Shield Mercantile v Citigroup

Affidavit evidence

1. I will first refer to the affidavit evidence and supporting documents, to which I have been taken in detail by Mr Grace who appears for the Company and the deed administrators in the application. The deed administrators rely on the affidavit of Mr Graeme Beattie dated 30 July 2020, who refers to the shareholdings in the Company and to the history of its activities. Broadly, the Company conducted a licensed debt collection business and, in the course of doing so, purchased loan books from financiers in its own name and then sought to benefit from taking recovery action. The shares in the Company were, in substantial part, held by Mr Desmond Shields, the First Defendant in the proceedings, although a relatively small number of shares was held by Cherale Pty Ltd. I pause to note that Mr Shields opposes the application under s 444GA of the Act, and has filed written submissions in opposition to the application, although he has not led evidence in opposition to the application and today advised the Court that he did not seek to be heard orally, although he continues to rely on his written submissions in opposition to the application. I will address those submissions below.
2. Mr Beattie there refers to the circumstances in which the DOCA was entered between the Company and a third party, AMPAC Debt Recovery Pty Ltd, for which Mr Johnson appears in the application, to support the claim brought by the deed administrators. That DOCA was preferred to a proposal put by Mr Shields, and another proposal by a third party, in the then voluntary administrators' report and a supplementary report prior to the second meeting of creditors, and by creditors at that second meeting of creditors.
3. Mr Beattie there expresses the view that there is no prospect of members of the Company receiving any dividend in the event of a liquidation of the company, and the shares on issue in the Company therefore have no value if the Company were to be wound up. That has been recognised in the case law to which I refer below as an essential question in an application for leave under s 444GA of the Act. Mr Beattie also addresses the circumstances in which a typographical error arose in the DOCA, apparently by omitting the reference to WBC from an exclusion of claims that would be released under the DOCA. As I noted above, WBC is a secured creditor of the Company, and its consent to the DOCA is required as a condition precedent to it. The deed administrators point to a concern that WBC will not consent to the DOCA unless its claims are excluded from the release under it, and that is consistent with the position which WBC has expressed. Mr Beattie also refers to correspondence with several parties, also addressed in other affidavit evidence, who have consented to the amendments. It appears the omission arose as a result of changes made in successive drafts of the of DOCA, and the use of revision mode for those changes.
4. I have been taken to an exhibit to Mr Beattie's affidavit, which is of some length. The voluntary administrators' report to creditors referred, inter alia, to certain claims made by the Company, which Mr Shields drew to the attention of the then voluntary administrators, in respect of what were described as "repatriation" charges, made against four banks to which the company had provided services or from which it had acquired loan portfolios. I refer to Mr Shields' submissions as to that matter below. I pause to note that the then voluntary administrators noted that the current value placed on those claims, necessarily by Mr Shields, was "substantial", but also pointed out that they had not been provided detailed evidence to support those claims and were not in a position to comment as to their likely success or any recovery. Mr Shields led no evidence to support those claims in this application, although he again asserted their magnitude as a reason that the application should not be allowed. The then voluntary administrators also referred, in their report to creditors, to their view that the Company had been insolvent since August 2019, although Mr Johnson rightly points out that the Company's solvency is less material in this application than the fact that its asset position is such that unsecured creditors would not be fully paid out on a liquidation and, necessarily, shareholders would receive no recovery where they rank below creditors in that liquidation. The voluntary administrator there expressed the view that the DOCA proposals would each allow a better result to creditors than a liquidation, although that would not itself be sufficient to support the relief that is sought under s 444GA of the Act, if it inappropriately prejudiced shareholders. Again I return to this question below.
5. The voluntary administrators also there noted, and it appears that creditors at the second meeting agreed, that the proposal which was ultimately adopted, put by the Ampac consortium, was preferable to that put by Mr Shields for the third party. The voluntary administrators also noted, in the information provided to creditors, that they had not included any recoveries from the repatriation claims as they were unable to quantify them and there were commercial risks as to what amount, if any, would be recovered from the claims. I will return to Mr Shields' submissions in respect of those claims below, but again recognise that he has led no evidence to support them. The information provided to creditors also noted the nature of the claims, which were said to relate to claims against three major banks, and additionally WBC, in respect of an alleged misdescription by those banks of referred debt, which are said to give rise to underpayment of commissions due to the Company from those banks. The amount referred to by the administrators as Mr Shields estimate for the value of those claims is relatively modest, but Mr Shields' estimate of that recovery in his submissions in this application was much more ambitious. Again, the then voluntary administrators there noted that they had not been provided with information that would put them in a position to estimate the likely success in recovery of those claims.
6. Importantly, the information provided to creditors also noted a substantial deficiency of net assets in the Company, commencing in the year ended 30 June 2019 and extending into the period ended 3 March 2020. That deficiency, reflected in an excess of liabilities over assets, is again inconsistent with any value in the Company's equity, where creditors' claims cannot be met in full. That proposition, however, does depend upon the correctness of the voluntary administrators' assessment of the repatriation claims, and the contrary position put by Mr Shields to which I will return. The repatriation claims were in turn allowed only a nominal value in information provided to creditors, immediately prior to the second meeting of creditors.
7. I have been taken to evidence of the passage of the resolution to approve the DOCA at the second meeting of creditors, and to an associated resolution passed by employees of the Company to vary the statutory priority for eligible employees, which was passed in respect of the DOCA proposed by the Ampac consortium, but not in respect of the other DOCA proposals, including Mr Shields' proposal. I have also been taken to a provision of the DOCA, which provides for the assignment of the repatriation claims to Mr Shields, upon certain conditions, including as to the manner in which any proceeds would be distributed, so as to benefit in the first instance, WBC as the secured creditor, unsecured creditors, and the balance to shareholders, after first allowing for the costs of the claim. That provision is also conditional upon Mr Shields demonstrating funding of the relevant claims, and some criticisms of that matter are made by Mr Shields in his submissions.
8. Other evidence led in the application includes an affidavit of Mr Cathro dated 30 July 2020 which confirms that he holds the views set out in the information provided to creditors, and confirms his understanding that there is a typographical error in the relevant clause of the DOCA, which is now sought to be corrected. Other affidavits deal with service of the application upon creditors, correspondence with Westpac in which it indicated that it seeks to have the error in the relevant clause corrected, and will consent to the DOCA on this basis, and evidence of persons associated with the Ampac consortium that they consent to the amendment that is sought.

