Weaver v Noble Resources Ltd

Affidavit evidence and background

1. The Administrators read the affidavit dated 16 April 2024 of Mr Cathro ("Cathro 1"), and tender exhibit SC-1 to that affidavit. Mr Cathro there refers to the nature of Openpay's business and the events leading to the appointment of Messrs Cathro and Lane as voluntary administrators of Openpay and as joint and several liquidators of Openpay Pty Ltd ("OPL"), the main operating entity within the Openpay Group. I address these events further below. Mr Cathro also refers to the conduct of the first and second meetings of creditors; to a resolution passed at the second meeting of creditors to execute the DOCA proposed by OP Fiduciary and to the entry into that DOCA which provides for the transfer of the shares in Openpay to OP Fiduciary, subject to conditions precedent including this application under s 444GA of the Act.
2. Mr Cathro there expresses the view that the return to creditors under the DOCA will, depending upon contingencies, be either payment in full or 0.45 cents in the dollar, and those contingencies include a potential insolvent trading liability claim of approximately $8.5 million in respect of OPL and a substantial claim by two employees from another company within the Openpay Group. Mr Cathro also notes that Openpay has no circulating assets and the only potential realisation for it is a contribution by OP Fiduciary in a DOCA and that a liquidation would result in a nil return to creditors, and accordingly a nil return to Openpay's shareholders. Mr Cathro also refers to the engagement of Mr Copeland of HoganSprowles to prepare an independent expert report of the value of shareholders' residual equity in Openpay, assessed on the basis that it is in external administration and on a winding up or liquidation basis. I refer to Mr Copeland's conclusions below. Mr Cathro there expresses the view that, having regard to Mr Copeland's conclusions, the transfer of shares in Openpay to OP Fiduciary in accordance with the terms of the DOCA will not unfairly prejudice shareholders' interests, and that it is in the best interests of Openpay's creditors and consistent with the objectives of Pt 5.3A of the Act.
3. The Administrators also read the affidavit dated 11 June 2024 of Mr Cathro ("Cathro 2") and tender exhibit SC-2 to that affidavit. Mr Cathro there referred to the Administrators' application for relief from the Australian Securities and investments Commission ("ASIC") under s 606 of the Act and to the steps taken to notify Openpay shareholders of this application. As I will note below, many of Openpay's shareholders were notified by email or by post by the date contemplated by the Court's orders, but there was one business day's delay in notification of 6770 shareholders to whom notice was posted on 27 May 2024. The Administrators properly drew that delay to ASIC's and the Court's attention. Sensibly, ASIC has ultimately not opposed the relief sought in this application by reason of that short delay, and has indicated its in principle decision to grant the relief sought under s 606 of the Act. The exhibit to that affidavit included the explanatory memorandum dated 23 May 2024 provided to shareholders in respect of the application.
4. The Administrators also rely on the affidavit dated 17 June 2024 of Mr Brendan Copeland, annexing his independent expert report dated 13 March 2024 ("Copeland IER"). Mr Copeland there expresses the view that the most appropriate method of valuation of Openpay is on an orderly realisation of assets basis, where it was unprofitable and is no longer trading; there is an estimated shortfall in excess of $18.3 million to OP Fiduciary on an orderly realisation of assets in a winding up, and there will be no recovery to unsecured creditors or contributories on a winding up; Openpay has a substantial negative equity position of between $18.5 million and $21 million; and its shares have no value. I return to those matters below.
5. By an affidavit dated 17 June 2024, Mr Declan Lane, who is an employee in Mr Cathro's firm, addressed the process adopted for notification to shareholders, and correspondence with Mr Lepre, who is associated with Wellsburg Pty Ltd ("Wellsburg") which is a shareholder in Openpay. Mr Lepre raised a concern as to the late notification of this application to shareholders, possibly including Wellsburg. I will address the correspondence with him below. By affidavits dated 17 June 2024, Ms Joanne Akkari of Alteris Financial Group, which is a company associated with Oakley fiduciary, and Ms Lina Halim of A&O Direct Mail, also addressed the steps taken to notify shareholders of the application. By an affidavit dated 17 June 2024, Mr David McIntosh, a solicitor acting for the Administrators, addresses ASIC's position in respect of the application, including ASIC's in principle decision to grant the relief sought by the deed administrators under s 606 of the Act, and further correspondence from Mr Lepre on behalf of Wellsburg.
