Sev.en Gamma a.s v IG Energy Holdings

Background

1. Sev.en is a company incorporated in the Czech Republic where it has its head office. Through a series of intermediate holding companies it holds a 25 percent interest in IEHA. The other 75 percent interest is held, again through a series of intermediate holding companies, by China Huaneng Group.
2. IEHA owns 100 percent of the shares in IG Power Holdings Pty Ltd (IGPH). IGPH owns 100 percent of the shares in InterGen Power (Callide) Pty Ltd (IGPC) which owns a 50 percent interest in Callide C, one of two power plants that form the Callide Power Station in Queensland. Callide C has two generating units known as C3 and C4. The other 50 percent of Callide C is owned by Callide Energy, which is owned (indirectly) by the Queensland Government. Both IGPH and IGPC are also in voluntary administration.
3. On 25 May 2021, the turbine of unit C4 unexpectedly suffered a kinetic disintegration, which resulted in an explosion. On or about 31 October 2022, part of the cooling tower of unit C3 suffered a significant structural failure. As a result of those two events, the Callide C power plant has been offline. It is not expected to resume generating electricity until later this year. The total cost of repairing units C3 and C4 is estimated to be in the order of $94 million.
4. As I have said, the Credit Agreement was entered into on 25 April 2022.
5. Article 2.1 of the Credit Agreement provides: 2.1 Purpose of the Agreement The purpose of this Agreement ("Purpose") is to provide the Credit Recipient [IEHA] with monies in the form of a credit pursuant to the contractual terms and conditions agreed below for the purpose of Credit Recipient loaning funds to its subsidiary IG Power (Callide) Ltd for financing of its variation margins on Callide C hedging contracts ("Actual VM") in excess of the base amount being the value of the variation margin on the Base VM Relevant Date of AUD 66,580,000.00 (in words: sixty six million five hundred eighty thousands Australian dollars) ("Base VM"). Under Art 3.2, IEHA was only entitled to use the credit for the Purpose.
6. The interest rate payable under the Credit Agreement was 10 percent, which increased by an additional 5 percent if an "Event of Breach" occurred. Article 8 provides that an Event of Breach occurs if relevantly "the Credit Recipient is in delay with the payment of any amount under this Agreement or in connection therewith as at any Maturity Date" and that delay is not rectified "within three (3) Working Days following the delivery of the Credit Provider's written notice to the Credit Recipient concerning occurrence of such fact". Under Art 5.1, IEHA undertook to repay the Credit on the Maturity Date, which was defined to mean 31 March 2023 (although it is incorrectly referred to in the definitions clause of the Credit Agreement as the "Final Maturity Date"). "Credit" is defined to mean €25 million.
7. The Credit Agreement was expressed to be governed by the laws of the Czech Republic "with exclusion of conflict rules and direct rules of private international law". It is common ground that the laws of the Czech Republic are not relevantly different from the laws of New South Wales.
8. By an amendment agreement dated 26 May 2022, the credit limit was increased to €50 million. It was increased again by an amendment dated 14 October 2022 to €75 million. At the same time, the interest rate was increased to 20 percent per annum.
9. On 24 March 2023, IEHA was placed into voluntary administration.
10. On 2 April 2023, Sev.en gave written notice to IEHA that it (IEHA) had committed an Event of Breach and required the breach to be rectified within the 3 Working Days specified in Art 8.
11. On 5 July 2023, Baker McKenzie, the solicitors for Sev.en sent Allens, the solicitors for the Administrators, an email requiring IEHA pursuant to Art 9.1.1(c) of the Credit Agreement to execute the GSD which was attached to that email.
12. The GSD is a detailed formal document. Clause 2.1 of the GSD provides: As security for the due and punctual payment and satisfaction of the Secured Money, the Grantor grants to the Secured Party a security interest in all and any Secured Property.
13. "Secured Property" is defined to mean: … all property, rights, title, interests and undertaking of the Grantor, including anything in respect of which the Grantor has at any time the power to grant a Security Interest, irrespective of: (a) whether it is present or future; (b) whether it is real or personal; (c) whether it is tangible or intangible; and (d) where it is located; including: (e) the Shares; (f) the Rights; (g) any PPSA Retention of Title Property; (h) any Trust Property; and (i) each Certificate in respect of the above, and includes any proceeds derived from any "Secured Property".
14. "Shares" is defined to mean all the shares held in IGPH.
15. "Rights" is defined to mean: … all of the Grantor's present and future right, title and interest in and to any: (a) dividends, interest, distributions, profits, money, accounts and securities; (b) shares (including bonus shares), stock, debentures, warrants, notes, convertible instruments, securities and other instruments of any kind; and (c) rights, options, allotments, accretions, offers, benefits and advantages, payable, made, granted, issued or otherwise distributed at any time in respect of, in substitution for, in addition to, or in exchange for, the Shares, whether on or by reason of a winding up, reduction of capital, scheme of arrangement, conversion, redemption, forfeiture, cancellation, re-classification, consolidation or subdivision, option, rights issue or otherwise.
16. Clause 4 of the GSD contains comprehensive provisions relating to the shares, including restrictions on changes to the company's constitution or changes to its directors or officers.
17. Clause 5 contains a number of representations and warranties given by IEHA.
18. Clause 9 confers extensive powers on Sev.en in the case of a default by IEHA including the power to take possession of the Secured Property, to carry on the business of IEHA, to sell any part of the Secured Property, to commence proceedings relating to insurance of the Secured Property, to borrow money for the account of IEHA and to operate IEHA's bank accounts. In the case of an Event of Default, cl 10 confers on Sev.en a right to appoint a receiver. "Event of Default" is defined to include an Event of Breach under the Credit Agreement (whether occurring before or after the date of execution of the GSD).

The defence based on s 437D of the Corporations Act

1. Section 437D of the Corporations Act relevantly provides: (1) This section applies where: (a) a company under administration purports to enter into; or (b) a person purports to enter into, on behalf of a company under administration; a transaction or dealing affecting property of the company. (2) The transaction or dealing is void unless: (a) the administrator entered into it on the company's behalf; or (b) the administrator consented to it in writing before it was entered into; or (c) it was entered into under an order of the Court.
2. It is common ground that the GSD, if executed, would be void under s 437D(2) unless it was entered into under an order of the Court made under s 437D(2)(c). There appears to be no authority dealing specifically with the circumstances in which the Court would make such an order. IEAH accepts that the provision confers a wide discretion on the Court. However, it submits, correctly in my view, that the power must be exercised consistently with the purpose of Part 5.3A of the Corporations Act, which is concerned with the administration of a company's affairs pending the possible execution of a deed of company arrangement: see s 435A of the Corporations Act. Commenting on a similar power conferred by s 227 of the Companies Act (NT) (a predecessor to s 468(1) of the Corporations Act) in relation to the disposition of the property of a company after the commencement of its winding up, the Full Court of the Federal Court in Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd (1984) 3 FCR 311 at 316-7 said: The object of s. 227 is to hold matters in statu quo during the pendency of the petition, while at the same time permitting those transactions to take place which the court thinks should be sanctioned … A transaction entered into in good faith which offers actual or prospective advantage to the company or its general body of creditors would, ordinarily, be sanctioned by the court even if an incidental advantage were obtained by one creditor or one class of creditors …. Prima facie, an attempt by an unsecured creditor to gain security for a past debt is inimical to the interests of the general body of creditors of the debtor. … Whilst s. 227 proceeds upon the footing that, prima facie, a company against which a petition is presented should be deprived of the power to dispose of its assets pending the final hearing of the petition, the section also recognises the possibility that there may be some transactions which occur in this period which, by reason of their potential to advantage the company and, thereby, the general body of creditors, should be sanctioned by the court. Thus, although dissipation of the company's assets should be avoided, if possible, in some cases it is in the interests of creditors as a whole to keep the company trading with a view to the sale of its undertaking on a "going concern" basis; and, in such cases, the court, acting under s. 227, may well sanction a transaction which advantages a particular creditor who takes security in return for a promise to extend the company credit for future transactions. … The rationale, therefore, is that, although the disposition of the company's assets is presumed to be inimical to the interests of the company's general body of creditors, the presumption is not a conclusive one; special circumstances may justify the intervention of the court under s. 227, but only as a means to an end; and that end is the promotion of the interests of creditors as a whole. It follows, in our opinion, that the inquiry required by s. 227 is essentially a commercial or economic one, calling for a balancing of the anticipated net gains or losses from the transaction for which approval is sought.
3. Applying those principles, the Court refused to validate an equitable mortgage granted by the company after the presentation of a petition for its winding up.
4. The approach taken by the Full Court has been cited with approval in a number of subsequent cases: see, for example, Re Connelly (Liquidator), Samgris Resources Pty Ltd (in liq) [2018] FCA 1814 at [19] per Reeves J; Conlan v Pratt [2013] FCA 19 at [34] per McKerracher J; Commonwealth Industrial Gases Ltd v Dorcon Constructions Pty Ltd (in liq) (1988) 92 FLR 197; 14 ACLR 201 per Asche CJ.
5. The objects of Pt 5.3A are broader than those applicable to a winding up. They require the company to be administered to maximise the chance that it may continue in existence while also maximising the return to creditors where that is not possible: s 435A. One thing is clear, however, and that is that the company is not to be administered for the benefit of a particular creditor.
6. In the present case, it seems plain that the GSD would be entered into not for the benefit of the company as a whole or for the benefit of creditors generally, but for the benefit of Sev.en. Sev.en seeks to answer that point in two ways. First, it submits that the evidence establishes that there are no other significant creditors of IEHA. In support of that contention, it relies on a creditor listing of IEHA that shows the only other creditors are Genuity Pty Ltd for an amount of $32,062.00 and IGPH for an amount of $216.43, and on the minutes of the first meeting of creditors which lists those creditors and Sev.en as the only creditors represented at the meeting. Second, at the hearing it made an open offer to execute a deed poll by which it agreed that, if it had security, "the Admitted Claims of Admitted Creditors up to the Capped Amount in aggregate are to be paid in priority to its Secured Claim". "Capped Amount" is defined in the draft deed to be $250,000.
7. There are, however, difficulties with Sev.en's response. At most the evidence establishes that at the time of the first creditors meeting, the only creditors that had been identified are those it refers to. The evidence does not go so far as to establish that IEHA engages in no activity other than to hold shares in IGPH and that no other creditors exist.
8. More fundamentally, the question is not whether other creditors or the company are harmed by the proposed transaction (that is, entry into the GSD), but whether the proposed transaction is for the benefit of the company or creditors as a whole. Sev.en bears the onus in relation to that issue. It does not discharge that onus by demonstrating that the other known creditors will not be worse off as a consequence of the transaction.
9. In this case, it is appears from an affidavit sworn by Mr Petr Šlechta, the Vice President, M&A and Business Development of Sev.en Global Investments, that Sev.en seeks to have the GSD executed not because it wants to obtain priority over other creditors but because it wants the right to appoint receivers and to take control of IEHA. One reason for that is that it wants to obtain control of an insurance claim in respect of the damage to Callide C that is currently being prosecuted in the Supreme Court of Queensland and which it believes is being mishandled. Plainly, however, the power granted to the Court under s 437D(2) was not granted for the purpose of permitting one creditor to obtain control of a company in administration, whatever the reasons that creditor may have for obtaining that control.
10. It follows that the Court would not order IEHA to execute the GSD.

