Silvia v FEA Carbon Pty Ltd

Introduction 1 Chris Hill, Ross Blakeley and Ben Campbell, together the first plaintiff, are the voluntary administrators of the ASX listed Ovato Limited and 58 of its subsidiaries. The administrators seek orders pursuant to ss 443A(1) and 447A of the Corporations Act 2001 (Cth) and s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) (which is Sch 2 to the Act) that they are justified in: (1) entering into and performing the Acknowledgement and Seventh Amendment Deed (together, the Seventh Amendment Deed) between the plaintiffs, Scottish Pacific Business Finance Pty Ltd and a deed trustee (together, ScotPac); and (2) drawing down funds pursuant to the Seventh Amendment Deed. 2 The Ovato group conducts one of two national integrated print and distribution businesses in Australia and New Zealand, providing services including the printing of catalogues for well-known national businesses, the printing of promotional materials, custom product packaging and direct marketing as the largest Print Post mailer in Australia. 3 The administrators were appointed to the 59 companies on 21 July 2022. Since that time, they have sought to continue to trade the business of the group on a "business as usual" basis while assessing viable options for a sale or recapitalisation of the business. The administrators have engaged in a sales campaign, with expressions of interest to purchase the whole or part of the business or its assets due by 28 July 2022 and a current expected deadline of binding offers by 11 August 2022. The administrators are optimistic about the prospects of a sale. 4 The administrators have formed the opinion that continuing to trade Ovato's business during the sales campaign will maximise the prospect of a sale of the business as a going concern, which in turn is expected to provide a greater return to creditors. The difficulty is that the group has limited cash reserves which restricts the administrator's ability to keep trading. 5 The group has had a financing facility in place with ScotPac since at least July 2020. ScotPac holds a number of securities for the credit that it extends to the group. In simple terms, the facility agreement operated so that ScotPac would make an early payment (at a discounted percentage called the "early payment percentage") to group companies (referred to as the Clients) based on invoices issued by the Clients to customers. Pursuant to the facility agreement, the Clients' bank accounts were transferred to ScotPac so that when the issued invoices were paid by customers, the money was paid into an account that had been transferred to, and was held by, ScotPac. 6 The "early payment percentage" was such that, unless a customer did not pay the issued invoice in full, the early payment was fully covered by the receivable. Further, the structure meant that any costs, fees or other charges in respect of the facility were likely to be covered by the balance of the receivable over and above the early payment amount. 7 In the event that an invoice was not paid, ScotPac also had security over the assets the subject of the ScotPac securities. 8 As at the date of the administrators' appointment, the amount owed to ScotPac pursuant to the facility was considerably less than the amount of receivables owing to the Ovato group by customers, meaning the facility can be repaid in full (with a substantial balance remaining for the Ovato group and other creditors) without recourse to any other assets of the Ovato group or the ScotPac securities. However, if the efforts to sell the business fail and the group companies go into liquidation, the administrators fear that some of the pre-appointment receivables from customers will not be recovered because customers will likely claim a set-off of the debt owing against damages for breach of their respective contracts. The administrators therefore believe that the ongoing trading of the group will maximise the chances of recovery of the pre-appointment securities. 9 The administrators have estimated the level of funding that the group will require in order to keep trading until the end of the anticipated period for the conclusion of the sale process. It is a considerable sum, and they are understandably not prepared to be personally liable for its repayment. ScotPac has agreed to extend the facility (by way of the Seventh Amendment Deed) and provide the required funding subject to a specified limit. The limit is higher than the presently anticipated funding requirement for the requisite period. The funding will enable the administrators to continue to trade the Ovato business. 10 Amongst other things, the Seventh Amendment Deed provides as follows: (1) The "early payment percentage" is less than what it is under the existing facility; (2) Other than in the case of negligence, fraud or wilful misconduct or a loss caused by a breach by the administrators of two identified obligations in the Seventh Amendment Deed, the liabilities of the administrators for any amount payable in connection with the Seventh Amendment Deed and specified ancillary documents is limited to the assets the subject of the ScotPac securities. (3) If the assets the subject of the ScotPac securities are insufficient to satisfy the above liability, ScotPac agrees that it will not seek to recover the shortfall against the administrators personally. (4) The Seventh Amendment Deed is contingent upon the Court making orders as sought in the application and will not be binding unless the orders are made. 11 In short, the administrators have negotiated a deal for continued funding for the group in order to continue to trade during the anticipated sale period, but the deal depends on approval by the Court and the administrators being excused from personal liability to repay the funding.

