Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 706 of 2015

IN THE MATTER OF QRXPHARMA LIMITED (ADMINISTRATORS APPOINTED) (ACN 102 254 151) TIMOTHY HEESH AND AMANDA LOTT AS JOINT AND SEVERAL ADMINISTRATORS OF QRXPHARMA LIMITED (ADMINISTRATORS APPOINTED) (ACN 102 254 151)

QRXPHARMA LIMITED (ADMINISTRATORS APPOINTED) (ACN 102 254 151)

JUDGE: JAGOT J DATE: 22 OCTOBER 2015 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is an application for directions pursuant to s 447D(1) of the Corporations Act 2001 (Cth) (the Act), or alternatively pursuant to s 447A(1) of the Act, that it is appropriate and justified for the administrators of the second plaintiff, QRxPharma Limited (QRx), to adopt certain procedures for the purposes of notifying shareholders and/or former shareholders of QRx who are or may be creditors of QRx of the meeting of the company's creditors to be convened under s 439A of the Act or any adjourned or subsequent meeting. 2 Section 439A(1) provides for an administrator of a company under administration to convene a meeting within certain time periods. In response to earlier applications made in the context of this administration, I have made various orders extending the time periods for the convening of the meetings. As matters presently stand, the second meeting of creditors of QRx is to be convened on or before 30 November 2015. 3 By s 439A(3) of the Act: (3) The administrator must convene the meeting by: (a) giving written notice of the meeting to as many of the company's creditors as reasonably practicable; and (b) causing a notice setting out the prescribed information about the meeting to be published in the prescribed manner; at least 5 business days before the meeting. 4 The obligation in s 439A(3) is not absolute. The administrator is not required to give notice to each and every creditor of the company. The obligation is to give such notice to as many of the company's creditors "as reasonably practicable". I accept the submissions of Mr Henry SC for the first plaintiff that the appropriate power which is available is that provided for in s 447D(1) of the Act, rather than s 447A(1). The reason for this is that the application involves amendments to the Act made by the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) (the Amending Act) and, in particular, the insertion of s 600H into Div 3 of Pt 5.9 of the Act. As Mr Henry SC said, s 600H is not in Pt 5.3A of the Act. Given that s 447A(1) expressly relates to the making of orders "about how this Part is to operate in relation to a particular company", it would seem to me that those powers are not available in the present case. The powers in s 447D(1), however, in my view are available. That section provides as follows: (1) The administrator of a company under administration, or of a deed of company arrangement, may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. 5 As set out in the written submissions, which conveniently address the relevant and indeed novel issues to which this application gives rise, Jacobson J in Strawbridge, in the matter of Retail Adventures Pty Ltd (Administrators Appointed) v Retail Adventures Pty Ltd (Administrators Appointed) (2013) 95 ACSR 121; [2013] FCA 891 conveniently summarised the principles applicable to the operation of s 447D as follows: [37] The purpose of s 447D is to provide a procedure for administrators to obtain the benefit of the Court's guidance on matters of principle and law. Directions given under the section provide protection to the administrator against incurring personal liability in relation to the action the subject of the application: Re Ansett (No 3) at [44], citing Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674. [38] In Re Ansett (No 3), Goldberg J, after undertaking a detailed review of the authorities, summarised the relevant principles in such applications as follows (at [65]): There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. 6 In the present case, as should become apparent, there is no question that the administrators are seeking a direction not merely in relation to the making of a commercial or business decision, but rather as to a legal issue, as well as to the propriety or reasonableness of the course of action which the administrators propose to take. 7 In order to explain the context, it is necessary to record some of the background facts. These I take from Mr Henry SC's written submissions, but they are also reflected in the affidavit evidence which has been put before me. 8 QRx entered into voluntary administration on 22 May 2015. During the course of the administrators' investigations into QRx's affairs they became aware that QRx may not have disclosed price sensitive information to the market. In particular it may be the case that QRx did not disclose to the market the fact that on or about 5 October 2009 it received a letter from the Food and Drug Administration (the FDA) in the United States of America (US) stating that QRx's request for a Special Protocol Assessment in respect of a proposed new drug for which QRx wished to obtain FDA approval, a drug known as Moxduo, was denied. In addition, as Mr Henry SC has said, it is possible that QRx did not disclose price sensitive information to the market earlier in 2009 and/or after October 2009. QRx undertook capital raising subsequent to October 2009. 