor have an order for costs made against them: see Re Ten Network Holdings Ltd (admin appted) (recs & Mgrs apptd) [2017] NSWSC 1359 [15] and Re DSHE Holdings Ltd (recs and mgrs apptd) (in liq) [2018] NSWSC 275 [11]. It is the plaintiffs' position this rule is not hard and fast and will depend upon the extent to which a party's intervention is justified and the extent to which the party adopts the role of an opponent to the application. By way of example the plaintiffs rely on Yeo v ASIC [2018] FCA 37 where Gleeson J ordered the intervening party to pay the costs of the application because the intervening party's position in the litigation was 'analogous to an unsuccessful litigant'. That the plaintiffs say was the position here. They say KHML vigorously contested the application and filed a large volume of material. Further, KHML's position was wholly rejected at the final hearing.
61 On behalf of KHML, it was submitted that the legislation required the plaintiffs to satisfy the court there was no residual value in the Tiger shares. So whether or not KHML participated in the hearing, the plaintiffs would have to have taken certain steps and necessarily incurred certain costs. That much is common ground between the parties. It must also be acknowledged that if a party is given leave to appear under r 2.13 of the Corporations Rules there would almost certainly be increased costs as a consequence of that participation. The intervenor may appear and cross‑examine expert witnesses even if they did not produce expert evidence of their own. A hearing which, if it proceeded without an intervenor might take one hour could with an intervenor take perhaps a day. The intervenor might produce expert evidence of their own, thus necessitating an even longer hearing. While the role of such an intervenor could not be regarded as entirely passive, its role might be said to amount to nothing more than ensuring all aspects of the application were exposed to careful scrutiny which would result in the court having the benefit of a full examination of all the relevant material.
62 In this case, KHML went well beyond such limited involvement. This was a fierce contest with no quarter asked or given. KHML attacked with vigour all aspects of the plaintiffs' case. It was an instance where the proceedings were indistinguishable from any plaintiff/defendant suit. Not only is there no doubt KHML's involvement resulted in additional costs, but this is one of those cases where, given the nature of KHML's involvement, it ought pay the additional costs incurred.
63 The second issue is whether there should be a special costs order. The plaintiffs seek an order removing the limits under the relevant scale and removing any limits with respect to the maximum hourly and daily rates fixed by the scale. Ordinarily, the taxation of costs is regulated by costs determination made by the Legal Cost Committee established under s 280(1) of the Legal Profession Act 2008 (WA) (LPA). Pursuant to s 280(2) of the LPA, the court has the power to remove the limits under the scale of costs. That section reads as follows:
(2) Despite subsection (1), if a court or judicial officer is of the opinion that the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter, the court or officer may do all or any of the following -
(a) order the payment of costs above those fixed by the determination;
(b) fix higher limits of costs than those fixed in the determination;
(c) remove limits on costs fixed in the determination;
(d) make any order or give any direction for the purposes of enabling costs above those in the determination to be ordered or assessed.
64 The principles concerning special cost orders under s 280(2) of the LPA were summaries by Eidelman J in Crawley Investments Pty Ltd v Elman [2014] WASC 233 (S) [5]. They are:
(i) The court must form an opinion which has two components. First, the court must determine that the amount of costs allowable in respect of a matter under a legal costs determination is inadequate. Second, the court must conclude that the inadequacy arises because of the 'unusual difficulty, complexity or importance of the matter'.
(ii) Having heard the matter and being familiar with the way in which the case was conducted and the issues which were litigated, the court is in a position to form the opinions required under the section as matters of impression rather than 'detailed evaluation', 'precision', 'science' or 'mathematics'.
(iii) As to the question of (inadequacy) the court must form the view that the maximum amount allowable under the relevant scale is inadequate in the sense that there is a fairly arguable case that the bill to be presented to the taxing officer may properly tax at an amount which is greater than the limit which would be imposed by the relevant costs determination. Until that threshold is crossed, the power will not ordinarily be exercised.
(iv) A conclusion that it is fairly arguable that the taxing officer might properly allow costs at an amount greater than the amount allowable under the Scale does not always require evidence of the costs actually incurred.
(v) As to the second question (the cause of the inadequacy being unusual difficulty, complexity or importance), the word 'unusual' qualifies only the 'difficulty' of the matter and not its complexity or importance. The word 'unusual' in this context means unusual having regard to what one might describe as the usual run of civil cases determined in the Supreme and District Courts. That essentially involves the making of a value judgment by the court, having regard to the court's experience of the particular case when compared with the usual run of cases. And the word 'importance' in s 280(2) encompasses importance to the parties; it does not require broader importance to the public or a sector of the public.
(vi) Although replacing the amount of the Scale item with a different ceiling may be appropriate where sufficient information exists to make that assessment, it is not uncommon for an order to be made removing the limit for the Scale item without replacing that limit with a different ceiling.
(vii) One of the principles that should guide a court in addressing an issue under s 280(2) is the court should not usurp the role of the taxing officer.
65 This was a case which was unusually difficulty and complex. The application involved evidence of a technical nature that required expert evidence in connection with the valuation of shares in the company. Five experts who prepared a joint expert report were all cross‑examined over a period of two days via the 'hot tub' process. In excess of 3,000 pages of evidence and submissions were filed by the parties. Furthermore, the proceedings were heard and determined on an expedited basis given the DOCA was required to be effectuated by no later than 31 December 2021. In all, I am satisfied that this is a case for a special costs order. I have no doubt that the bill which is presented to the taxing officer would properly tax out at an amount greater than the relevant limit on the scale. Furthermore, I accept the rates payable under the scale are inadequate. The complexity of the matters at issue and the importance of the outcome to the plaintiffs is a relevant factor. The plaintiffs should be entitled to recover their costs at a rate higher than that charged under the scale and in accordance with its costs agreement with the plaintiffs' solicitors.
66 YYT and Jinji have also applied for orders that KHML pay their costs. They do so notwithstanding the proceeding was commenced by the deed administrators on an ex parte basis and each of the parties - including KHML - were given leave to be heard in the proceedings as mere interested parties. Clearly, the application of YYT and Jinji is on an altogether different basis than the application of the plaintiffs. Essentially, YYT and Jinji make three points. First, while YYT and Jinji may have applied to be heard on the plaintiffs' application, were it not for the presence of KHML, their participation would have been very limited. After all, they were entirely supportive of the orders being sought by the plaintiffs and accordingly, in the absence of KHML, they had no reason to do anything more than provide support for the plaintiffs if support was needed. Second, when KHML mounted vigorous opposition to the plaintiffs' claim, YYT and Jinji were necessarily drawn into the proceedings. They were, in effect, obliged to act to protect their positions. In that way, KHML were directly responsible for the costs incurred by YYT and Jinji. Third, the fact that a person opposed an application in its capacity as an interested non‑party did not prevent the court from making an order against that person.
67 In effect, YYT and Jinji said they were in no different a position to any other litigant in contested inter partes proceedings. They had been successful in those proceedings and costs should follow the event.
68 In its submissions, KHML conceded, not without some hesitation, that it was open to the court to order it as an interested party to pay the costs of other interested parties. KHML submitted there would have to be some very special factor outside the ordinary course of events before that power would be exercised: see Re Pan Pharmaceuticals Ltd; Selim v McGrath [2004] NSWSC 129.
69 KHML made the point that YYT and Jinji were essentially in the position of a non‑party intervenor supporting the position of the plaintiffs. As such, a costs order in their favour would not normally be made. It was submitted the general position is that a successful intervenor can recover costs only if the intervention was necessary to protect an interest not common with the main parties: see Xat Ky v Australvic Property Management Pty Lltd [No 2] [2007] FCA 1785 [22] ‑ [23].
70 That statement of principle ought be accepted. While there is no doubt that this matter was conducted very much as a contested application and while YYT and Jinji did lead evidence separate from and independent of the evidence led by the plaintiffs, in all respects their position mirrored that of the plaintiffs. The plaintiffs on the one hand and YYT and Jinji on the other were really two sides of the one coin. In the circumstances, there is no warrant for requiring KHML to pay the costs of YYT and Jinji. That application will be dismissed.
71 The parties should confer in an attempt to agree orders. If no agreement can be reached competing minutes of orders ought be lodged within seven days of the date of publication of these reasons.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.