Shephard, Re Quest Minerals Ltd v Mutual Holdings Pty Ltd

Affidavit evidence

1. The Plaintiffs read the affidavit dated 21 August 2024 of Mr Keenan, who is one of the Deed Administrators. Mr Keenan refers to the circumstances of his and Mr Krejci's appointment as voluntary administrators of the Company on 23 November 2023, now about a year ago. He refers to the steps which were then taken to seek to sell the Company's business and assets, which were initially paused after BP Fiduciary Pty Ltd ("BP Fiduciary"), the principal secured creditor of the Company, appointed receivers and managers over all of the Company's assets and business, who then assumed control of those assets. Mr Keenan also refers to the steps which have been taken in respect of dealing with the Company's creditors, including reports to creditors, to which I will shortly refer, and a first and second creditors' meeting and then an adjourned creditors' meeting, after a Deed of Company Arrangement ("DOCA") proposal was received from three persons associated with the deed proponent. Mr Keenan also referred to the supplementary second report to creditors which dealt with that DOCA proposal and to its consideration at a second meeting of creditors, where creditors voted in favour of the Company executing that DOCA which was then executed on 21 March 2024, nearly eight months ago.
2. Mr Keenan also addresses the position in respect of a loan facility between the Company and BP Fiduciary, and refers to the secured interest registered on the Personal Property Securities Register in favour of BP Fiduciary. He also addresses the steps that the Deed Administrators have taken to obtain an expert report in respect of the proposed transfer of the shares in the Company to BP New Start, and addresses notification of the application given to shareholders and the Australian Securities Investments Commission ("ASIC"). I pause to note that ASIC has indicated the intention, in principle, to grant relief under s 606 of the Act in respect of the application, and has not appeared at this hearing to seek to be heard in respect of the application.
3. The exhibit to Mr Keenan's affidavit identifies several relevant documents. In particular, the first report to creditors issued by the voluntary administrators included a request that any creditor or interested party may wish to submit a proposal for a DOCA and, as I noted above, a DOCA proposal was subsequently submitted.
4. The second report to creditors dated 14 December 2023 included reference to the Company's history. The voluntary administrators there noted that the Company was incorporated in May 2019, initially providing buy now pay later invoice finance services to businesses; the Company converted to an unlisted public Company on 1 January 2021 and raised a substantial amount of new share capital in 2021; and they understood that the Company's then board were seeking to list the Company, and was placing higher volumes of loans to improve its perceived business value, including writing riskier loans. The voluntary administrators also there pointed to subsequent events by which the Company's auditor raised solvency concerns; a new board was appointed to the Company in March 2022 and took steps to reduce costs and undertook a detailed review of the loan book; the Company completed a further placement of new capital in December 2022; and, when further attempts to raise additional capital failed in the last part of 2023, the directors appointed the voluntary administrators to the Company. The voluntary administrators also there refer, nearly a year ago in mid-December 2023, to a potential claim by shareholders as follows: "We have also been made aware that certain shareholders have previously attempted to claim damages from the Company in respect of alleged misrepresentations made by the directors/management at the time, when they attempted [to] raise new share capital in 2020 and 2021. Shareholders are not creditors of the Company in ordinary circumstances, however, if the allegations are valid, then it is possible that some shareholders may have a claim against the Company and/or the company directors/management at the time that those representations were made. We have not sought legal advice and are not in a position to quantify the exposure at this time. We note the Company had D and O insurance policies in place and we have made enquiries, however this would need to be explored further to determine if they may respond to such claims."
5. The second report to creditors further outlined the conduct of the administration and then returned to the position of possible claims against the Company as follows: "We discussed earlier in the report, potential claims from shareholders in respect of alleged misrepresentations when the Company raised share capital in 2020 and 2021. We are aware of two groups of shareholders who have notified the Company of such claims, seeking to recover the value of their investment. Those claims were not settled or abandoned. We have not had the benefit of any legal advice on the merits of those potential claims. However, with the benefit of hindsight, it is apparent that there were substantial impairments in the old loan book, the extent of which does not appear to have been disclosed when the capital was being raised. If valid, we understand that those claims would arguably be pursued as breach of duty claims against the officers at the time and/or the Company. We are not in a position to quantify that exposure at this time. We have also made enquiries in respect of any D and O insurance policies that were in place. We have obtained documentation that indicates that D and O policies were required in the past. However, there is confusion between the former broker and the Company as to what policies were validly acquired, and furthermore what exclusions may apply. A Liquidator for the [receivers and managers] (subject to funding) may explore those policies further, in case they may respond to potential creditor claims. We include the above commentary of potential breach of duty claims for transparency. We note that there are commerciality concerns and we do not have sufficient information to quantify any recoverable value for creditors at this time. Subject to funding being available, further investigations are required if the Company is placed into Liquidation."