9 On 23 June 2015, a class action was commenced in the US against QRx on behalf of all persons and entities who purchased or otherwise acquired QRx American Depository Receipts (ADRs) between 24 January 2011 and 23 April 2014 inclusive. ADRs are certificates issued over the counter at a US depository bank representing shares in the company held by the bank. Generally speaking, the plaintiffs in the class action alleged that QRx made false and misleading statements about Moxduo and failed to disclose price sensitive information about Moxduo. Insofar as the administrators are aware, at present, the class comprises four shareholders with claims totalling approximately $35,500 plus legal costs and interest. However, the size of the class and the total value of its members' claims are presently unknown. 10 No claims have been made against QRx by shareholders in Australia. However, the administrators recognise the possibility that shareholders in Australia may make claims against QRx based on misleading statements made by the company or the failure to disclose price sensitive information. The administrators accept that shareholders of QRx who have damages claims against QRx by reason of being misled by it into subscripting for, buying, holding or selling shares in QRx are creditors for the purposes of s 439A of the Act. They do not know how many shareholders meet this description. However, they do have access to a mailing address for each shareholder identified on QRx's share registry who held shares between 5 October 2009 and 22 May 2015 and also have access to email addresses for some of those shareholders. 11 What is proposed by the administrators is that persons who either were registered as shareholders in QRx between 5 October 2009 (the date on which the letter from the FDA was received about Moxduo) and 18 December 2010 or who subscribed for shares in QRx between those dates, be notified under s 439A(3)(a) of the Act. However, relying upon s 600H(1)(a), the provision introduced by the Amending Act, the administrators will not notify any other shareholder creditor of QRx unless requested in writing to do so by that shareholder creditor. 12 It has been pointed out to me that the construction and application of s 600H of the Act, insofar as the administrators are aware, has not yet been considered by a court. It is appropriate now to set out the relevant provisions of the Amending Act. The relevant provisions of the Amending Act commenced on 18 December 2010. Schedule 1 to the Amending Act, insofar as relevant, repeals s 563A and substitutes it with a new provision as follows: 563A Postponing subordinate claims (1) The payment of a subordinate claim against a company is to be postponed until all other debts payable by, and claims against, the company are satisfied. (2) In this section: claim means a claim that is admissible to proof against the company (within the meaning of section 553). debt means a debt that is admissible to proof against the company (within the meaning of section 553). subordinate claim means: (a) a claim for a debt owed by the company to a person in the person's capacity as a member of the company (whether by way of dividends, profits or otherwise); or (b) any other claim that arises from buying, holding, selling or otherwise dealing in shares in the company. 13 Section 600H, a new provision, is inserted into Div 3 of Pt 5.9 in these terms: 600H Rights if claim against the company postponed (1) A person whose claim against a company is postponed under section 563A is entitled: (a) to receive a copy of any notice, report or statement to creditors only if the person asks the administrator or liquidator of the company, in writing, for a copy of the notice, report or statement; and (b) to vote in their capacity as a creditor of the company, at a meeting ordered under subsection 411(1) or during the external administration of the company, only if the Court so orders. (2) In this section: external administration includes the following: (a) voluntary administration; (b) a compromise or arrangement under part 5.1; (c) administration under a deed of company arrangement; (d) winding up by the Court; (e) voluntary winding up. 14 A revised Explanatory Memorandum in relation to the Amending Act notes that the related Bill contains three key measures, one of which is described as follows: It removes the right of persons bringing claims regarding shareholders to vote as creditors in a voluntary administration or a winding up unless they receive permission from the Court. They will also not be entitled to receive reports to creditors unless they make a request in writing to the external administrator. 