Legal principles 12 The object of Pt 5.3A of the Act and the IPS (insofar as it relates to Pt 5.3A) is set out in s 435A of the Act, namely, to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 13 Section 443A of the Act relevantly provides that an administrator is liable for debts they incur in the performance, or purported performance or exercise, of any of their functions and powers as administrator, including for the repayment of money borrowed. 14 In order to avoid the consequence of s 443A, when a company in administration borrows funds from a third party financier to help fund the company's ongoing trade during administration, administrators commonly seek orders limiting their personal liability: Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) [2020] FCA 717;144 ACSR 347 at [90] citing Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 1144; 35 ACLC 17-044 at [42]. 15 Where the continued trade is for the benefit of creditors, personal liability of administrators can be (and has been) excluded, including pursuant to s 447A of the Act, prior to any such liability being incurred: Virgin No 2 at [91], citing Silvia v FEA Carbon Pty Ltd (admin apptd) (recs and mgrs apptd) [2010] FCA 515; 185 FCR 301 at [14]. As noted in Virgin No 2 at [89], Sloss J in Re Unlockd Limited (administrators appointd) & Ors [2018] VSC 345 at [60]-[64] helpfully set out the principles applicable to such an application under s 447A with extensive reference to authority. It is not necessary to repeat them here. 16 The Court is empowered under s 90-15 of the IPS to make such orders as it sees fit in respect of the administration of the group. The function of such orders, or judicial directions, is not to determine the rights and liabilities associated with a particular transaction, but rather to confer a level of protection on the administrator: Krejci, in the matter of Union Standard International Group Pty Ltd (Administrators Appointed) (No 2) [2020] FCA 1111 at [9]. 17 The fact that a s 90-15 direction may relate to a decision or action of a "commercial character" does not prevent such a direction being made: In the matter of RCR Tomlinson Ltd (administrators appointed) & Ors [2018] NSWSC 1859 at [14]. In that case, where the administrators sought a direction that they be justified in procuring the borrowing of loan funds by the companies in administration, Black J explained: The Court's preparedness to grant such a direction in those circumstances reflects the intrinsic unfairness of leaving a voluntary administrator to be at risk of liability, in respect of a complex decision of that kind, where any decision that is made, including making no decision, will have inevitable risks for some or all of the affected constituencies." 18 Similarly, in Niccol, in the matter of Fly365 Pty Ltd (in liq) [2020] FCA 1303, there was a direction that the liquidators were justified in entering into a funding agreement and were authorised to carry its terms into effect. Relevant to that decision was the conduct and purpose of the external administrators in seeking the funding, including that it be for the benefit of creditors.

Consideration 19 The administrators have formed the view that the ongoing trade of the group's business is in the best interest of creditors. In order for that ongoing trade to occur, funding is required. I am satisfied that the relief that they seek is necessary for that purpose. 20 The administrators have considered the best interests of creditors of the group. Given that the funding enables continuation of the business, which in turn maximises the prospect of preserving the business of the group with a view to its sale or recapitalisation, it is also in the best interests of creditors for the terms of that funding agreement to be endorsed. The purpose, therefore, of the proposed entry into the Seventh Amendment Deed, is, entirely appropriately, to benefit creditors of the group, and fulfils the proper purpose of seeking a s 90-15 direction. Such a direction will offer the administrators a level of protection in respect of their decision to obtain funding to secure the ongoing operation of a national business whilst the prospect of a sale of the business continues to be actively explored for the benefit of creditors. 21 It is noteworthy that the relief from personal liability that the administrators seek is limited to liability to ScotPac under the Seventh Amendment Deed, and ScotPac has agreed to that limitation. Thus, other post-appointment creditors are not prejudiced by that relief. 22 In the circumstances, I am satisfied that the principal relief that the administrators seek is justified as being in the best interest of creditors because it maximises the chances of the group, or its business, continuing in existence which will likely result in a better return to creditors.