6. By way of background, Openpay was listed on the Australian Securities Exchange ("ASX") on 16 December 2019 (Cathro 1, [8]-[9]) and was the parent company of several companies within Openpay Group, which primarily operated a "buy now pay later" service which allowed consumers to pay for purchases over time and interest free, although subject to late fees in respect of late payments (Cathro 1, [11], [13]). As I noted above, OPL operated as the Group's main operating entity and had approximately 120 former employees (Cathro, [14]). During the financial year ending 30 June 2022, the Group aimed to extend its business beyond a traditional "buy now pay later" model, and operated a platform which allowed consumers to complete transactions up to a limit of $20,000 with repayment terms of up to 24 months over a range of industries including automotive, healthcare, home improvement, education and retail (Cathro 1, [12]). As at 30 June 2022, the Openpay Group had approximately 4,000 active merchants, 321,000 active customers, and recorded revenue of $34 million. However, during the financial year ending 30 June 2022, Openpay recorded a pre-tax consolidated loss of $82.5 million (Cathro, [14]).
7. On 1 February 2023, Openpay issued an announcement to ASX that it was entering into a trading halt, pending a further announcement and, on 3 February 2023, Openpay's shares were suspended from trading on ASX (Cathro 1, [17]-[18]). On 4 February 2023, Messrs Kogan, Henry and Smith were appointed as joint and several receivers and managers of Openpay by OP Fiduciary as a secured creditor of Openpay (Cathro, [19]).
8. On 23 November 2023, the Administrators were appointed as voluntary administrators of Openpay, pursuant to s 436A of the Act. Since their appointment, the Administrators have, inter alia, conducted statutory and investigation tasks; held discussions with the receivers and Openpay's directors; attended to other required statutory notifications and lodgements with ASIC and the Australian Taxation Office; held the first meeting of Openpay's creditors on 5 December 2023; issued notices to Openpay's directors to provide all books and records of Openpay in their possession, and requested that they provide a completed report of company activities and property ("ROCAP") and lodged the ROCAPs received with ASIC.
9. Prior to the second meeting of Openpay's creditors, the Administrators received a proposal for the DOCA from OP Fiduciary (Ex SC-1, 172). In their second report to creditors issued on 21 December 2023, the Administrators outlined the work they had undertaken after their appointment and noted that, from the Administrators' discussions with Openpay's directors and the receivers and managers, "we understand that the reason for failure of the Group, was that there were insufficient funds available to fund ongoing operations and debt services, leading to [the receivers'] appointment on 4 February 2023". The report to creditors also outlined steps which had been taken by the receivers and managers to seek to achieve a sale of the corporate shell of Openpay and assets within the operating company, OPL. An appendix to the report to creditors summarised the deed proposal put by OP Fiduciary including conditions precedent to the DOCA, terms relating to the deed contribution, the establishment of a creditors' trust, and the steps to implement the DOCA which included the transfer of the shares in Openpay to OP Fiduciary or its nominee pursuant to an order to that effect made under s 444GA of the Act. The Administrators there recommended that Openpay's creditors vote in favour of the DOCA proposed by OP Fiduciary (Ex SC-1, 174, 188-192). They referred to the likelihood of a better outcome under the DOCA, where there were insufficient realisations to meet all outstanding claims of Openpay's creditors, the return to creditors under the proposed DOCA was expected to be timely and more certain as opposed to that in a winding up, the Administrators' investigations had not identified any voidable transactions or insolvent trading claims against the directors which could be pursued by a liquidator on behalf of creditors and Openpay's related entities and the deed proponent would not claim in the DOCA, which would increase the potential return to the balance of Openpay's non-priority and unsecured creditors (Ex SC-1, 192).
10. At the second meeting of creditors of Openpay held on 2 January 2024, the two creditors in attendance resolved that the DOCA be executed (Cathro 1, [28]). On 23 January 2024, in accordance with that resolution, the DOCA was executed (Cathro 1, [30]) and the Administrators were appointed as joint and several administrators of DOCA: Cathro 1, [31]. The DOCA is subject to several conditions precedent, including that the creditors' trust be executed; an independent expert prepares an independent expert report which opines that there is no remaining economic value in the shares of Openpay; ASIC grant any necessary exemptions or modifications to the requirements of the Act as are necessary to permit the transfer of Openpay's shares to OP Fiduciary; and an explanatory statement being prepared and issued to shareholders, which has now occurred (Cathro 2, [16], [22]; Ex SC-2, 37ff); and this application be made (Ex SC-1, 241-2).