15 My attention has also been drawn to the following parts of the revised Explanatory Memorandum. First, at page 3, the following appears: Compliance cost impact: Low. The measures will provide minimal additional compliance costs for those bringing subordinated claims who will be required to incur the cost of a written request to the external administrator for communications to creditors; and the cost of a court application should they wish to vote in an external administration. It is, however, very unlikely that such request or application will be made, as almost always, those bringing subordinated claims are very unlikely to be able to participate in any distribution to creditors due to there being insufficient assets to meet their claims. Any costs imposed on those bringing claims, in the rare circumstances where claims are brought, would be offset by the reduced costs of conducting external administrations. External administrators would have reduced costs, as unless a written request was made, they would no longer be obliged to provide communications to those bringing subordinated claims. Any reduced costs of an external administrator leads to greater returns for creditors. 16 Second, in the summary of the new law at page 5 of the revised Explanatory Memorandum, paragraph 1.4 states as follows: The Bill also provides that a person bringing a subordinated claim does not have an entitlement to a copy of any notice, report or statement to creditors unless they make a written request to the external administrator, nor do they have a right to vote as a creditor of the company unless given leave by the Court. The Bill inserts a definition of external administration clarifying that the reforms to voting rights and the right of creditors to receive reports, as contained in the Bill, apply to voluntary administrations, deeds of company arrangement, voluntary and involuntary liquidations, provisional liquidations and schemes of arrangement. The Bill provides that the voting reforms also apply to a meeting of creditors ordered by the Court to vote on a proposed compromise or arrangement under Pt 5.1 of the Corporations Act. 17 Third, at page 7 in a table which sets out a comparison of key features of the new law and current law, this appears: New law Current law Persons bringing subordinated claims would not be able to receive communications to creditors from an external administrator without making a written request, nor would they be able to vote in an external administration without leave of the Court. Persons bringing subordinated claims are treated as creditors and entitled to receive communications to creditors from external administrators, without making a written request, and are able to vote in the external administration.

18 It is plain that the Amending Act was enacted in order to reverse the effect of the decision of the High Court in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2007) 231 CLR 160; [2007] HCA 1 to the effect that shareholders' claims against a company for damages pursuant to statutory provisions prohibiting misleading and deceptive conduct were not postponed under s 563A of the Act. There does not seem to be much doubt that Parliament intended s 563A in its new form together with s 600H, the new provision, to have such postponing effect. However, as the administrators candidly acknowledge, the drafting of the new ss 563A and 600H leave much to be desired. 19 Given that this application is made ex parte, Mr Henry SC has appropriately drawn my attention to an article in the Butterworths Corporations Law Bulletin written by David Cowling, a solicitor with substantial experience in respect of this area of law. In the article (Cowling D, "Sons of Gwalia: Back to Court?" [2011] BCLB [1]) Mr Cowling points out the following at page 5: Section 563A is a winding up provision. It does not apply in voluntary administration (apart from anything else, creditor claims are not paid out in voluntary administration) and only applies to a deed of company arrangement if the creditors vote to incorporate it. It follows, therefore, that a shareholder claimant in a voluntary administration is not "a person whose claim against a company is postponed under s 563A" (emphasis added). That being the case, s 600H would, on the face of it, have no application to a Sons of Gwalia-type situation - no matter how fervently the drafters would like it to. 20 Further, at the same page, Mr Cowling makes the following points: At present, s 600H is stated to apply to the voting rights of "a person whose claim against a company is postponed under s 563A". Where the company is in voluntary administration, a shareholder claimant's claim against it is not postponed under s 563A. In order to give effect to the section, therefore, it would be necessary to read the section as applying to "a person the payment of whose claim against a company would be postponed under s 563A if the company were being wound up under this Act and the claim were being made in that winding up". Some may argue that the s 600H problem is only a matter of ambiguity in the legislation. However, it is asking a lot of a court to, in effect, completely rewrite a statutory provision in order to give effect to what Parliament apparently meant to say. In order to resolve this mere ambiguity, the court would have to change a present tense verb ("is") into a subjunctive one ("would be") and insert two conditional clauses "if the company were being wound up under this Act" and "if the claim were being made in that winding up"). 