6. Mr Rubenstein, who appears for Mr Whatmore, points out that this description may extend to Mr Whatmore's claims, although they appear to relate to early 2022, and I accept that is possible. Mr Rubenstein submits that the voluntary administrators there recognise that claims against the Company may have some legal merit, so far as the extent of impairments in the old loan book may not have been disclosed by the former directors of the Company at the relevant time. That is plainly a significant matter. However, it is notable that the voluntary administrators, rightly, treat the question of the ultimate merits of the potential claims with a degree of caution. It is, of course, one thing to have a claim with legal merit; it is another thing entirely to have a claim that is recoverable against a party with sufficient assets to meet a judgment. The voluntary administrators there recognise that the position as to directors' and officers' liability insurance is uncertain, and that further investigations would be required to assess the merits of potential claims. Plainly, as I will note below, Mr Whatmore, and other shareholders who may or may not be in the same position as Mr Whatmore, have had substantial time to make such further investigations.
7. A third and supplementary second report to creditors addressed the position in respect of the DOCA proposal which was put to creditors for approval and recommended that creditors vote in favour of the proposed DOCA, for the reasons there expressed. Mr Rubenstein points out that that report did not further address the question of claims by potential shareholders which had been addressed in the second report to creditors; however, there is no particular reason to think that creditors who had been told of that potential claim in the second report to creditors, on 14 December 2023, would have forgotten the existence of such claims by 21 February 2024, when the supplementary second report to creditors was issued, and no reason to think that creditors would not have understood that the supplementary report to creditors was, as its title indicated, a supplement to the earlier second report to creditors, rather than an attempt to repeat its content.
8. The Plaintiffs also read an affidavit dated 28 October 2024 of Mr Wilson, a solicitor who represents them, who deals with the ASIC application for relief, notification of the application to shareholders, and creditors, and a foreshadowed objection to the application by Mr Whatmore, which was pressed at the hearing. The Plaintiffs also read two affidavits dated 6 November and 7 November 2024 of Ms Le, also a solicitor acting for the Plaintiffs in respect of the application, who deals with aspects of Mr Whatmore's involvement in the proceedings and further correspondence with ASIC, including questions raised by ASIC in respect of the position taken by Mr Whatmore. A third affidavit of Ms Le dated 11 November 2024 confirms ASIC's in principle decision in respect of the relief application and its position that it does not seek to appear to oppose the relief sought.

Expert evidence

1. The Plaintiffs also rely on two affidavits dated 7 and 11 November 2024, of Mr Stone, an experienced insolvency practitioner, who has prepared an independent expert report in respect of the application.
2. By his independent expert report dated 15 August 2024, Mr Stone addresses the residual value of shares in the Company, adopting the approach contemplated by ASIC Regulatory Guide 111, by assessing the Company's assets or business operations, less borrowings, other liabilities and creditors' claims, by reference to shareholders' residual equity in a liquidation, where that is the likely or necessary consequence of the transfer of shares being approved. Mr Stone there expresses the view, based on a detailed analysis set out in that report, that shareholders have a negative equity position of some $8.375 million, largely attributable to the fact that the claims of the secured creditor significantly exceed the Company's available assets. There is no reason to doubt that analysis, on its face, and Mr Whatmore has not challenged it in the course of this application. By an exhibit to his second affidavit, Mr Stone addresses the fact that the secured creditor has subsequently entered into an Asset Sale Agreement for the Company's assets, which was completed in September 2024, and expresses the view that this agreement does not change the opinion set out in his report, so far as it confirms that the secured creditor has a material shortfall in respect of its debt following that transaction.