Final matters 23 I am persuaded that it is necessary to prevent prejudice to the proper administration of justice within the meaning of s 37AG(1)(a) of the Federal Court of Australia Act 1976 to make non-publication orders in respect of certain details of the group's current cash position and anticipated cash needs and of the existing and contingent facility with ScotPac. The public disclosure of those details could prejudice the group's competitiveness, the sale process and the ability of the administrators, or others in a similar position, to access funding. In the event that any of those details are required by any creditor or other sufficiently interested party in order to assess their position in respect of seeking a variation or the setting aside of any of the orders, appropriate arrangements can be made to facilitate that. 24 I am also satisfied as to the arrangements for giving creditors notice, including the ability to have the matter returnable to set aside or vary any of the orders. See Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) [2020] FCA 571; 144 ACSR 310 at [50]-[51]. I appreciate that in respect of funds already drawn down, it will be difficult if not impossible for the orders to be varied or set aside, but the way in which the facility works is that the funds will only be drawn down as and when invoices are issued to customers - the funds will not be drawn down all at once, but can be expected to be drawn down gradually over time. The prejudice in this respect is accordingly limited. See RCR Tomlinson at [13]. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.

Associate: Dated: 3 August 2022 Schedule No: NSD565/2022 Federal Court of Australia District Registry: New South Wales Division: General Second Plaintiff OVATO LIMITED ACN 050 148 644 Third Plaintiff ARGYLE PRINT PTY LTD ACN 001 753 420 Fourth Plaintiff ATTIC FUTURA PTY LTD ACN 058 491 268 Fifth Plaintiff CANBERRA PRESS PTY LTD ACN 072 132 266 Sixth Plaintiff CRAFT PRINTING PTY LTD ACN 073 088 909 Seventh Plaintiff D. LIVINGSTONE PTY LTD ACN 008 471 976 Eighth Plaintiff FORTY TWO INTERNATIONAL PTY LTD ACN 095 622 889 Ninth Plaintiff HANNAN FINANCE CORPORATION PTY LTD ACN 105 770 956 Tenth Plaintiff HOLLER ADMINISTRATION PTY LTD ACN 122 047 821 Eleventh Plaintiff HOLLER AUSTRALIA PTY LTD ACN 127 752 523 Twelfth Plaintiff IPMG ADMINISTRATION PTY LTD ACN 123 230 713 Thirteenth Plaintiff IPMG CONSULTING PTY LTD ACN 611 368 346 Fourteenth Plaintiff IPMG DIGITAL PTY LTD ACN 122 262 819 Fifteenth Plaintiff IPMG HOLDOO PTY LTD ACN 615 558 944 Sixteenth Plaintiff IPMG MANAGEMENT (NO 2) PTY LTD ACN 052 506 037 Seventeenth Plaintiff IPMG PTY LTD ACN 123 230 259 Eighteenth Plaintiff IPMG SUBOO