21 Those statements carry considerable weight. In particular, s 563A refers to "the payment of a subordinate claim", whereas s 600H refers to "a person whose claim against a company is postponed under s 563A". As Mr Cowling has also said, s 563A is a winding up provision. Despite the strength of the arguments which are identified by Mr Cowling and what can only be described as substantial infelicity in the drafting of the relevant provisions, I accept the submissions of Mr Henry SC that it is possible and appropriate to construe these provisions in a way which enables them to operate as should be inferred to have been intended by Parliament. 22 In particular, there is no doubt that s 600H depends for its operation on s 563A. The preamble in s 600H(1) assumes that it is the claim that is postponed under s 563A, not the mere payment of the claim. Further, when a company is in administration the reference to external administration of the company in s 600H(1)(b) is defined to include voluntary administration as set out in s 600H(2)(a). As Mr Henry SC has said, given that s 600H is entirely dependent upon s 563A, to construe the provisions otherwise would mean that s 600H has misfired completely, in that it would never have any work to do. 23 In my view, these are sufficient grounds to construe these provisions as applying in the way in which the administrators contend in the present case, namely, that s 600H applies: (a) to persons whose claims are postponed under s 563A; (b) when a company is in administration (see the reference to "the administrator" in s 600H(1)(a), the reference to "external administration of the company" in s 600H(1)(b) and that "external administration" is defined to include "voluntary administration" in s 600H(2)(a)); (c) to the notice to creditors referred to in s 439A(3)(a); and (d) to the notice, report or statement to creditors in s 439A(4). 24 Otherwise, I should make reference to the following matters which are relevant to the question whether the power to make directions ought to be exercised on the facts in this particular case. The evidence before me discloses that the assets of QRx are relatively confined. There is also evidence before me that there are approximately 2300 shareholders as at 22 May 2015. If orders are made as sought by the administrators, then notices will be required to be given to approximately 1900 shareholders. If orders are not made as sought by the administrators, then notices will be required to be given, at least insofar as reasonably practicable, to approximately 5900 shareholders. 25 While the costs of the additional notification have not been estimated to be particularly large, perhaps in the order of $30,000, there are practical difficulties which are envisaged in respect of the notification, including the following: (a) The sheer volume of information (names, addresses etc) and number of shareholders there are which would be required to be sent the Report. (b) The unknown number of enquiries which may or may not be received including the time it will take to respond to such queries. (c) That some of the shareholders are in other jurisdictions and there may be delays in receipt of the report. (d) The costs of ultimately convening a meeting to accommodate 2,346 number of shareholders (assuming 30% of shareholders lodge a claim). (e) The costs of adjudicating proofs of debt received (assuming 30% of shareholders lodge a claim). 26 As has been indicated, given the relatively substantial difference in the number of shareholders to be notified under the differing regimes, it is expected that the practical difficulties will be substantially exacerbated if orders are not made as the administrators seek. The significance of these difficulties is to be assessed having regard to the limited assets available. 27 The only other matter to which I should refer is that the proposed orders take 5 October 2009 as the relevant date for the commencement of the period for the holding or subscription of shares for notice purposes. In circumstances where that is the date of the letter from the US FDA and the US proceedings themselves involve substantially later dates, I am satisfied that the selection of this date to commence the relevant period rather than any earlier date is appropriate. As Mr Henry SC has submitted, it is inherent in the nature of the Amending Act that, given that it has no retrospective operation, there will be differences in the treatment of shareholders before and after the commencement date. Further, it is not unlikely that claims arising before the date which has been selected, in any event, may well be statute barred. 28 Given these matters, I am satisfied that the relevant powers in s 600H of the Act are available and ought to be exercised in the present case. Accordingly, I make the orders as sought by the administrators. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.