3. Mr Whatmore in turn relies on the affidavit dated 8 November 2024 of his solicitor, Mr Hazell. Mr Hazell refers to having taken instructions from Mr Whatmore in about February 2023 regarding potential claims against the Company, its officers and senior managers arising from statements that had been made to "shareholders and prospective shareholders", presumably including Mr Whatmore, during a capital raising in about January 2022, and he contends (in evidence admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW) as submission) that those statements introduced Mr Whatmore to purchase shares and convertible notes in the Company. He identifies, in evidence also admitted with a limiting order, Mr Whatmore's potential claims. He also addresses (in evidence, again subject to a limiting order) a suggested prejudice to Mr Whatmore arising from the Company's failure to make its insurance position clear, and refers to the fact Mr Whatmore is currently, some eight or so months after the DOCA was executed on 21 March 2024, considering an application to set aside or vary the DOCA on the basis that the DOCA: "extinguishes any claims that [Mr Whatmore] may have against [the Company], for misleading and deceptive conduct arising from the company announcements and fund raising statements".
4. Mr Hazell in turn refers to the concern which Mr Whatmore has, in respect of this application, again in evidence admitted with a limiting order, that the transfer of shares in the Company may prejudice his potential claim against the Company, its directors or officers, and prejudice any application he may now bring to set aside or vary the DOCA.

Applicable principles

1. Section 444GA of the Act provides for the circumstances in which the administrator of a deed of company arrangement may transfer shares in a company, relevantly, with the leave of the Court. That section relevantly provides that: "(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 (b) the leave of the Court. (2) A person is not entitled to oppose an application for leave under subsection (1) unless the person is: (a) a member of the company; or (b) a creditor of the company; or (c) any other interested person; or (d) ASIC. (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." I summarised the applicable principles in Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 at [38]ff as follows: "In Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301 [("Weaver")], Martin CJ undertook a detailed review of the history of s 444GA of the [Act], which I gratefully adopt. This section was introduced into the [Act] by the Corporations Amendment (Insolvency) Act 2007 (Cth) with effect from 31 December 2007 and adopts a recommendation made in a report of the Legal Committee of the Companies and Securities Advisory Committee ("CAMAC") on Corporate Voluntary Administration (June 1998) that the law should grant deed administrators the ability to compulsorily sell company shares where necessary for the purposes of implementing a deed of company arrangement under which payment of creditors' debts is dependent upon such a transfer occurring (Recommendation 42, para [6.75], noted in Weaver v Noble Resources Ltd above at [65]-[71]). The Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 in turn notes (at [7.53]) that, prior to the introduction of the section, there was some uncertainty as to whether deed administrators had the power to transfer shares without the holder's consent, and the weight of authority was against such a power. The Explanatory Memorandum in turn notes (at [7.54]) that the purpose of the section is to enable a deed administrator to transfer shares in the company without the consent of shareholders where such a transfer is necessary for the success of the deed. The Court may only grant leave for a transfer of shares under this section if satisfied that the transfer would not unfairly prejudice the interests of members. In Weaver v Noble Resources Ltd above, Martin CJ noted (at [67], [70]-[71]) that this requirement in s 444GA of the Corporations Act reflects the view expressed in the CAMAC report that the possibility of prejudice to a shareholder would arise if there were some residual equity in the company. His Honour also noted (at [79]) that: '... [t]he notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair.' … His Honour also noted (at [80]) that something more than a mere transfer of shares without compensation would be necessary to establish unfair prejudice. The approach adopted in Weaver v Noble Resources above is consistent with that adopted by the courts in respect of the similar concept used in s 445D of the [Act], where the question whether a deed of company arrangement gives a class of creditors less than they would receive in a liquidation is highly material to whether unfair prejudice to creditors is established: Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48; 22 ACSR 169. In Lindholm v Tsourlinis Distributors Pty Ltd [2010] FCA 1488 at [9]-[10], Finkelstein J took a similar view to that taken by Martin CJ in Weaver v Noble Resources above. In Lewis, In the Matter of Diverse Barrel Solutions Pty Ltd (subject to a Deed of Company Arrangement) [2014] FCA 53 at [19], White J noted (at [19]) that the terms of s 444GA(3), in focusing on the concept of "unfair prejudice" to shareholders, contemplated that a transfer of shares may result in some prejudice to the interests of shareholders and that: 'Whether or not 'unfair prejudice' will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to the existing shareholders if the leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted.' His Honour there held that a transfer of shares involved no unfair prejudice where those shares had no residual value and the shareholders would not receive any return on a winding up."