Uncertainty and specific performance

1. The question in this case is whether the promise contained in Art 9.1.1(c) is sufficiently certain to be enforceable. It is accepted that if it is not, it can be severed from the contract, leaving the balance of the Credit Agreement to operate according to its terms.
2. The answer to the question whether the term is sufficiently certain to be enforceable turns on whether the essential elements of the security to be provided are sufficiently identified in the terms of the article itself or can be identified in some other way: see, for example, Secure Parking Pty Ltd v Woollahra Municipal Council [2016] NSWCA 154; Whitlock v Brew (1968) 118 CLR 445.
3. In Biotechnology Australia v Pace (1988) 15 NSWLR 130, the Court of Appeal considered whether a provision of a contract of employment, which provided Dr Pace with "the option to participate in the company's senior staff equity sharing scheme" - which never came into existence - was too illusory or too vague and uncertain to constitute a binding contractual term. In relation to certainty of terms Kirby P explained that "…the bare bones of the promise to establish such a scheme leave[s] too many decisions to be made for a court to attempt to give content to the promise by substituting its opinion of a fair scheme in view of the failure of the appellant to establish such a scheme as the appellant promised to do."
4. In my opinion, the present case is analogous. Article 9.1.1(c) leaves too many questions concerning the security to be provided to give content to the promise. The article does not identify the property over which security is to be provided, the circumstances in which the security may be exercised and the rights that attach to the exercise of the security. As the terms of the GSD demonstrate, there are many possibilities. But the article provides no means of choosing between them.
5. Sev.en submits that the term "adequate" provides an objective standard by which the terms of the security can be ascertained. It submits that the question whether the security is adequate must be determined at the time the request for the provision of security under Art 9.1.1 is made. In the present case, the request was made at a time when IEHA owed an amount in the order of €50.9 million. The only adequate security IEHA could give to secure repayment of that amount was security over all its assets including its shares in IGPH and the money that IEHA was entitled to recover from IGPH. But there are a number of difficulties with this submission.
6. First, although it is possible that the content of the obligation to provide security could change depending on the circumstances, the question whether Art 9.1.1(c) is void for uncertainty must be judged at the time the Credit Agreement was entered into. The agreement cannot be insufficiently certain at one time to be void and sufficiently certain at another to be enforceable. Consequently, the question must be whether the article was sufficiently certain at the time the Credit Agreement was entered into.
7. Second, the expression is "any adequate", not "adequate". The word "any" and the alternative forms of security identified at the end of the article suggest that the security could take a number of forms. However, it provides no mechanism for choosing between those alternatives. If what the parties had intended was that IEHA would provide security over all its assets (including future assets), it is to be expected that the article would have said so.
8. Third, even if the word "adequate" somehow or another could be interpreted as providing an objective standard by which the subject-matter of the security could be identified, it does not identify the terms. The terms of the GSD indicate that there are many possibilities.