The parties' submissions and the case law as to the s 444GA application

1. Turning now to the parties' submissions and the applicable case law. Mr Grace, who appears as I noted above for the company and the deed administrators, refers to the factual background of the application and the creditors' vote in favour of the DOCA proposed by the Ampac consortium at the second meeting of creditors, and also refers to the information provided to creditors in that respect to which I have referred above.
2. He notes that s 444GA of the Act provides that the deed administrators may transfer shares in a company, with the written consent of the owners of the shares, which has not been obtained, or with the leave of the Court. He rightly recognises that the Court can only give such leave if it is satisfied that the transfer would not unfairly prejudice the interests of members of the Company, and refers to case law concerning that provision, including Lewis, in the Matter of Diverse Barrel Solutions Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 53 and the subsequent decision of Brereton J in Re Statewide Office Furniture Pty Ltd [2018] NSWSC 1393. Mr Johnson also points out, rightly, that the case law as to these principles is consistent, both in decisions in this Court and in decisions in other courts dealing with corporations matters in Australia, and I summarised that case law in my decision in Ten Network Holdings Ltd [2017] NSWSC 1529 at [32]ff; (2017) 123 ACSR 253, I adopt that summary without repeating it for the purposes of this application.
3. On the face of it, and subject to the submissions put by Mr Shields, it is apparent that there is no value in the equity in the Company in a liquidation, and that a liquidation is the only alternative to the DOCA, given the Company's insolvency, its deficiency of assets, and the fact that it was in default in its loan owed to WBC, prior to being placed in voluntary administration. The question then arises as to whether the matters raised by Mr Shields in his written outline of submissions, and particularly the suggested value of the repatriation claims, displace that result.
4. Turning to those submissions, Mr Shields appears to accept that liquidation is the only alternative to the DOCA, but suggests that an "indefinite winding up" of the Company would promote the interests of Pt 5.3A of the Act because it would allow the realisation of assets of value, implicitly, the repatriation claims. The reference to an "indefinite winding up" appears to relate to a winding up which is stayed for an indefinite period, and I will point below to the difficulties with that proposition. A second difficulty with this submission is that, of course, a winding up, whether indefinite or otherwise, is an alternative to a voluntary administration or deed of company administration, and does not promote the interests of Pt 5.3A of the Act.
5. Mr Shields also refers to the relevant factual background, but relies on the evidence of Mr Beattie for his account of it, and that account cannot extend beyond the evidence of Mr Beattie to which I have referred above. Mr Shields refers to the fact that the Company sent invoices to four banks in respect of these claims, for the amount of no less than $93 million. As I have noted above, there is no evidence to support the basis of these claims led by Mr Shields, still less evidence to indicate that they have the enormous value which he attributes to them in submissions. Mr Shields indicates that the claims are based on law derived from a prior legal case, Shield Mercantile v Citigroup [2013] NSWSC 117. Mr Johnson points out that, unfortunately for that proposition, that case resulted in a modest recovery by the Company, less by many orders of magnitude than the amount now claimed, and no order for costs in favour of the Company. Mr Grace also points out that, obviously enough, the fact that a Company may once have a claim against one bank, recovering a modest amount, does not demonstrate that it has claims against four other banks, many years later, in respect of other transactions, in any amount, still less in an amount of $93 million.
6. Mr Shields in turn referred to references in the voluntary administrator's report to creditors, and their supplementary report to creditors, which he seeks to treat as endorsing the value of the claims. It seems to me that, as Mr Grace pointed out, they do not have that effect, where the then voluntary administrators had made clear that they had not been provided information to support the claims and were unable to assess them, but merely referred to the value which Mr Shields had attributed to the claims. That, of course, does not demonstrate that that value is well-founded.
7. Mr Shields in turn refers to the test adopted in Lewis, Re Diverse Barrel Solutions Pty Ltd above in respect of an order under s 444GA of the Act, and submits, by a somewhat complex submission, that there is value to be realised from the repatriation claims within a reasonable time in the future. That turns, in part, upon the proposal that the claims should be assigned to Mr Shields under the DOCA but that proposition has the difficulty that the claims will only be assigned to Mr Shields if the transfer which he opposes goes forward over his opposition. Second, after advancing various criticisms of the mechanism adopted under the DOCA, which it is not necessary for me to address, Mr Shields submits that the alternative course is for the Company to be placed in liquidation, and for the liquidation to then be stayed indefinitely. He submits that this would provide a significantly better outcome to creditors than an immediate winding up, and would retain shareholder value. That proposition, however, seems to me without substance. The Company is plainly insolvent, on the evidence that has been led by the deed administrators; and, where the Company is plainly insolvent, there is no prospect that the Company would, at once, be placed in liquidation because of its insolvency, and then that liquidation would permanently be stayed, or indefinitely stayed, so as to permit an insolvent company going about the business of pursuing the repatriation claims against the several banks. That, of course, is inconsistent with both the nature of a winding up and the circumstances in which a winding up may be stayed.
8. For these reasons, it seems to me that Mr Shields has not established, even taking his submissions on their face, that there is value in the equity of the Company in a liquidation, if the DOCA does not go forward. However, as Mr Grace rightly points out, those submissions are in any event undermined by the complete lack of any evidentiary support for the propositions advanced, and the lack of any identification of the legal basis of the repatriation claims against the banks, which is more significant where Mr Shields had the opportunity to, but did not, lead evidence to establish the value of the claims in the application.
9. For these reasons, I am satisfied that the order under s 444GA of the Act should be made.