Notice of this application

1. There is evidence that Openpay's shareholders (other than 25 shareholders as to which emails "bounced" back) have been notified of the hearing of the application, although notice to some shareholders was given one business day later than required by the Court's orders. Mr Rose points out that, as at close of trade on 1 February 2024, Openpay had 13,433 Shareholders (Cathro 2, [18]). On 29 April 2024, I directed that notice of this application be given to shareholders by 24 May 2024. Openpay gave notice of the application by email to shareholders for whom an email address was held by that date, although emails sent to 25 of those 2,649 shareholders have "bounced back" to the sender of those emails (Cathro 2, [22(f)(i)]). Openpay also gave notice by post to 4,014 shareholders on that date. One business day's later, on 27 May 2024, Openpay sent notice by post to the remaining 6,770 shareholders of the application (Cathro 2, [22(j)]).
2. Mr Rose fairly acknowledges that, having regard to the deemed times for service pursuant to s 160 of the Evidence Act 1995 (NSW) (which deems an item sent by post to have been received on the seventh working day after postage), those shareholders to whom notice was sent on 27 May 2024 will have had 13 days' notice of the hearing of this application; and the 25 shareholders as to whom emails had bounced back have not been notified of this application. As to the former, Mr Rose also recognises ASIC's policy that shareholders should have at least 14 days to consider an explanatory memorandum before hearing, and that that factor will be taken into consideration in ASIC's final decision as to whether to grant the relief sought from ASIC by the Administrators from the requirements of s 606 of the Act. Mr Rose points to the absence of a statutory requirement for that notice period, and the Court has accepted lesser notice periods in, for example, schemes of arrangement. I am satisfied that a delay in notice by one business day for some shareholders, and a corresponding shortening of the period available to those shareholders had no material impact here, where no shareholder (including those shareholders who were notified in accordance with the Court's orders) has raised any concern as to the application, other than Wellsburg, whose position I address below.
3. As to the 25 shareholders as to whom emails had bounced back, bounce-backs are inevitable where shareholders choose to be notified by email, are commonplace in schemes of arrangement, and do not undermine the opportunity allowed to shareholders generally to be heard as to the application. Mr Rose also refers to my observation in Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 ("Mirabela Nickel") at [36] that "there is no specific requirement for notification of each individual shareholder in respect of an application of this kind, which is instead a matter relevant to the exercise of the Court's discretion." Mr Rose recognises that, where the shares of Openpay have been suspended from trade for a significant amount of time, have minimal value, and are otherwise held in a company in external administration, it is possible that those shareholders have no continuing interest in the affairs of Openpay. That possibility does not undermine the conclusion that shareholders have had an opportunity to be heard. Mr Rose also notes that, other than Wellsburg (which did not appear at the hearing), no other shareholders in Openpay have opposed the application. He submits and I accept that the lack of notification to shareholders where emails bounced back ought not, as a matter going to the exercise of the Court's discretion, preclude the grant of the relief claimed by the Administrators.
4. As I noted above, one shareholder in Openpay, Wellsburg by its director Mr John Lepre, has raised an objection to the transfer of its shares, or at least to the one business day's delay in notification of the application to some of Openpay shareholders, which may or may not include Wellsburg. I have had regard to the correspondence between the Administrators' solicitors and Mr Lepre on behalf of Wellsburg. Mr Lepre does not advance any contention that the shares in Openpay have value, and Wellsburg (or Mr Lepre) did not appear to oppose the application. Mr Lepre advised the Administrators' solicitors that he personally was overseas at the time of the hearing, but that would not have prevented Wellsburg being represented by a solicitor at the hearing, which is the manner in which companies ordinarily appear in proceedings in this Court.
5. The Administrators also tendered a subsequent email dated 17 June 2024 from Mr Lepre, sent immediately before the hearing of this application (Ex P1), where Mr Lepre observed that: "Like I said it has become all too hard due to my being out of the country, and having others at the hearing without full knowledge is impractical. I would have thought that strict compliance with the order and timing of the notices would have had greater bearing on the matter and find it strange that the [C]ourt are accepting the failure to comply. I will have to leave it there and possibly make enquiries when I return. I hope for the sake of the case that no errors or misinformation were made and my enquiries becoming a spanner in the works." I should note, for completeness, that the Court had not reached any view as to the compliance with service orders made or the timing of the notices at the date of this email, where those matters were addressed at the hearing on the next day.
6. I am satisfied that shareholders in Openpay were sufficiently notified of the application and have had a reasonable and proper opportunity to oppose the application and put any contrary arguments before the Court. I am also satisfied that the one business days' delay in the dispatch of notice of the application to some, albeit numerous, shareholders did not deprive Openpay's shareholders of such an opportunity. I again note that a large number of shareholders had been sent notice of the hearing on the date contemplated by the Court's orders, although others were not, and no shareholders in Openpay has appeared to identify any substantive objection to the application, nor has Mr Lepre identified any substantive objection to the application, apart from the day's delay in dispatch of the notice to some shareholders.
7. In accordance with the Court's directions made on 29 April 2024, the Administrators also notified ASIC of this application and ASIC has indicated that it will, in principle, grant relief from the requirements of s 606 of the Act in respect of the application.