PTY LTD ACN 615 559 549 Nineteenth Plaintiff KIERIE INVESTMENTS PTY LTD ACN 003 418 273 Twentieth Plaintiff KTAR PTY LTD ACN 108 207 558 Twenty First Plaintiff LINQ PLUS PTY LTD ACN 070 732 071 Twenty Second Plaintiff MANNINGTREE INVESTMENTS PTY LTD ACN 072 132 300 Twenty Third Plaintiff MASSMEDIA STUDIOS PTY LTD ACN 094 222 563 Twenty Fourth Plaintiff MAX AUSTRALIA PTY LTD ACN 093 947 963 Twenty Fifth Plaintiff MJV PTY LTD ACN 108 207 629 Twenty Sixth Plaintiff NDD DISTRIBUTION PTY LTD ACN 074 517 909 Twenty Seventh Plaintiff OFFSET ALPINE PRINTING GROUP PTY LTD ACN 003 394 876 Twenty Eighth Plaintiff OFFSET ALPINE PRINTING PTY LTD ACN 003 094 602 Twenty Ninth Plaintiff OVATO FINANCE PTY LTD ACN 053 814 976 Thirtieth Plaintiff OVATO PACKAGING PTY LTD ACN 050 411 759 Thirty First Plaintiff OVATO PRINT CAIRNS PTY LTD ACN 050 487 879 Thirty Second Plaintiff PACIFIC O'BRIEN PUBLICATIONS PTY LTD ACN 069 892 440 Thirty Third Plaintiff PACIFIC PUBLICATIONS HOLDINGS PTY LTD ACN 051 748 344 Thirty Fourth Plaintiff PMP ADVERTISING SOLUTIONS PTY LTD ACN 051 748 157 Thirty Fifth Plaintiff PMP DIRECTORIES PTY LTD ACN 006 457 503 Thirty Sixth Plaintiff PMP HOME MEDIA PTY LTD ACN 051 757 718 Thirty Seventh Plaintiff PMP PROPERTY PTY LTD ACN 051 748 246 Thirty Eighth Plaintiff PMP PUBLISHING PTY LTD ACN 053 814 878 Thirty Ninth Plaintiff PMP SUBCO NO 1 PTY LTD ACN 052 506 073 Fortieth Plaintiff PMP SUBCO NO 2 PTY LTD ACN 008 472 115 Forty First Plaintiff PMP SUBCO NO 3 PTY LTD ACN 008 472 106 Forty Second Plaintiff PMP SUBCO NO 4 PTY LTD ACN 008 471 985 Forty Third Plaintiff PMP SUBCO NO 5 PTY LTD ACN 003 925 479 Forty Fourth Plaintiff PMP SUBCO NO 6 PTY LTD ACN 600 279 721 Forty Fifth Plaintiff PMP WHOLESALE PTY LTD ACN 004 386 663 Forty Sixth Plaintiff PROPSEA PTY LTD ACN 108 206 800 Forty Seventh Plaintiff RED PPR HOLDINGS PTY LTD ACN 111 284 961 Forty Eighth Plaintiff SHOMEGA PTY LTD ACN 060 808 013 Forty Ninth Plaintiff SHOW-ADS PTY LTD ACN 004 879 627 Fiftieth Plaintiff SOUTHERN INDEPENDENT PUBLISHERS PTY LTD ACN 117 373 636 Fifty First Plaintiff SPIN COMM SYD PTY LTD ACN 065 742 627 Fifty Second Plaintiff SYNC COMMUNICATIONS MANAGEMENT PTY LTD ACN 079 529 267 Fifty Third Plaintiff THE ARGUS & AUSTRALASIAN PTY LTD ACN 051 747 892 Fifty Fourth Plaintiff THE FEDERAL PUBLISHING CO PTY LTD ACN 000 013 776 Fifty Fifth Plaintiff THE GANG OF 4 PTY LTD ACN 095 624 678 Fifty Sixth Plaintiff THE INDEPENDENT PRINT MEDIA GOUP PTY LTD ACN 071 231 215 Fifty Seventh Plaintiff TIGERSTONE PTY LTD ACN 108 206 855 Fifty Eighth Plaintiff TOTAL SAMPLING PTY LTD ACN 063 659 923 Fifty Ninth Plaintiff WARWICK FARM BUSINESS PARK PTY LTD ACN 129 141 046 Sixtieth Plaintiff WOODOX PTY LTD ACN 067 150 789