2. In Re Nexus Energy Ltd (subject to deed of company arrangement) [2014] NSWSC 1910 ("Nexus") at [22], I again followed the observations of Martin CJ in Weaver that the possibility of prejudice to a shareholder "would arise if there was some residual equity in the company." Conversely, it is difficult to see how shareholders could be prejudiced by the transfer of their shares in the absence of any residual value or equity in the company: Weaver at [70]. The case law also seems to me to establish that there would not ordinarily be any prejudice, or no prejudice that has the requisite quality of "unfairness", if the shares to be transferred have no value and there would be no distribution in the event of a liquidation which is the only realistic alternative to the proposed transfer: Re Kupang Resources Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2016] NSWSC 1895 at [16]; Re Ten Network Holdings Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) [2017] NSWSC 1529 at [32]-[39]; see also Re Openpay Group Ltd (recs and mgrs apptd) (subject to a DOCA) [2024] NSWSC 789 at [20]ff on which I have drawn for this summary.
3. In Cussen, Re Big Un Ltd [2019] FCA 1162 at [5], Jagot J observed that: "the test involves unfair prejudice to the interests of the shareholders. Further, in order to determine this, the Court must consider whether there is any residual value in the company as the issue involves comparing the circumstances in the event of a transfer of shares with the circumstances which would prevail in a liquidation."
4. I again address these principles in my judgment in Re Infinite Water Holdings Ltd (subject to deed of company arrangement) [2024] NSWSC 1096 at [16]ff, on which I have drawn for the summary which appears above.
5. Mr Rubenstein pointed to the possibility that additional matters were relevant in an application of this kind, and in turn referred to those additional matters in his submissions for Mr Whatmore. He referred to the position in Shephard, Re Quest Minerals Ltd v Mutual Holdings Pty Ltd [2016] FCA 1559 at [37] where McKerracher J appears to have left open that an analysis of possible prejudice asserted by defendants in that case, because potential claims against the company's past and present directors had not been considered, would be relevant to determining an application of this character. In Tucker, Re Black Oak Minerals Ltd (subject to deed of company arrangement) (in liq) [2019] FCA 293 ("Black Oak Minerals") at [64] and [66-67], Banks-Smith J referred to that observation and to Mr Tucker's acceptance that matters beyond the "mere assessment of residual value" may be relevant to the assessment required by s 444GA of the Act, and pointed to a possible relevance of the fact that members might be denied the benefit of the outcome of further investigations in that case, although ultimately holding that that matter did not warrant declining the leave that was there sought. In Re Centennial Mining Ltd, (subject to deed of company arrangement); Ex Parte Tucker [2019] WASC 441, Vaughan J at [16]ff also referred to the applicable principles as summarised in Black Oak Minerals, and emphasised the familiar proposition that the ultimate onus of satisfying the Court that the discretion should be exercised remains on the deed administrator, and that requires the deed administrator to satisfy the Court that the transfer would not unfairly prejudice the interests of members of the company. His Honour also there noted Banks-Smith J's reference to the possibility of a potential benefit to shareholders from further investigations carried out by a liquidator but also there concluded that he was satisfied that the proposed transfer did not in fact prejudice the interests of members of the company.

Submissions and determination

1. Mr Rose rightly accepts that the Deed Administrators here bear the legal onus of establishing that the Court's discretion to allow the share transfer should be exercised in their favour. The Deed Administrators rely on Mr Stone's expert report in order to establish that matter, and I have summarised that evidence above. That evidence plainly establishes that the shares in the Company have nil value, given the equity shortfall calculated by Mr Stone. Subject to the additional issues which Mr Whatmore raised in this application, which I will address below, I would conclude that there is a significant shortfall to creditors on a liquidation and therefore no prospect of any return to the Company's shareholders and, subject to those additional matters, that there could be neither prejudice nor unfair prejudice to the Company's shareholders in making the orders sought by the administrators.
2. Mr Rubenstein adopted a somewhat different approach. He did not challenge the position put by Mr Rose, in terms, but pointed, first, to the elements of Mr Whatmore's potential claims against the Company, its directors and officers. I will assume, without deciding, that those claims have potential legal merit and I have referred above to the acknowledgement of the possibility of such claims, and the factual basis that may underpin them, in the voluntary administrators' second report to creditors. Mr Rubenstein points out that, so far as Mr Whatmore wishes to bring claims against the Company, those claims would be extinguished under the terms of the DOCA and by s 444D of the Act. He advances several criticisms of the approach adopted in the DOCA, and the adequacy of consideration of whether such claims might be covered by insurance by the then voluntary administrators, now the Deed Administrators. The difficulty with that proposition, however, is that Mr Whatmore has had, since the date of the execution of the DOCA, the opportunity to move to set it aside and, some eight months later, he is still considering whether to do so. This application is not a proxy for an application to set aside the DOCA, which has not been brought, and the application must be approached on the basis that the DOCA remains on foot and, when effected, will extinguish Mr Whatmore's claims under it.