Applicable principles and determination

1. Section 444GA of the Act 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."
2. Mr Rose refers to my summary of the applicable principles in Mirabela Nickel 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."
3. In Re Nexus Energy Ltd (subject to deed of company arrangement) [2014] NSWSC 1910 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]. Mr Rose also refers to my observations, to similar effect, in Re Ten Network Holdings Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) [2017] NSWSC 1529 at [32]-[39].
4. 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."
5. Mr Rose accepts that the Administrators bear the legal onus of proving that the Court's discretion to allow the share transfer should be exercised in their favour: Re Nexus Energy Ltd (subject to deed of company arrangement) [2014] NSWSC 1910 at [27]. The Administrators rely on Mr Cathro's first affidavit and the Copeland IER in order to proof that matter. Mr Cathro's evidence is that the secured creditors including OP Fiduciary are owed in excess of $18.5 million and OP Fiduciary is owed $17,115,211 of that sum (Cathro 1, [35(b)(i)]); unsecured creditor claims are approximately $2.46 million; Openpay is exposed to a potential insolvent trading liability of approximately $8.5 million in respect of OPL, although it may be unlikely that will proceed (Cathro 1, [35(b)(ii), (iii)]); and the Administrators formed the view that, on either a high or low scenario in liquidation, there would be a nil return to creditors (Cathro 1, [34]). Mr Cathro does not anticipate that there would be any surplus of property in Openpay available for distribution to members in a winding up where, inter alia, there are insufficient realisations to meet all outstanding claims in Openpay, and his investigations to date have not identified any voidable transactions or insolvent trading claims which might be pursued by a liquidator for the benefit of Openpay's creditors (Cathro 1, [37]).
6. The Copeland IER addressed "[t]he value, if any, of shareholders' residual equity in [Openpay], assessed on the basis that Openpay is in external administration and on a winding up or liquidation basis", and Mr Copeland there assessed the value of the shares in Openpay, in accordance with ASIC Regulatory Guide 111, on an orderly realisation of assets basis. He there expresses the view and I accept that other methodologies such as a cash flow basis, a multiple of earnings method, or quoted price for listed securities basis were not available or were not appropriate here (Copeland IER, [5.1]). Mr Copeland also concludes and I accept that the shares in Openpay have nil value, where there is a substantial shortfall to OP Fiduciary and the unsecured creditors of Openpay on an orderly realisation of Openpay's assets in a liquidation (Copeland IER, [5.1]); the recoveries identified by the Administrators in a liquidation scenario are insufficient to repay the creditors of Openpay in full, resulting in a negative equity position of between $18.5m and $21m (Copeland IER, [6.2]; and, if Openpay were placed in liquidation, there would likely be no further recoveries available for creditors (Copeland IER, [6]).
7. Mr Rose submits and I accept that the evidence establishes that the shares in Openpay have nil value, and that conclusion is not marginal where the equity shortfall calculated by Mr Copeland is, at least, $18,336,277 to OP Fiduciary (Copeland IER, [5.1]) and is greater including Openpay's other creditors. In this context, the DOCA represents the best outcome for creditors and, so far as s 444GA of the Act is concerned, there can be no prejudice to shareholders in the orders sought by the Administrators being made, let alone unfair prejudice.

Orders

1. For these reasons, I made the orders sought by the Administrators at the conclusion of the hearing on 18 June 2024.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 June 2024