9. Sev.en submits that the terms contained in the GSD are standard terms that could be expected to be found in any security. In any event, it submits that if IEHA has problems with some of the terms, Sev.en would be happy to consider them and amend the GSD accordingly.
10. Neither of these responses is an answer to the problem. No evidence was led in support of the first proposition and the fact that many of the terms contained in the GSD can be found in many forms of security does not mean that those terms must be taken to be the terms agreed to by Sev.en and IEHA. Critically, not all forms of security give the security holder power to appoint a receiver over the secured property in the event of a default. How, then, can it be said that by agreeing to Art 9.1.1(c), the parties agreed to a form of security that had that characteristic?
11. As to Sev.en's second proposition, that observation highlights the problem rather than addresses it. The invitation to negotiate the terms of the security to be provided in accordance with Art 9.1.1(c) if there are terms in the GSD that are unacceptable to IEHA suggests that the terms cannot be found in the article itself. Looked at in that way, the agreement contained in Art 9.1.1(c) is nothing more than an agreement to agree on the terms of the security, which is void: May & Butcher Ltd v The King [1934] 2 KB 17 at 20 per Lord Buckmaster; see also Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72.
12. It is doubtful that IEHA's third defence raises any separate issues. However, the relief sought be Sev.en highlights the difficulties in its case. In order to give content to the obligation said to be contained in Art 9.1.1(c), Sev.en seeks an order for specific performance which requires IEHA to execute the GSD. In seeking an order in those terms, Sev.en overcomes the objection that any order for specific performance framed in terms of Art 9.1.1(c) would be insufficiently clear to be made: see Pakenham Upper Fruit Co Ltd v Crosby [1924] HCA 55; (1924) 35 CLR 386 at 396-7 per Isaacs and Rich JJ; Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; (1998) 195 CLR 1 at 90-1 [195]-[196] and 93 [198] per Callinan J. But in doing so it raises the question of how all the terms of the GSD can be said to be derived from Art 9.1.1(c) and how, in those circumstances, it could be said that what the Court was doing was giving specific performance of the obligation said to be imposed by that article.

Does Art 9.1.1(c) itself create an equitable charge?

1. IEHA submits that this issue is raised by Sev.en's List Statement, and, as a consequence, it addressed it in its written submissions. However, the submission was not advanced by Sev.en in its written submissions and only touched on orally.
2. As IEHA points out by reference to the decision of Bathurst CJ (with whom Beazley JA and Tobias AJA agreed) in Roberts v Investwell Pty Ltd (in liq) [2012] NSWCA 134 at [29], in order for a term in a contract for the payment of a debt to create an equitable charge the term on its true construction must evince an intention "to create an immediate proprietary interest or immediate right of recourse to identifiable, present, or … future property" (see also Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584 at 594-5; 2 All ER at 425-6 per Buckley LJ). Plainly, Art 9.1.1(c) does not do that. The security for which it provides is contingent on an Event of Breach and on a request by Sev.en. Moreover, it does not identify the property the subject of the charge. Even on Sev.en's case, that will depend on the circumstances that exist at the time the request under Art 9.1.1(c) is made.

Orders

1. It follows that the summons must be dismissed with costs.

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