- Shephard, Re Quest Minerals Ltd v Mutual Holdings Pty Ltd

Applicable principles

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."
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.
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."
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.
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

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.
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.
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.
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.
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.
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.
For these reasons, I grant the approval sought by the Deed Administrators under s 444GA of the Act.

At a glance

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Judgment (7 paragraphs)

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Legislation Cited (4)

Cases Cited (15)