Weaver v Noble Resources Ltd

REASONS FOR JUDGMENT 1 Mr Mableson and Mr Lewis (the applicants) were appointed joint and several administrators of Diverse Barrel Solutions Pty Ltd (subject to a deed of company arrangement) (DBS) on 14 October 2013. They are also the deed administrators of the deed of company arrangement dated 20 November 2013. 2 By the present proceedings, the applicants seek the leave of the Court under s 444GA of the Corporations Act 2001 (Cth) (Corporations Act) to transfer the shares in DBS to Pinara Group Pty Ltd (Pinara) or its nominee. Pinara already holds approximately 51% of the issued shares in DBS. Accordingly, the application relates to the remaining shares. 3 The application is supported by four affidavits: one sworn by Mr Mableson on 16 December 2013; one sworn by Mr Lewis on 16 December 2013; and two sworn by Ms Bullock, on 6 and 7 February 2014 respectively. I accept the contents of those affidavits and the opinions expressed in them by the applicants. 4 DBS was incorporated as Southern Cross Cooperage Pty Ltd on 8 October 2003. Its business has been the manufacture and rejuvenation of wine barrels for a number of customers in South Australia, Victoria and Western Australia. The applicants describe the company as having been in a "start-up" phase for a significant period of time and as having invested heavily in research and the development of technology and processes to manufacture and restore wine barrels. It has developed a patented technology known as "Phoenix" to extend the useful life of wine barrels. 5 DBS has recorded significant losses in the 2010, 2011 and 2012 financial years, totalling $4.576 million. The draft accounts for the financial year ending on 30 June 2013 and for the financial year to date indicate further net losses of the order of $2.317 million. The total losses for these periods are therefore of the order of $6.893 million. 6 To date, the activities of DBS have been financed significantly by Pinara. It is presently owed some $5.209 million. It is a secured creditor of DBS. 7 By letter dated 9 October 2013, Pinara informed DBS that it was no longer prepared to continue financing the whole of the operations of DBS. The letter indicated that it was prepared to finance those operations only in proportion to its approximate 51% shareholding. That meant that DBS needed an alternative source of finance for the remaining 49% of its requirements. 8 The directors of DBS then resolved, in the light of the uncertainty occasioned by Pinara's decision, to place DBS in the control of voluntary administrators. 9 The applicants, who are those administrators, have concluded, following their investigation, that: (a) In recent years, Pinara has been the sole financier of DBS and that DBS has been operating at a loss. (b) The assets of DBS are charged in favour of Pinara and the debt owing to Pinara exceeds the value of the assets of DBS. (c) No shareholder, other than Pinara, has expressed a willingness to provide funding to enable DBS to continue to trade. (d) DBS is, and was at the date of the appointment of the voluntary administrators, insolvent on both a cash flow test and a balance sheet test. (e) On a winding-up, after discharge of the secured debt to Pinara, the deficit in funds available to meet unsecured creditors is likely, depending on valuations and recoveries, to be in the range of $1.971 million to $4.707 million. (f) The unsecured creditors' claims are of the order of $231,000. 10 On 18 November 2013, at a second meeting of the creditors of DBS, the creditors passed a resolution that DBS execute a deed of company arrangement (DOCA) and it did execute such a deed. The principal elements of the DOCA are: (a) The applicants are appointed as administrators of the deed; (b) Pinara is to contribute an initial sum to a Deed Fund of $150,000 and, if required, such further sum as the deed administrators determine is necessary to satisfy the claims of defined creditors, the administrators' liabilities and the deed administrators' liabilities; (c) The control of DBS is to be returned to its officers; (d) The unsecured creditors of DBS will be divided into two classes, one of which will receive nothing under the DOCA and the other payment of their debts and claims in full; (e) All shares in DBS not presently held by Pinara are to be transferred to Pinara; (f) If the transfer of shares to Pinara is not fulfilled within 90 days of the execution of the DOCA, or within such longer time as Pinara may stipulate, the DOCA will terminate and DBS will be placed into liquidation; (g) Pinara will not submit a proof of debt for distribution purposes in the administration of the Deed; (h) On the conditions subsequent to the Deed being satisfied and it coming into effect, DBS is released from all admissible debts and claims of participating creditors and non-participating creditors. 11 The applicants consider that, if the DOCA is not carried into effect, the only alternative for DBS is liquidation. They are satisfied that, in that event, the unsecured creditors will not receive any return. The figures I mentioned earlier in these reasons support that conclusion. On the other hand, if the DOCA does come into effect, the majority of creditors of DBS will receive payment in full. 12 By letters dated 21 November 2013, and in one case dated 22 November 2013, the applicants have sought the consent of all shareholders of DBS, other than Pinara, to the transfer of their shares in DBS to Pinara or its nominee. It has received such consents from five shareholders who, collectively, hold approximately 19% of the issued shares in DBS. 13 The correspondence of 21 November and 22 November 2013 to the shareholders foreshadowed the application to this Court in the event that the consents sought were not given. In addition, the solicitors for the applicants have sent by post to the known address or addresses of shareholders who have not consented to the transfer a copy of the application to this Court, together with a copy of the affidavits of Mr Mableson and of Mr Lewis. There has been no response to some of that correspondence and some has been returned to sender. 14 One of the shareholders from whom a consent has not been received is a company, AR Grieve Nominees Pty Ltd (Grieve Nominees), which was deregistered on 20 July 2008. By virtue of that deregistration, and s 601AD(2) of the Corporations Act, all of the property of Grieve Nominees (other than property held by it on trust) has vested in ASIC and, by s 601AD(1A), all property held by Grieve Nominees on trust immediately before its deregistration has vested in the Commonwealth. 