3. Mr Whatmore is also concerned, it appears, that relief granted in this proceeding is not subsequently raised in opposition to an application to set aside the DOCA as a reason why that relief should be refused. He invites the Deed Administrators to offer an undertaking not to raise that matter in such an application, although I bear in mind that it is more likely that the deed proponent than the Deed Administrators would be the primary opponent to such an application. The Deed Administrators have not taken up the invitation to provide such an undertaking. Mr Whatmore indicates that, on that basis, he opposes the application because he would not wish to be seen to have not done so, for the purposes of any subsequent application in the DOCA. At times, the way in which that submission was put appeared to suggest that Mr Whatmore's position was directed more to demonstrating that he had opposed the application (as he has partly done), than to the ultimate outcome of that application.
4. Turning now to the determination of the application. I have referred above to the fact that it is plain that the shares in the Company have no residual value. Apart from Mr Whatmore's additional submissions, there would be no unfair prejudice to shareholders in approving the transfer, and I have noted above that Mr Whatmore does not contest that position. The question, then, is whether there is unfair prejudice in the transfer to the interests of members of the Company, because Mr Whatmore has a potential claim, and possibly some other shareholders have potential claims, against the Company which, as Mr Rubenstein points out, could potentially be brought directly against an insurer in a liquidation, and potentially would have a claim to insurance proceeds under s 562 of the Act in a liquidation. Ultimately, the evidentiary onus of establishing those matters rested upon Mr Whatmore, although the legal onus of establishing relief under s 444GA(3) of the Act rested upon the deed administrators.
5. I am satisfied that the transfer would not unfairly prejudice the interests of members of the Company, because of any impact of the transfer upon such a potential claim by Mr Whatmore, or indeed the unidentified other shareholders who may or may not also have such a claim. I am satisfied of that matter, because the evidentiary basis of the claims by Mr Whatmore, particularly so far as access to any insurance is concerned, and the likelihood of any such insurance policy responding to the relevant claims, is so unclear that any recovery in the claims is merely speculative. As I noted above, it is one thing for shareholders in the Company to have arguable claims; it is another thing to have a defendant who will respond to those claims, in a manner that will allow a judgment to be satisfied; and here, Mr Whatmore does not make any real attempt to establish that the claims would be satisfied, by an insurer responding to them, so as to establish any evidentiary basis for a finding of prejudice in respect of any extinction of those claims. It also seems to me that, here, any prejudice which Mr Whatmore may suffer, or any other shareholders may suffer, in respect of such claims, is not coincident with unfair prejudice to the interests of members of the Company as a whole. Further, it is not apparent to me that the prejudice is unfair, where Mr Whatmore, and persons falling within the same class of shareholders as Mr Whatmore, have now had some months to set aside the DOCA, which contemplated the extinguishing of their claims and the transfer of the shares, and have not sought to date to do so. It is not apparent to me that unfair prejudice is established, where Mr Whatmore or other shareholders could have sought to set aside the DOCA but has not done so, and the prospect that he or she will do so in the future is at best uncertain; if one were to take a different view, then the utility of s 444GA of the Act would be significantly undermined in any situation where shareholders in a Company have potential claims against the Company or its directors, which they have not sought to pursue, even after a significant time.
6. So far as the second part of Mr Whatmore's claim is concerned, no unfair prejudice to members of the Company is established because the effect of approving the transfer may or may not have some effect, the nature of which is presently somewhat unclear, in any application which may or may not in future be brought by Mr Whatmore to set aside the DOCA. Whether or not that prejudice may arise, in respect of Mr Whatmore, it is not prejudice to members of the Company generally, nor is it unfair where Mr Whatmore has had a significant time in which to bring an application to set aside the DOCA, and has not done so.
7. For these reasons, I grant the approval sought by the Deed Administrators under s 444GA of the Act.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 November 2024