The s 447A application to vary the DOCA

1. The second order sought, under s 447A of the Act in respect of the plain error in the DOCA, is straightforward, and I can deal with it briefly. I am satisfied that such an error exists. It is apparent that WBC seeks correction of the error, to give effect to the original intent of the clause, and that correction is not opposed by persons interested in the DOCA. That correction will plainly promote the interests of Pt 5.3A of the Act, and the interests of creditors, where it will allow the DOCA to go forward, allowing a better result for creditors than will result from a liquidation, and allow a significant number of employees of the Company to retain their jobs, as contemplated by the DOCA. For these reasons, I will also make the order that is sought under s 447A of the Act.

Orders as to s 444GA application

1. Accordingly, I make orders in accordance with paragraphs 1 and 2 of the Originating Process filed on 30 July 2020. I direct the Plaintiffs to submit a short minute of order giving effect to those orders to my Associate by 6pm today.

Costs

1. The Plaintiffs seek, but I am presently not inclined to make, an order that Mr Shields pay the Plaintiffs' costs of the s 444GA application as agreed or as assessed. Subject to hearing from Mr Grace, I would not make such an order, where Mr Shields' participation in the application has ultimately involved little more than submitting a set of written submissions, and the deed administrators have led the evidence which they needed to lead, in order to establish the basis of the orders sought under s 444GA of the Act, which is no greater in circumstances had Mr Shields opposed the application than it would have been had he taken no role in respect of it.
2. Mr Grace sought to be heard in opposition to the tentative view that I had expressed that no order for costs should be made against Mr Shields in respect of the s 444GA application. He submitted that such an order should be made on the basis that Mr Shields had not consented to the acquisition of his shares, and in that respect had put the deed administrators to the costs of the proceedings. It seems to me that there are two difficulties with that proposition. The first is that Mr Grace does not refer to any previous example where costs orders have been made against a shareholder who have opposed such an application, and there appear to be at least some recent cases where such orders have not been made. The second, which may explain the first, is that Mr Grace's submission seems to me to neglect the fact that Mr Shields was not under any obligation to consent to the acquisition of his shares. It was no breach of duty by him to the deed administrators to say that he did not wish to have his shares acquired, and he was entitled to take that view, just as shareholders in some previous cases have taken that view. The legislature has addressed that question by providing a mechanism, under the Act, for a deed administrator to obtain the Court's approval for such an acquisition, and the deed administrators have properly invoked that mechanism. The fact that they have been required to do so, because Mr Shields would have preferred to retain his shares, does not seem to me to be a sufficient basis, irrespective of any aspect of the conduct of the proceedings, to support an order for costs against Mr Shields.
3. I am, however, satisfied that this application was properly brought by the deed administrators in the performance of their role and, for that reason, there should be an order that the Plaintiffs' costs of these proceedings be costs in the deed administration.

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