15 ASIC, representing the Commonwealth, has advised the solicitors for the applicants that it has no knowledge of the trust under which Grieve Nominees may have held its shares in DBS and that it comes to the matter as a stranger. ASIC has also indicated that it did not wish to appear at today's hearing and that it neither consented nor objected to leave being granted by the Court on the application. 16 Ms R McLennan, who owns shares in her own right and who is a director of another shareholder, Trendsure Pty Ltd, has attended today. Although voicing some concerns about the process and about Pinara more generally, Ms McLennan indicated a neutral attitude to the grant of leave. In particular, Ms McLennan did not make any submissions opposing the grant of leave. 17 No other person or entity has expressed to the applicant opposition to leave being granted and no other person or entity has appeared today to oppose the grant of leave sought by the applicants. 18 Section 444GA provides: (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. As can be seen, the administrator of a deed of company arrangement may transfer shares in the company only if the administrator has obtained either the written consent of the owner of the shares or the leave of the Court. As the applicants do not have the consent of all shareholders, they seek the leave of the Court. By s 444GA(3), the Court may grant that leave only if satisfied that the transfer would not "unfairly prejudice" the interests of members of the company. 19 Plainly enough, subsection (3) contemplates that a transfer of shares may result in some prejudice to the interests of members of a company. The adverb "unfairly" indicates that the Court must be satisfied that such prejudice as may result should not be "unfair". 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. 20 Some further guide as to relevant matters may be derived from s 435A of the Corporations Act which sets out the object of Part 5.3A of the Act, of which s 444GA forms part. Section 435A provides: The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. The object of maximising the chances of a company continuing in existence is to be noted. 21 In his written outline provided in support of the application, counsel for the applicants drew attention to the Explanatory Memorandum provided in connection with the Corporations Amendment (Insolvency) Bill 2007 (Cth). That Memorandum (at [7.58]) indicated that s 444GA(3) "is intended to direct the Court to consider the impact of the compulsory sale of shares where there may be some residual value in the company". 22 Martin CJ in the Supreme Court of Western Australia considered s 444GA in Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301. After referring to the Explanatory Memorandum and to judicial elaboration of the concept of unfair prejudice in analogous contexts, Martin CJ continued at 314: [79] [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. … [80] … I would also observe that a mere transfer of shares without compensation cannot of itself constitute unfair prejudice, otherwise the section's operation will be significantly constrained. So, something more would have to be established before it could be said that unfair prejudice to the members of the company could arise. 23 I consider that those passages are also pertinent in the circumstances of this case. 24 The evidence in the affidavits and, in particular, the conclusions of the applicants which I accept, indicate that the shares in DBS have no residual value and that it is likely to be a considerable time, if ever, before they do gain some value. 25 On a winding-up, the unsecured creditors of DBS will not receive any return at all. It follows that the shareholders would not receive any return either. On the other hand, if the conditions subsequent in the DOCA are realised, the majority of creditors of DBS will receive payment in full. 26 It is also pertinent that several of the affected shareholders consent to the transfer. It is not possible to exclude altogether the possibility that those shareholders with whom the applicants have not been able to make contact may voice some objection to the transfer. However, given the financial status of DBS as outlined earlier in these reasons, it seems improbable that any such objection could lead to a conclusion that the shares in DBS have any residual value. 27 I note, in addition, that no shareholder other than Pinara is willing to contribute to the financing of its continued operations and that, in the absence a 100% shareholding, Pinara is willing to contribute further funds to finance the operations of DBS only in proportion to its current shareholding, namely, 51%. 28 In these circumstances, I am satisfied in terms of s 444GA(3) that a grant of leave would not unfairly prejudice the interests of the shareholders in DBS and that it is appropriate to grant that leave. 29 It is, however, appropriate to say something about the form of the order sought by the applicants. 30 The operation of the DOCA is made subject to the three conditions subsequent. The first, relevantly, is the grant of leave by the Court to the transfer of all the issued shares in DBS, other than those already owned by Pinara, to Pinara "or its nominee". The second condition subsequent is the registration "in the name of the Pinara (sic)" of all the issued shares of the company. The third is the issue to Pinara of share certificates for those shares in the name of Pinara. 31 By letter dated 8 January 2013 from its solicitors, Pinara has indicated that it wishes to have the 49% of shares transferred to a different company, namely, Thomco (No 1116) Pty Ltd as Trustee of the Rivendell Trust. 32 The question of whether a transfer to Thomco (No 1116) Pty Ltd as Trustee of the Rivendell Trust will result in satisfaction of the second and third conditions subsequent in the DOCA is not a matter which arises presently. However, given that such a transfer is not something which seems to be contemplated by the second and third of the conditions subsequent, I consider that the appropriate order is that leave be granted to the applicants in the terms of the first condition subsequent, namely, leave to them to transfer all of the issued shares of DBS other than those already owned by Pinara to Pinara or its nominee. 33 The orders of the Court are: