Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4)
[2024] FCA 112
•22 February 2024
FEDERAL COURT OF AUSTRALIA
Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2024] FCA 112
File number: QUD 124 of 2023 Judgment of: DERRINGTON J Date of judgment: 22 February 2024 Catchwords: CORPORATIONS – voluntary administration – deed of company arrangement – application to terminate deed of company arrangement and administration pursuant to s 445D(1) and s 447A of the Corporations Act 2001 (Cth) – where utilisation of the voluntary administration process and entry into the deed of company arrangement amounted to an abuse of the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) – where process utilised to avoid an unwanted debt – where process had the consequence of avoiding scrutiny of whether the company had engaged in insolvent trading – where deed was unfairly prejudicial and unfairly discriminatory against a major creditor – where effect could not be given to the deed without injustice – where misleading information was provided to creditors voting on the deed – where there were material omissions from the information given to those creditors – application granted
CORPORATIONS – insolvency – whether company was insolvent whilst carrying on its business – where company had no income stream or substantial assets of its own – where company funded predominantly by its parent company – whether the availability and provision of funds from the parent company prevented the company’s insolvency – whether the funds were genuinely and realistically available as a matter of commercial reality – where there was no agreement, commitment, assurance, or letter of comfort from the parent company in relation to funding – where the funds were not advanced on deferred terms – company found to be insolvent
Legislation: Corporations Act 2001 (Cth)
Insolvency Practice Rules (Corporations) 2016 (Cth)
Construction Contracts (Security of Payments) Act 2004 (NT)
Cases cited: Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846
Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270
Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd (2007) 213 FLR 450
Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148
Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) 110 ACSR 203
Barboutis v The Kart Centre Pty Ltd (No 2) [2020] WASCA 41
Bathurst City Council v Event Management Specialist Pty Ltd (2001) 36 ACSR 732
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510
Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) (2003) 47 ACSR 391
Britax Childcare Pty Ltd v Infa Products Pty Ltd (2016) 115 ACSR 322
Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783
Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) [2023] FCA 637
Chalmsbury Nominees Pty Ltd v Alita Resources Ltd (receivers and managers appointed) (subject to deed of company arrangement) [2023] WASC 97
Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28
Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32
Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723
Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) (2005) 228 ALR 598
Flynn v Theobald [2008] WASC 263
Foti v P & S Investments Pty Ltd [2009] FCA 1409
Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd (subject to deed of company arrangement) (2020) 149 ACSR 1
Hall v Ficema Pty Ltd (2022) 409 ALR 558
In the matter of Golden Robot Records International Pty Ltd [2021] NSWSC 1146
In the matter of SBL Solutions Pty Ltd (subject to a deed of company arrangement) [2021] NSWSC 1002
International Cat Manufacturing Pty Ltd (in liq) v Rodrick (2013) 97 ACSR 200
Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509
Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran (2005) 219 ALR 555
Lewis v Doran (2004) 208 ALR 385
Metal Manufactures Pty Ltd v Morton (2023) 275 CLR 100
Mighty River International Ltd v Hughes (2018) 265 CLR 480
Mulherin v Bank of Western Australia Ltd; McCann v Bank of Western Australia Ltd [2006] QCA 175
Paddington Gold Pty Ltd v Wave Pty Ltd (subject to a deed of company arrangement) [2023] WASC 263
Pilot Advisory Pty Ltd v ACN 137 806 574 Pty Ltd (admins apptd) (formerly Cloud 9 Software Pty Ltd) (2019) 376 ALR 662
Public Trustee (Qld) v Octaviar Ltd (subject to deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139
Re Condor Blanco Mines Ltd [2016] NSWSC 1196
Re CSR Ltd (2010) 183 FCR 358
Re Cube Footwear Pty Ltd [2013] 2 Qd R 501
Re New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd (2015) 107 ACSR 504
Re Sales Express Pty Ltd (admins apptd) [2014] NSWSC 460
Ross (Liquidator) in the matter of Print Mail Logistics (International) Pty Ltd (In Liq) v Elias [2021] FCAFC 203
Sandell v Porter (1966) 115 CLR 666
Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85
Shaoyong (David) Guo v Xinwei Song; In the matter of SG Capricorn Investments Pty Ltd (subject to deed of company arrangement); Dameng Developments Pty Ltd (subject to deed of company arrangement); and New Mangrove Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12
Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 53 NSWLR 213
TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789
Treloar Constructions Pty Ltd v McMillan (2017) 120 ACSR 130
Ulithorne Wines Pty Ltd v Ulithorne Vineyard Pty Ltd [2020] SASC 32
Universal Greening Pty Ltd v Sabine (1999) 17 ACLC 880
Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd (No 6) [2020] WASC 302
Williams (as liquidator of Scholz Motor Group P/L (in liq)) v Scholz [2008] QCA 94
Williams v Spautz (1992) 174 CLR 509
Workers Compensation Nominal Insurer v Perfume Empire Proprietary Ltd [2011] NSWSC 379
Young v Sherman (2002) 170 FLR 86
Dr Paulina Fishman, “Corporate Rescue in Danger: Pt 5.3A Abuse and Inappropriate Relief” (2023) 39 Australian Journal of Corporate Law 135
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 266 Date of hearing: 14 – 15 August 2023 Counsel for the Plaintiff: Mr B O’Donnell KC Solicitor for the Plaintiff: Thomson Geer Counsel for the First and Third Defendants: Mr MD Martin KC with Mr AP McKinnon Solicitor for the First and Third Defendants: Mills Oakley Counsel for the Second Defendant: Mr P O’Brien (on 14 August 2023) Solicitor for the Second Defendant: Cowen Schwarz Marschke Lawyers (on 14 August 2023) ORDERS
QUD 124 of 2023 BETWEEN: CANSTRUCT PTY LTD ACN 008 869 467
Plaintiff
AND: PROJECT SEA DRAGON PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 604 936 192
First Defendant
SHAUN CHRISTOPHER MCKINNON AND ANDREW PETER FIELDING IN THEIR CAPACITY AS DEED ADMINISTRATORS OF PROJECT SEA DRAGON PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 604 936 192
Second Defendant
SEAFARMS GROUP LIMITED AN 009 317 846
Third Defendant
ORDER MADE BY:
DERRINGTON J
DATE OF ORDER:
22 FEBRUARY 2024
THE COURT ORDERS THAT:
1.Pursuant to s 447A and/or s 445D of the Corporations Act 2001 (Cth), the deed of company arrangement entered into by Project Sea Dragon Pty Ltd and dated 23 March 2023 be terminated.
2.Pursuant to s 447A of the Corporations Act 2001 (Cth), the administration of Project Sea Dragon Pty Ltd which commenced on 14 February 2023 be brought to an end forthwith.
3.Pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act 2001 (Cth)), the resolution of creditors on 21 March 2023 that Project Sea Dragon Pty Ltd execute a deed of company arrangement be set aside.
4.Project Sea Dragon Pty Ltd be wound up in insolvency.
5.Robert William Hutson and David Martin Johnstone be appointed as joint and several liquidators of Project Sea Dragon Pty Ltd.
6.Canstruct Pty Ltd be released from the undertaking recorded in the Orders of this Court made on 3 May 2023.
7.The Orders made herein be stayed until the expiry of the period for filing an appeal from these Orders, unless earlier extended.
8.The parties are to be heard on the question of costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DERRINGTON J:
INTRODUCTION
The first defendant, Project Sea Dragon Pty Ltd (subject to a deed of company arrangement) (Project Sea Dragon), is a “special purpose vehicle” which was incorporated to establish and operate a large-scale prawn aquaculture project in northern Australia. As part of that project, it has facilitated the development of substantial prawn farming infrastructure in the Northern Territory at a site called “Legune Station”. Since its incorporation, however, it has had neither an income stream nor substantial assets of its own; instead, it has received funding on an ad hoc basis from its parent company, Seafarms Group Limited, the third defendant in these proceedings. Although this has enabled it to pay its debts from time to time, there has never been any agreement or arrangement in place pursuant to which Seafarms Group Limited has been obliged to, or has committed to, provide such funding.
In the course of the project, Project Sea Dragon accrued substantial liabilities to Seafarms Group Limited and to related companies in its corporate group in respect of the amounts that have been advanced to meet its debts. It also accrued a significant liability to the plaintiff, Canstruct Pty Ltd (Canstruct), a contractor that it engaged to carry out various construction works at the Legune Station site. In 2022, Canstruct and Project Sea Dragon fell into dispute as to the amount owed to the former for the work that it had performed at Legune Station. On 3 February 2023, Canstruct obtained an adjudication determination in its favour pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT) in the amount of approximately $14 million, including GST and interest. Project Sea Dragon and Seafarms Group Limited disputed that such an amount was properly owing, but the effect of the legislation is such that the amount was nevertheless required to be paid.
As the evidence addressed in the course of these reasons reveals, Project Sea Dragon and Seafarms Group Limited have since pursued a strategy by which the former company has sought to avoid the majority of its liability to Canstruct. That strategy has involved a number of steps. First, Seafarms Group Limited ceased funding Project Sea Dragon, thereby rendering the latter company immediately insolvent (at least in the view of Project Sea Dragon and Seafarms Group Limited). Secondly, Project Sea Dragon entered into voluntary administration. Thirdly, Project Sea Dragon entered into a deed of company arrangement (DOCA) proposed by Seafarms Group Limited, pursuant to which all arm’s-length creditors of the company are to be paid in full, other than Canstruct — which is estimated to receive a return of approximately 10 to 11 cents in the dollar. Finally, it is anticipated that Project Sea Dragon will resume its ordinary operations, in essentially the same position that it was in prior to its entry into the DOCA, minus its liability to Canstruct.
Canstruct contends in these proceedings, amongst other things, that this strategy constitutes an abuse of the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) (Corporations Act). It submitted that, were it otherwise, the corporate and financial structure of Project Sea Dragon and Seafarms Group Limited would effectively permit those companies to utilise the voluntary administration and DOCA process (hereinafter referred to as the “VA and DOCA process”) to avoid indebtedness on the part of the former to any creditor with whom they no longer desired to deal. It further asserted that the existing state of affairs as between Project Sea Dragon and Seafarms Group Limited, whereby the latter has provided funding to the former despite the absence of any obligation or commitment to do so, has in actuality meant that Project Sea Dragon has been insolvent for some time whilst continuing to accumulate substantial debts. In Canstruct’s submission, if Project Sea Dragon was now found not to have been insolvent during this time, and if its entry into the DOCA was not an abuse of Pt 5.3A of the Corporations Act, then the first and third defendants would essentially have developed a “business model to allow insolvent trading to occur”.
Project Sea Dragon and Seafarms Group Limited denied that the history of ad hoc funding passing from the latter to the former had the consequence that Project Sea Dragon was insolvent whilst carrying on its business, notwithstanding the fact that it was without substantial assets or financial resources of its own. They submitted that, as a matter of “commercial reality”, there was a commitment on the part of Seafarms Group Limited to fund the payment of Project Sea Dragon’s debts that was, in the circumstances, sufficient to render the latter company solvent. Project Sea Dragon was able to pay its debts as they arose, even though there was no particular assurance of funding from Seafarms Group Limited. It was further submitted that, because each individual step taken in relation to Project Sea Dragon’s entry into the DOCA was permitted by Pt 5.3A, it could not be said that any one of those steps (or any combination of them) constituted an abuse of the provisions.
For the reasons that follow, Canstruct’s position should be preferred. The DOCA should accordingly be terminated, the administration should be brought to an end, and Project Sea Dragon should be wound up. Whatever the intention might have been behind the financial and corporate structure adopted by Project Sea Dragon and Seafarms Group Limited, the effect of that structure was that the former company, as the special purpose vehicle that assumed the risk of the project, remained in an ongoing state of insolvency. In effect, it was a stalking horse. It accrued substantial indebtedness to its parent company, Seafarms Group Limited, held no substantial assets of its own, had no income, and had no commitment from any party to provide funds to meet its debts. Whilst in this position, it also came to be in dispute with Canstruct, a major contractor engaged on the project, which ultimately led to its incurring a further significant liability. It sought to avoid most of this liability by utilising the VA and DOCA process, pursuant to which it effectively purported to erase Canstruct’s entitlement to payment of the full amount awarded to it in the adjudication while maintaining its own operations and preserving its relationships with other arm’s-length creditors, each of whom was paid in full.
That use of the VA and DOCA process constituted an abuse of the provisions of Pt 5.3A of the Corporations Act. As such, the DOCA should be terminated pursuant to s 447A or s 445D(1)(g). Alternatively, it should be terminated because:
(a)as contemplated by s 445D(1)(f), it was unfairly prejudicial to, or unfairly discriminatory against, Canstruct;
(b)as contemplated by s 445D(1)(e), effect cannot be given to the DOCA without injustice;
(c)as contemplated by s 445D(1)(b), misleading information was provided to the creditors voting on the DOCA; and/or
(d)as contemplated by s 445D(1)(c), there were material omissions from the information given to those creditors.
When the conduct of Project Sea Dragon and Seafarms Group Limited is considered in full, as set out below, it is unsurprising that one set of facts has triggered the operation of several provisions of the Corporations Act that are designed to prevent the misuse of the provisions of Pt 5.3A.
THE FACTS
The outcome of this matter turns substantially upon its facts. It is particularly important that the circumstances in which the DOCA was entered into are carefully identified, even though they were not ultimately disputed to any significant extent.
General background
Seafarms Group Limited is a publicly listed company and the apical entity of the corporate group known as the “Seafarms Group”. Project Sea Dragon is a member of that group, having been incorporated in March 2015 as a wholly owned subsidiary of Seafarms Group Limited. At all relevant times, the directors of the two companies were identical, save for a small number of immaterial exceptions. It was not doubted that the corporate will of each entity was controlled by substantially the same group of individuals. Much of the evidence given in these proceedings on behalf of Project Sea Dragon and Seafarms Group Limited came from Mr Rodney Dyer, who is presently a director of the former company and a director and the CEO of the latter.
The overall business of the Seafarms Group involves the construction of prawn aquaculture facilities for the growing and harvesting of prawns, and the intended sale of the resulting produce in Australia and overseas. The individual prawn aquaculture operations are conducted from various locations, including certain sites in Western Australia, the Northern Territory and Queensland.
Project Sea Dragon is referred to in the first and third defendants’ written material in these proceedings as a “special purpose vehicle”. It was incorporated to develop and operate a major prawn aquaculture project, known as “Project Sea Dragon”, for the Seafarms Group. It is the sole shareholder in several subsidiary companies, which are seemingly involved in the same enterprise.
The project is a substantial undertaking, and there can be no doubt that its progression to this point has required the Seafarms Group to invest a great deal of time, effort and money. It has been described as a large-scale, integrated, land-based prawn aquaculture business, which is designed to produce a high-quality, reliable supply of black tiger prawns on a year-round basis for domestic and export markets. It involves, amongst other things, the development of prawn aquaculture facilities in five separate locations — three in the Northern Territory and two in Western Australia. The only operational site at present is in Exmouth, Western Australia, where a founder stock facility has been established and Project Sea Dragon has employed a number of personnel. The other sites remain in various stages of development. The dispute between Canstruct and Project Sea Dragon underlying these proceedings concerns the construction of facilities at Legune Station, a large cattle station in the Northern Territory, approximately 120 kilometres north-east of Kununurra, over an area of which Project Sea Dragon holds a sublease for which it pays rent of approximately $2 million per annum.
Financial operations of Project Sea Dragon
As a special purpose vehicle incorporated to develop and operate a specific prawn aquaculture project, Project Sea Dragon has had no income of its own with which to meet the costs that it has incurred. Whilst that, in and of itself, is perhaps unsurprising, it also had no substantial assets and no financial facilities on which to draw in order to meet those costs. Mr Dyer gave evidence that Project Sea Dragon was wholly reliant on Seafarms Group Limited, as well as other entities in the Seafarms Group, for both financial and operational assistance. Despite that apparent reliance, there has been no formal loan agreement in place by which Seafarms Group Limited or any other company in the corporate group has assumed an obligation to provide funding. Nor has there been any letter of commitment from Seafarms Group Limited or any other company to a similar effect. In fact, there has been no agreement or arrangement at all between Project Sea Dragon on the one hand, and Seafarms Group Limited and the other companies in the Seafarms Group on the other, by which the latter has offered to, has been obliged to, or has committed to provide funding to the former on any occasion.
Project Sea Dragon was effectively funded by third party investment in Seafarms Group Limited, which was procured by the issuing of new shares in Seafarms Group Limited. The evidence indicated that the financial ties between the two companies were especially close in this respect. When Seafarms Group Limited raised capital via a share placement in June 2021, its announcements to the Australian Securities Exchange (ASX) made clear that the funds were to be directed specifically to the project — that is, the work of Project Sea Dragon.
Mr Dyer gave evidence that Project Sea Dragon obtained funds from Seafarms Group Limited to meet its debts by a particular process, as part of which it would “call” for Seafarms Group Limited to transfer funds into its account to pay invoices and other obligations shortly before they fell due. Accounts staff would assemble the necessary supporting documents, including copies of invoices, payroll amounts, PAYG calculations and the like, and would send them by email to certain persons within Seafarms Group Limited with a request that they authorise the payments. The “approvers” with authority to authorise payments were Mr Dyer, Mr Harley Whitcombe (another director of Seafarms Group Limited), and Mr Ian Leijer (the CFO of Seafarms Group Limited). Payments generally required authorisation from any two of those persons, whilst transfers from Seafarms Group Limited to Project Sea Dragon required authorisation from only one. Calls to transfer funds from the parent to the subsidiary were made only if further funds were required to make certain payments.
In the context of these proceedings, Project Sea Dragon and Seafarms Group Limited emphasised that the process included a weekly “payment run” for invoices relating to the former company to be raised to the latter, the fortnightly payment of wages for Exmouth employees, the monthly payment of a salary to the manager of the Exmouth facility, and the payment of payroll tax as well as PAYG and superannuation. Whilst the obligation to make these payments fell on Project Sea Dragon, Seafarms Group Limited consistently put its subsidiary in funds by way of this established process in order to allow the necessary payments to be made.
As a consequence of the implementation of this process, however, the amount of Project Sea Dragon’s indebtedness to Seafarms Group Limited steadily increased. It was not in doubt that Seafarms Group Limited was entitled to demand repayment of its debt at any time, but Mr Dyer asserted that such a demand would never be made. He explained as follows in his affidavit evidence:
Any amounts owed by PSD to SFG would technically be payable on demand but that demand will never be made. In my capacity as director of SFG I would never move to or cause the board to move to call up SFG’s loans to PSD while the project was ongoing. It is commercially illogical and against commercial reality for SFG to do so because that would expose me to significant complaint and inevitably legal action by shareholders for breaching my duty as a director.
The sole use of the funds raised was to develop and operate PSD. The very purpose of raising the funds and the reason for investors to invest is that there would be a significant incremental value in their share value as the project was developed. That is the commercial reality regarding the use of those funds. It is simply not open to the directors of SFG to abandon the project and call up the loan funds in circumstances where the very purpose for which the funds were raised would fail. The commercial reality is that SFG could not call up the funds in circumstances where by doing so the Project would immediately fail.
Ultimately, the only conclusion that can properly be drawn in this case is that the funding of Project Sea Dragon continued entirely at the discretion of Seafarms Group Limited, and the decision to advance funds was made only as and when the need for additional funding arose. That conclusion is not especially controversial. However, as discussed in more detail below, a finding to this effect makes it necessary to assess the extent to which Seafarms Group Limited was willing to continue funding Project Sea Dragon, and that assessment is a somewhat intricate task.
The works at Legune Station
As at the time these proceedings were commenced, Project Sea Dragon had undertaken a great deal of preparatory work on the project — including by negotiating leases, entering into agreements with native title holders, securing environmental approvals and licences, producing feasibility studies, and establishing the founder stock facility at Exmouth. However, it was not entirely clear how substantially the development at Legune Station, specifically, had progressed.
Canstruct was engaged by Project Sea Dragon to carry out certain construction work at Legune Station pursuant to a “Framework Agreement”, which was entered into on 10 May 2021. Pursuant to the terms of the Framework Agreement, “Work Orders” could be issued by Project Sea Dragon to Canstruct, after negotiations between them, which would then constitute separate and legally binding agreements for the carrying out of certain work. In this way, the Framework Agreement was effectively, in the words of Mr Dyer, an “umbrella agreement”. The Framework Agreement also required Canstruct to provide security for the performance of its obligations in the form of an unconditional undertaking issued by an Australian bank in the amount of $12 million. That security was duly given in the form of two $6 million bank guarantees.
In September and October 2021, Project Sea Dragon issued three Work Orders. It was not seriously in doubt that Canstruct undertook a substantial amount of work pursuant to those Work Orders, though the precise extent of the work that was completed and its value became a point of contention between the parties. According to Canstruct, the work included:
(a)the construction of ponds and dams, which required significant earthworks;
(b)the construction of access roads;
(c)the creation of seawater intake and discharge channels;
(d)the construction of accommodation quarters for temporary and permanent workers;
(e)the development of a quarry, and the manufacture of gravels and aggregates from the quarry for use in the project; and
(f)the creation of other roads, embankments, concrete drainage structures and other structures required in order to perform its contractual arrangements with Project Sea Dragon.
Pursuant to the terms of the Framework Agreement, Project Sea Dragon was entitled unilaterally to suspend works at the site. It was also entitled to terminate the three Work Orders for convenience.
On 24 December 2021, Project Sea Dragon unilaterally suspended all works at the site. Mr Dyer deposed in the context of these proceedings that, in about January 2022, a dispute then arose between Canstruct and Project Sea Dragon in relation to the money owed following the suspension of the works. On 27 April 2022, Project Sea Dragon terminated each of the three Work Orders for convenience.
On 15 September 2022, Canstruct submitted payment claims in relation to the Work Orders to both Project Sea Dragon and the Superintendent on the project. It sought payment of approximately $27.83 million. On 30 September 2022, the Superintendent (on behalf of Project Sea Dragon) issued payment certificates to Canstruct in response to the payment claims, pursuant to which Canstruct was paid approximately $780,000 in connection with the first and third Work Orders. The Superintendent certified that the amount payable by Project Sea Dragon in respect of the second Work Order was approximately -$270,000, but this amount does not seem to have been paid by Canstruct.
Clearly, the disparity between the amount sought by Canstruct and the amount paid to it by Project Sea Dragon was vast. The evidence and submissions of Project Sea Dragon and Seafarms Group Limited in these proceedings make plain the fact that those companies strongly disputed Canstruct’s entitlement to the sum that it sought. However, it is unnecessary for the present purposes to consider that material in detail.
The cause of the termination of the Work Orders
The termination of the Work Orders was not, as one might have expected, the result of any disputation between Project Sea Dragon and Canstruct in connection with the work at Legune Station. Instead, it was the result of growing financial difficulties and internal corporate issues within the Seafarms Group.
In the “Directors’ report” section of the Annual Report for Seafarms Group Limited for the financial year ended 30 June 2022, it was stated that the year had been a “turbulent” one. It was further identified that there had been a “renewal of the board” in the first half of the year, with the appointment of two new directors and the resignation of three others. There was also a change in the chairmanship of the board, and the appointment of a new CEO and CFO. Although it was noted that construction on the project had commenced early in the year, it was explained that:
In November [2021] the new board announced a review of Project Sea Dragon. Decisions taken during this time included the curtailment of all debt funding activity, and the termination of Project Sea Dragon contracts and most of the Project Sea Dragon construction team. This effectively placed the majority of Project Sea Dragon on hold which was announced to the market in March 2022.
…
In June 2022 Seafarms announced it was conducting a thorough assessment of the key challenges, development path and opportunities for Project Sea Dragon. The assessment is re-examining a number of matters raised about the viability of Project Sea Dragon announced by previous management in March 2022.
In connection with these events, a major shareholder moved to have the then-new CEO removed. The CEO subsequently resigned from his position, and from the board, along with the Company Secretary. In late May 2022, Mr Dyer was appointed as CEO, Mr Leijer as CFO and Mr Whitcombe as Company Secretary. Mr Dyer and Mr Whitcombe were also appointed to the board.
Later in the Directors’ report, it was noted that:
Following the statements made by the Company in March of 2022 the Company terminated contracts with most vendors, and the construction contracts with Canstruct were terminated for convenience in late April 2022. By the end of September 2022 the demobilisation of construction plant & equipment had largely been completed.
The Company also placed further work on hold at Bynoe and Kununurra while progressing a reduced scope of work at the Exmouth facility. The Company continues to undertake works to maintain all permits and approvals.
In the section of the Annual Report containing the notes to the financial statements of the Seafarms Group, beneath the heading “Summary of significant accounting policies”, it was explained that:
The Group commenced construction on Project Sea Dragon in August 2021, which was suspended in December 2021 due to the wet season. In the same month, the Group terminated negotiations on debt funding, which were at an advanced stage, due to the cessation of negotiations by the previous management. In April 2022 the major construction contracts for the construction of ponds and other infrastructure at Legune Station were terminated to preserve cash as the future of the project is re-assessed. … [F]ollowing the termination of the construction contracts, the Group received a number of claims from the construction company and after assessment of the currently available information, recorded a provision for general contractual liabilities of $8,730,094.
The Seafarms Group also produced a financial report for the half-year ended 31 December 2022. In the section of that report containing the notes to the condensed consolidated financial statements, beneath the heading “Summary of significant accounting policies”, it was stated that:
At 31 December 2022, the Group had net current assets of $18,796,286, including $20,426,850 cash and cash equivalents.
The Directors note material uncertainties relating to the decision to continue with Project Sea Dragon, if so whether adequate funding will be obtained to fund the continuance, if not whether the remaining Project Sea Dragon related expenses will be successfully reduced and ceased, as to the final amount payable to meet Project Sea Dragon contractual liabilities, and as to the future profitability and cash flow from improvements at Queensland Farms and the ability of these to cover corporate expenditure.
Mr Dyer confirmed in his evidence that the statements made in the reports were accurate. The conclusion most readily to be drawn, then, is that the Work Orders issued from Project Sea Dragon to Canstruct were terminated because the viability of the project had become less certain on account of financial concerns that were emerging at that time.
The adjudication of Canstruct’s claims
Unsurprisingly, Canstruct was dissatisfied with the significant disparity between the quantum of its payment claims and the Superintendent’s subsequent assessments of the value of the work. On 7 November 2022, it filed four adjudication applications pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT). Three of the applications related to the work performed under each of the Work Orders. By those applications, Canstruct sought determinations that, amongst other things, Project Sea Dragon was liable to pay to it the full amount of its payment claims. By its fourth application, Canstruct sought the return of one of its bank guarantees in the amount of $6 million, which had been provided by way of security under the Framework Agreement.
On 3 February 2023, three determinations were made in favour of Canstruct in respect of the three Work Orders in the total amount of $13,581,592.21, excluding GST and interest. That figure was subsequently adjusted to $12,473,810.14, excluding GST and interest, or $13,994,955.32, including GST and interest. The adjudicator also made a fourth determination, in relation to the Framework Agreement, that the outstanding bank guarantee was to be returned to Canstruct.
For the sake of convenience, the four determinations are referred to cumulatively throughout the remainder of these reasons as the “adjudicator’s decision”.
The response to the adjudicator’s decision
On 3 February 2023, the same date as the adjudicator’s decision, Seafarms Group Limited released an announcement to the ASX, indicating that, whilst it had provisioned an amount of $8.7 million for a settlement of the dispute with Canstruct in its 2022 accounts, it was “extremely disappointed” with the adjudicator’s decision and “believe[d] the determination to be excessive”.
On 8 February 2023, Herbert Smith Freehills (Freehills), who were the solicitors for Project Sea Dragon at that time, wrote to Canstruct’s solicitors, Thomson Geer, advising that their client rejected the adjudicator’s decision. The letter asserted, amongst other things, that the decision was affected by a number of jurisdictional errors. It added that Project Sea Dragon intended to commence proceedings in the Supreme Court of the Northern Territory to obtain relief in the nature of certiorari in respect of the adjudicator’s decision. Freehills sought confirmation that Thomson Geer had authority to accept service of those proceedings.
The following day, on 9 February 2023, Freehills wrote to the adjudicator to inform him that Project Sea Dragon was considering “the imminent commencement of proceedings … in respect of the purported determinations dated 3 February 2023”.
Mr Dyer gave evidence in these proceedings that he was extremely disappointed with the adjudicator’s decision, as were the other directors of Project Sea Dragon and Seafarms Group Limited. Accordingly, the directors explored the legal options available to them at the time. He said that they felt that there were jurisdictional errors affecting the decision, though he could not elaborate upon them. He added that the directors had discussed the possibility of litigation to challenge the adjudicator’s decision, but they did not get to the point of instructing Freehills to commence proceedings.
In connection with these same matters, Mr Dyer gave evidence that he spoke to Mr Tim Cox of Mills Oakley, the current solicitors for Project Sea Dragon and Seafarms Group Limited. Following this discussion, contact was made with Mr Shaun McKinnon of BDO (who is now one of the second defendants in these proceedings) in order to determine whether he was prepared to act as voluntary administrator of Project Sea Dragon. Mr McKinnon deposed that the prospect of a voluntary administration was first raised with him in a telephone discussion with Mr Cox on or about 8 February 2023, being the day on which the aforementioned letter was sent from Freehills to Thomson Geer, and the day before Freehills gave notice to the adjudicator of the possible commencement of proceedings.
Under cross-examination, Mr Dyer acknowledged that the directors had considered whether the voluntary administration of Project Sea Dragon would be a preferable course for the Seafarms Group to take over the commencement of court proceedings. In doing so, they discussed several matters, including whether making payment to Canstruct in accordance with the adjudicator’s decision would undermine the group’s ability to pursue the project, and whether it would result in the termination of employees. Ultimately, they concluded that making the payment to Canstruct would compromise the business of the group. The directors also considered that, if they were to pursue the option of litigation, they would be required to pay the money into court, or to Canstruct, which would cause Project Sea Dragon to be “in trouble”. It was thought that the litigation might remain on foot for over two years. According to Mr Dyer, the directors understood at the same time that, if the option of voluntary administration was pursued, then Canstruct would be precluded from enforcing payment of the adjudicator’s decision as soon as the process commenced. They also understood that, if a DOCA was approved by the creditors of Project Sea Dragon, then Canstruct’s ability to recover the amount awarded to it by the adjudicator would be limited to whatever the DOCA provided for it to be paid, and the liability arising out of the adjudicator’s decision could be discharged.
It emerged from Mr Dyer’s cross-examination that, during their deliberations, the directors took into account the fact that a DOCA could only pass in the context of a voluntary administration if it was approved by a majority of creditors in both number and value. They discussed the fact that Seafarms Group Limited would have to make a financial contribution under the DOCA in order to ensure that the creditors, or most of them, would do better under the deed than in a liquidation scenario. The $3.5 million sum that was ultimately put up was apparently calculated by working out the allowance that would need to be made for:
(a)the fees of the administrators and the other costs of the administration to be paid;
(b)all of the unrelated creditors of Project Sea Dragon, other than Canstruct, to be paid 100 cents in the dollar; and
(c)Canstruct to receive a return on its adjudication debt of about 10 cents in the dollar.
Mr Dyer explained that the directors’ decision to pay Canstruct about 10 cents in the dollar was made because the amount that Canstruct would stand to receive under the DOCA as a result was equivalent to the amount that the directors thought that it was properly owed.
As for the unrelated creditors, Mr Dyer initially asserted that the decision to pay them 100 cents in the dollar had not been made in order to encourage them to vote in favour of the DOCA. However, he conceded that the directors had discussed “how the voting might balance out” — that is, “the values and the numbers of all of the creditors and how that might fall out”. In this connection, the directors had recognised that the majority of the creditors by value were related entities, which would vote in favour of the DOCA. They had then discussed whether they could get a majority by number of creditors to approve the DOCA and, in doing so, discussed the likelihood that offering 100 cents in the dollar to the unrelated creditors would entice them to vote in favour of the deed. According to Mr Dyer, the discussion went no further: while it was acknowledged that offering the unrelated creditors a full return was “likely” to encourage them to vote for the DOCA, that was apparently not the reason that a full return was offered.
All in all, there were approximately 50 unrelated creditors of Project Sea Dragon, other than Canstruct and the company’s employees. Those unrelated creditors were owed about $420,000. It should be noted that the group of unrelated creditors affected by the DOCA also excluded the landlords with whom Project Sea Dragon was engaged in respect of its various leases, whose entitlements remained unaffected. In his affidavit evidence, Mr Dyer set out a list of trade creditors who had lodged proofs of debt at the eventual second meeting of creditors of Project Sea Dragon and asserted that each of those creditors was a “critical supplier or provider to the operations of Project Sea Dragon”. He was cross-examined in some detail on this assertion, particularly insofar as it seemed to suggest that there was some basis for the different treatment of those creditors relative to Canstruct.
Before turning to consider what was revealed in the course of that cross-examination, it bears repeating that the development of the project at Legune Station had effectively been put on hold from about April 2022. As at the time of the hearing of this matter, that was approximately 16 months in the past. Accordingly, to test the aforementioned assertion in Mr Dyer’s affidavit evidence, Mr O’Donnell KC, counsel for Canstruct, conducted an exercise in cross-examination whereby he proceeded one by one through the list of trade creditors of Project Sea Dragon and asked Mr Dyer what service each creditor had provided to the company and when that service had last been provided. The assumption underlying this exercise seemed to be that, if a creditor had provided a service of a particular importance to Project Sea Dragon — especially during the period in which the project was on hold — then that creditor could perhaps be accepted to be a “critical supplier or provider to the operations of Project Sea Dragon”. That might then justify some difference in treatment under the DOCA between the creditor in question and Canstruct.
This exercise ultimately worked to reveal some important points. As it was carried out, it became apparent that many of the unrelated creditors who were to be paid in full under the DOCA had indeed provided services of some importance to Project Sea Dragon during the time that the project had been on hold. These creditors supplied services that were necessary for the ongoing maintenance of the facilities established by Project Sea Dragon, and for the maintenance of the status quo on the project more generally, given the prospect that it might recommence. However, not all of the creditors who were to be paid in full were providing ongoing services to Project Sea Dragon. Mr Dyer accepted that the DOCA was not structured so as to tie payment in full to the ongoing provision of a service, as follows:
[MR O’DONNELL KC]: But the structure of the DOCA doesn’t provide for 100 per cent return to those creditors who continue to provide a service to Project Sea Dragon. It provides for 100 per cent — 100 cents in a dollar to all unrelated creditors other than Canstruct, doesn’t it?
[MR DYER]: Yes.
Indeed, the cross-examination revealed that there were certain creditors of Project Sea Dragon who could not, on any reasonable view, be said to be critical suppliers or providers. Specifically, the DOCA made provision for the payment of Project Sea Dragon’s former solicitors, Freehills, and a supplier of indoor plants, Darwin Indoor Plant Hire — neither of whom could be said to be vital to the continuation of the project. This belied Mr Dyer’s justification for paying all of the arm’s-length creditors in full, save for Canstruct.
As cross-examination progressed, Mr Dyer confirmed that the directors of Seafarms Group Limited well understood that, if the company ceased to fund Project Sea Dragon, then the directors of Project Sea Dragon would place it into voluntary administration. The subsidiary would then be in the hands of administrators, who would continue the operations of the company (and retain its employees) with funds provided by Seafarms Group Limited. Mr Dyer also confirmed that the directors’ intention was that, once Project Sea Dragon was in administration, Seafarms Group Limited would propose a DOCA for the purposes of which it would make a financial contribution in order to ensure that the deed offered the creditors a better return than they would receive in a liquidation. When asked by Mr O’Donnell KC whether the directors had discussed “that the plan would be to structure the … deed of company arrangement so that all of the unrelated creditors, apart from the landlord and apart from Canstruct, would get 100 cents in the dollar”, he answered in the affirmative. However, he denied that the directors had discussed whether this was likely to entice a vote in favour of the DOCA. On the other hand, he admitted that the amount paid to Canstruct was calculated to afford it a better return than it would receive in a liquidation — describing it as a “subjective amount”.
Mr Dyer also acknowledged that the directors had discussed that, once the DOCA was executed, control of Project Sea Dragon would return to its directors and Seafarms Group Limited would resume funding of the subsidiary to continue its operations. He ultimately accepted the proposition put to him that the only substantial difference in Project Sea Dragon before and after its administration was that it would be released from its liability to Canstruct in connection with the adjudication and would therefore retain the money that it would otherwise have been obliged to pay. Mr Dyer quite candidly acknowledged that the object of the VA and DOCA process was to achieve a situation where the funds did not have to leave the Seafarms Group to go to Canstruct, as per the adjudicator’s decision. The relevant exchange proceeded as follows:
[MR O’DONNELL KC]: So the object of the administration and the deed was to achieve a situation where the funds don’t have to leave the Seafarm Group to go to Canstruct as per the adjudication determination. Correct so far?
[MR DYER]: Correct.
[MR O’DONNELL KC]: And Project Sea Dragon gets a release from all liability to Canstruct through the deed; correct?
[MR DYER]: Correct.
[MR O’DONNELL KC]: They were the only two real objects achieved by the voluntary administration in the deed; correct?
[MR DYER]: Incorrect.
[MR O’DONNELL KC]: What else was achieved?
[MR DYER]: Project Sea Dragon would survive, and Seafarms Group would survive.
[MR O’DONNELL KC]: And that’s because the money doesn’t go out of the Seafarm Group to Canstruct and because - - -?
[MR DYER]: Seafarms Group to Project Sea Dragon to Canstruct, yes.
[MR O’DONNELL KC]: And because Project Sea Dragon gets a release from all liability of Canstruct; correct?
[MR DYER]: Correct.
[MR O’DONNELL KC]: So they’re consequences of those two things being achieved; correct?
[MR DYER]: Correct.
This evidence assists in understanding why, on 13 February 2023, the directors of Seafarms Group Limited resolved to withdraw funding to Project Sea Dragon. A meeting of the board of directors of Project Sea Dragon was held on the same day, the minutes of which note (inter alia) that:
4. the financial position of the Company is such that the Company does not, by itself, have the ability or the means to pay the Adjudicated Amount;
5. the Company has received notice from its ultimate holding, namely Seafarms Group Limited ACN 009 317 846 (ASX:SFG) (SFG) that SFG is withdrawing funding support to the Company and specifically that they will not pay the Adjudicated Amount;
6. further the Company cannot give any assurance to SFG that Canstruct will be capable of repaying the funds in the event that it is ultimately determined that the Adjudicated Amount was not in fact due and payable;
7. the board has formed the view that without the financial support of SFG, the Company will likely become insolvent in the near future; and
8. Shaun McKinnon and Andrew Fielding of BDO Business Restructuring Pty Ltd should be appointed as Joint & Several Administrators of the Company pursuant to Section 436A of the Corporations Act 2001 (Cth)
(Emphasis in original).
On 14 February 2023, Mr McKinnon and Mr Andrew Fielding, the second defendants in these proceedings, were appointed as joint and several administrators of Project Sea Dragon.
On 15 February 2023, Seafarms Group Limited released an announcement to the ASX, which included the following statement:
As a result of the decision made by the adjudicator on 3 February 2023 regarding a construction dispute, the voluntary administration became a necessary step for Project Sea Dragon.
On 17 February 2023, Seafarms Group Limited entered into a “Funding Agreement” with the administrators, pursuant to which it agreed to provide a working capital facility of $1.65 million for the administrators’ use. Those funds were intended to cover the administrators’ fees and expenses, as well as all expenses involved in continuing to operate the business of Project Sea Dragon. That included the cost of continuing the employment of Project Sea Dragon’s existing employees, paying all lease payments that fell due, and meeting supplier payments and other operational costs.
On 23 February 2023, the same date as the first meeting of the creditors of Project Sea Dragon, Canstruct lodged with the administrators a formal proof of debt in the amount of $13,994,955.30. The proof of debt form cited the three determinations of the adjudicator on 3 February 2023, relating to each of the Work Orders.
The proposal of the DOCA
Mr McKinnon deposed that, on 13 February 2023, he attended a meeting with certain other representatives of BDO and some of the directors of Project Sea Dragon. At that meeting, it was allegedly communicated by the directors that their intention was to keep the company and the project alive, and that they intended to propose a DOCA — though they had to confirm their position and consider financial models before doing so.
On 13 March 2023, Seafarms Group Limited, as the deed proponent, proposed a DOCA to the administrators of Project Sea Dragon. The terms of the DOCA were in line with what is now known to have been the intention of the directors of Seafarms Group Limited prior to the cessation of its funding of Project Sea Dragon.
The purpose was identified in the following terms:
The proposed DOCA for the Company is intended to satisfy the objectives of Part 5.3A of the Act, including to maximise the chances of the Company, or as much as possible of its operations, continuing in existence, or to achieve better outcomes for the Company, compared to the expected outcome were the Company to be immediately wound up and assets liquidated.
It ought to be noted, in passing, that this passage seems to have been intended to encapsulate or reflect the object of Pt 5.3A identified in s 435A of the Corporations Act. If this is so, then it contained a significant error which, as it transpires, might well have been Freudian in nature: instead of the DOCA seeking to achieve “a better return for the company’s creditors and members than would result from an immediate winding up of the company”, to use the words of s 435A(b), it apparently seeks to achieve “better outcomes for the Company, compared to the expected outcome were the Company to be immediately wound up and assets liquidated”.
The key elements of the DOCA were as follows:
(a)Seafarms Group Limited would contribute $3.5 million (described as the “Seafarms Contribution”) to a “Deed Fund”, which would first be used to repay the working capital facility provided by Seafarms Group Limited for the administrators’ expenses, after which an amount of $1.9 million to $2.03 million would be available for creditors.
(b)The remainder of the Deed Fund would be distributed according to a priority arrangement so as to:
(i)meet the claims of employees and “Small Claim Creditors” (presenting claims of $300,000 or less) such that they received 100 cents in the dollar; and
(ii)thereafter, pay the “Balance Creditors” — that is, Canstruct — an estimated amount of 10.11 cents to 11.12 cents in the dollar, equating to approximately $1.4 to $1.55 million.
(c)Other than the repayment of the interim funding, neither Seafarms Group Limited nor any of the other related companies in the Seafarms Group would receive anything from the Deed Fund.
(d)Upon the effectuation of the DOCA, all claims against Project Sea Dragon would be released and extinguished in full, save for any claims by any landlord in respect of premises occupied by Project Sea Dragon.
The following day, on 14 March 2023, the administrators sent to the creditors of Project Sea Dragon a report entitled “Report to Creditors by Voluntary Administrators pursuant to section 75-225 of the Insolvency Practice Rules (Corp) 2016 & Section 439A of the Corporations Act 2001” (hereinafter, the “14 March 2023 Report”). The 14 March 2023 Report contained, amongst other things, information regarding the second meeting of creditors to be held on 21 March 2023. In the executive summary at the outset of the document, the administrators recommended that the company execute a DOCA, as the DOCA proposal before it would “result in a higher and more certain return to all unsecured creditors”. In a later subsection of the executive summary entitled “Frequently Asked Questions”, it was stated that “[t]he DOCA proposal results in all classes of creditors receiving more than is estimated to be returned in a liquidation scenario”.
Later in the 14 March 2023 Report, the administrators gave more detailed commentary in respect of the DOCA proposal. That commentary included the following points, amongst others:
•The DOCA effectively repays all creditors in full, other than Canstruct Group Pty Ltd. Other than related party creditors, Canstruct is the largest creditor by a significant value. Canstruct is estimated to receive more under the DOCA proposal than they would in a Liquidation scenario.
•The DOCA proposal would result in:
The Company’s operations to be continued;
The ongoing employment for all thirteen staff members, and the avoidance of the crystallisation of the associated employee entitlements, including termination entitlements;
These employee entitlements would be honoured by the Company post DOCA
The avoidance of the crystallisation of various contractual and contractual related damages clauses for future lease payments and remediation works associated with teases and other agreements, that would be required to be completed at various sites;
A single upfront lump-sum payment and is therefore not subject to the uncertainty of recoveries associated with a Liquidation;
Under the DOCA related party creditors of circa. $65m would not claim; and
A better financial return for all creditors than a liquidation.
In the next section of the Report, the administrators purported to estimate the return to creditors in two possible scenarios. It was suggested that, under the DOCA, all creditors would receive 100 cents in the dollar except for the one “Non-Small Claim Creditor”, which was Canstruct. By contrast, it was suggested that, in a liquidation, all creditors would receive zero cents in the dollar.
Notably, the administrators stated that they had “not identified any potential claims that would provide any return to creditors of the Company in a liquidation scenario”. At least part of the basis for this conclusion seemed to be the following series of points:
•Based on our investigations, the Company was insolvent from 13 February 2023 being the date SFG resolved to no longer provide financial support.
•Prior to this date, the access to Capital and ongoing financial support of the parent allowed the Company to meet their debts as and when they fell due. Once this support was withdrawn, the Company became insolvent.
•A claim for insolvent trading is generally calculated by reference to the increase in liabilities in the period of insolvency. As the period in question is for the day prior to the Administrators [sic] appointment, we consider that this balance is nil.
There is no need at this juncture to set out in detail any other parts of the 14 March 2023 Report. It suffices to observe that the document effectively assumed as its foundation, and expressed throughout, certain views with which Canstruct vehemently disagreed.
The ability of Seafarms Group Limited to pay the debt owed to Canstruct
It is an uncontroversial fact that, at the time that Seafarms Group Limited proposed the DOCA, it had the ability to fund the payment of the debt owed by Project Sea Dragon to Canstruct. So much had been asserted by Seafarms Group Limited in its announcement to the ASX on 3 February 2023, which stated relevantly as follows:
Seafarms provisioned $8.7m for a settlement of this dispute in its 2022 accounts, and has the capacity to cover the balance.
This was also confirmed by Mr Dyer in the course of his evidence in these proceedings.
Nevertheless, Seafarms Group Limited declined to fund the payment of that debt. The reason that it gave was that it did not believe that the amount was properly due and owing.
The second meeting of the creditors of Project Sea Dragon and the entry into the DOCA
The second meeting of the creditors of Project Sea Dragon was held on 21 March 2023. As at that date, the creditors of Project Sea Dragon included:
(a)13 employees, who were to be paid $11,133 if the DOCA was approved;
(b)50 trade creditors (apart from Canstruct), which were owed approximately $420,000;
(c)Canstruct, which was owed approximately $14 million; and
(d)related party creditors, who were owed a total of approximately $64.85 million.
Amongst those related party creditors, Seafarms Group Limited was owed $62.36 million.
Additionally, Project Sea Dragon had continuing commitments under certain lease arrangements, although those liabilities were to be met by the administrators as part of the continuation of the business and were not dealt with in the DOCA.
The minutes of the second meeting of the creditors recorded that 25 proofs of debt were received by the administrators, totalling approximately $128.15 million. Of that, approximately $80.37 million was admitted for voting purposes.
Voting at the second meeting occurred by poll. Pursuant to s 75-115 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (IPR), for the DOCA to be passed by resolution at the meeting, there needed to be a vote in favour of the resolution by both a majority in number of the creditors voting and a majority in value of the creditors voting.
When the resolution to enter into the DOCA was put, 19 creditors (including four related party creditors) voted in its favour. Only Canstruct voted against it. There was accordingly a vote in favour of the resolution by a majority in number of the creditors voting. The value of the debts of those voting in favour was $65,364,096.15, of which $64,853,676.65 was attributable to related parties — including Seafarms Group Limited, which contributed the overwhelming majority of the total amount. Canstruct’s debt was entered as $13,994,955.25, and this was the value of the only vote cast against the resolution. The resolution therefore attracted votes in favour by a majority in value of the creditors voting.
The DOCA was entered into on 23 March 2023. In accordance with its terms, control of Project Sea Dragon was immediately returned to its directors.
In an announcement released to the ASX by Seafarms Group Limited on 24 March 2023, it was stated (amongst other things) that:
As a result of entry into the DOCA, control of Project Sea Dragon has now returned to the directors. As previously announced no jobs were lost and the operations at Exmouth continued successfully throughout the Administration period. The directors expect that SFG operations will now return to normal and they will continue to assess advancing Project Sea Dragon including interim funding. Further funding to advance the project is being sought from third party funders.
SFG has been advised that the DOCA discharges the claims against Project Sea Dragon by Canstruct (including the claim and claim amount announced by SFG on 3 February 2023).
The commencement of proceedings and the payment of creditors
Canstruct commenced the present proceedings by filing an originating process on 5 April 2023. By an interlocutory application filed 24 April 2023, it sought to restrain the deed administrators (that is, the second defendants) from finalising the distribution of the Deed Fund to creditors.
The application was heard on 3 May 2023, and the orders sought by Canstruct were ultimately made on the same day. The second defendants were thereby restrained, in effect, from finalising the DOCA until the determination of this matter or further order: see Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) [2023] FCA 637.
Despite this interlocutory injunction having been granted, Seafarms Group Limited paid the debts owed to nearly all of the arm’s-length creditors of Project Sea Dragon. As at the time of the final hearing, the only unrelated creditors who had not been paid in full were Canstruct and Freehills.
The entirety of Canstruct’s debt remains unpaid.
CANSTRUCT’S CLAIMS IN RELATION TO THE VA AND DOCA PROCESS
Canstruct claims that the DOCA should be terminated pursuant to s 447A and/or s 445D of the Corporations Act on several grounds, including that:
(a)as contemplated by s 447A(2)(b), and within the ambit of s 445D(1)(g), entry into the DOCA constituted an abuse of the provisions of Pt 5.3A;
(b)as contemplated by s 445D(1)(f), it was unfairly prejudicial to, or unfairly discriminatory against, Canstruct;
(c)as contemplated by s 445D(1)(e), effect could not be given to the DOCA without injustice;
(d)as contemplated by s 445D(1)(b), misleading information was provided to the creditors voting on the DOCA; and
(e)as contemplated by s 445D(1)(c), there were material omissions from the information given to those creditors.
As noted at the outset of these reasons, those grounds overlap both factually and, to some extent, legally.
Canstruct also seeks a number of ancillary orders, including that:
(a)pursuant to s 447A of the Corporations Act, the administration of Project Sea Dragon be brought to an end;
(b)pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act) (IPS), the resolution of creditors on 21 March 2023 that Project Sea Dragon execute the DOCA be set aside;
(c)Project Sea Dragon be wound up in insolvency; and
(d)Mr Robert William Hutson and Mr David Martin Johnstone be appointed as joint and several liquidators of Project Sea Dragon.
The various aspects of the relief sought by Canstruct may be addressed in turn.
TERMINATION OF THE DOCA AND THE ADMINISTRATION
Legal principles concerning ss 447A(2)(b) and 445D(1)(g) of the Corporations Act
Canstruct applies under each of s 447A and s 445D(1)(g) of the Corporations Act for an order that the DOCA be terminated on the basis that the entry into it constituted an abuse of the provisions of Pt 5.3A. It also applies under the former provision for an order that the administration of Project Sea Dragon be brought to an end.
The concept of an abuse of Pt 5.3A of the Corporations Act requires some attention to be directed to the purpose of that part. Conveniently, this is set out expressly in s 435A, as follows:
435A Object of Part
The object of this Part, and Schedule 2 to the extent that it relates to 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.
With this in mind, s 447A(1) – (2) relevantly provides:
447A General power to make orders
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
In Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) 110 ACSR 203 (ASIC v Midland Hwy), Beach J identified (at 222 [64] – [67]) that s 447A provides the Court with power to terminate an administration and to order a winding up in the public interest. His Honour also identified in the same case (at 223 [69]) that the Court has power under the section to set aside a resolution to enter into a DOCA. It is otherwise well established that s 447A also provides the Court with power to terminate a DOCA and, accordingly, it is not uncommon for an application under the section to be coupled with an application under s 445D: see Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846 [819], [1221].
The concept of “abuse” in s 447A(2)(b) was said by Barrett J in Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) (2003) 47 ACSR 391, 396 [17] (Blacktown City Council) to be that involved in an abuse of process. His Honour went on to state, in the same paragraph, that:
The specific aspect of the very wide s 447A jurisdiction described in s 447A(2)(b) is therefore akin, as to its content and purpose, to the court’s inherent jurisdiction to stay proceedings permanently for abuse of process. As the decision of the High Court in Williams v Spautz (1992) 174 CLR 509; 107 ALR 635; 61 A Crim R 431 confirms, the use of a procedure or process for a purpose essentially foreign to the purpose it is designed to serve is the principal determinant of abuse. Resort to the procedure or process to effectuate some collateral purpose makes the use of the procedure or process improper. In the present context, this leads in the first instance to a consideration of what the proper purposes of the provisions of Pt 5.3 may be said to be.
This passage and the reference to Williams v Spautz (1992) 174 CLR 509 (Williams) therein were discussed by Sackville AJA in Re New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd (2015) 107 ACSR 504 (New Bounty). His Honour remarked (at 544 [196]) that:
Williams, to which frequent reference is made in proceedings brought under s 447A(1) of the Corporations Act, was concerned with abuse of the court’s process, not with abuse of the process available under Pt 5.3A of the Corporations Act.
(Footnotes omitted).
He then went on (at 545 [198]) to make the following observation:
In my view some care must be taken in applying the principles governing the process of a court to the different question of whether a party has improperly invoked the process available under Pt 5.3A of the Corporations Act. The issues may be similar in each situation, but they are not necessarily identical. It may be difficult, for example, to apply concepts such as procedural fairness to actions taken by a company or its officers. When the question of abuse of process arises in a statutory context, attention has to be directed primarily to the terms of the legislation.
Whilst there is perhaps some tension between these statements and what was said in Blacktown City Council, there is no necessary inconsistency between the judgments. Justice Barrett referred to the jurisdiction described in s 447A(2)(b) as one that is “akin” to the inherent jurisdiction to stay proceedings for abuse of process. His Honour’s remarks do not clearly suggest, and should not be taken to suggest, that the jurisdiction in both instances is the same — and it was specifically that equating of the statutory and inherent jurisdictions that Sackville AJA cautioned against: see Dr Paulina Fishman, “Corporate Rescue in Danger: Pt 5.3A Abuse and Inappropriate Relief” (2023) 39 Australian Journal of Corporate Law 135, 138.
It is also worth pointing out what was said by Sackville AJA in New Bounty (at 544 [197]) after his Honour set out a passage from the majority judgment in Williams regarding the abuse involved in the commencement of proceedings for a collateral purpose, as follows:
The important point that emerges from this passage is that a person who intends to use a process for the purpose for which it is designed, does not abuse that process by having an “ultimate purpose” that is outside the scope of the proceedings.
To similar effect is the statement of White J in Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd (2007) 213 FLR 450, where his Honour described the conclusion drawn in Williams as follows at 460 [37]:
There, it was held that it is an abuse of process to institute proceedings for the predominant purpose of obtaining a collateral advantage outside the proper purpose for which the proceedings are designed. However, it is not an abuse of process to bring proceedings for the purpose of pursuing them to a conclusion to obtain whatever entitlement or benefit the law provides if the proceedings terminate in the plaintiff’s favour.
The idea that, in order for there to be an abuse of process, the improper or collateral purpose must be the “predominant” purpose emerges in clear terms from the judgment of the majority in Williams at 529. It has been repeated in other more recent cases in the context of s 447A: see, for example, Foti v P & S Investments Pty Ltd [2009] FCA 1409 [27], [34].
Several scenarios in which the jurisdiction described in s 447A(2)(b) has been relied upon to terminate a DOCA and voluntary administration were recently listed by Hill J in Chalmsbury Nominees Pty Ltd v Alita Resources Ltd (receivers and managers appointed) (subject to deed of company arrangement) [2023] WASC 97 [49] (Chalmsbury Nominees v Alita). They include:
(a)where it would bar particular claims already being litigated against the company (citing Blacktown City Council);
(b)where the winding up may serve the public interest as investigations and recovery proceedings are likely to be funded and could realistically lead to persons who engaged in suspect transactions being brought to account (citing Public Trustee (Qld) v Octaviar Ltd (subject to deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139, 194 [182]);
(c)if the provisions of the Corporations Act are being abused (citing Re Sales Express Pty Ltd (admins apptd) [2014] NSWSC 460 [19] (Sales Express)); or
(d)where there is an ulterior element or purpose in using the provisions of Pt 5.3A (citing Workers Compensation Nominal Insurer v Perfume Empire Proprietary Ltd [2011] NSWSC 379 [22]).
In the last of those cited decisions, Barrett J pointed out (at [22]) that the cases in which courts have intervened to terminate a voluntary administration are all cases in which there has existed what might be termed some “ulterior element”. This observation has been referred to without disapproval in subsequent decisions: see, for example, Sales Express [19]; Re Condor Blanco Mines Ltd [2016] NSWSC 1196 [19]; Shaoyong (David) Guo v Xinwei Song; In the matter of SG Capricorn Investments Pty Ltd (subject to deed of company arrangement); Dameng Developments Pty Ltd (subject to deed of company arrangement); and New Mangrove Pty Ltd (subject to deed of company arrangement) [2018] NSWSC 12 [124] (Guo v Song).
The power in s 447A is necessarily broad, though it is not entirely without limit: Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270, 280 [20]. Although it will usually be exercised having regard to the interests of the creditors as a whole and the public interest, the former factor may be overcome by the latter in a particular case, such that liquidation is the more favourable result: ASIC v Midland Hwy at 222 [67]. As Beach J observed in that last mentioned decision (at 223 [68]), the public interest “includes considerations of commercial morality and the interests of the public at large” (citing Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510, 565 [287]). His Honour further held, in the same paragraph, that:
Where there has been misconduct in the affairs of a company requiring appropriate investigation by a liquidator and appropriate recovery proceedings being considered and undertaken, it is detrimental to commercial morality to prevent or hinder such steps through the device of a DOCA propounded by entities and individuals who ought be the subject of investigation and the target of such proceedings. A winding up will be beneficial from a public interest perspective where investigations and recovery proceedings are likely to be funded and the investigations and appropriate recovery proceedings could realistically lead to the relevant persons who have engaged in the suspect transactions being brought to account: Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139; [2009] QSC 202 at [182] per McMurdo J.
Relevantly for present purposes, his Honour also held (at 223 [69]) that, in exercising its power under s 447A to set aside a resolution to enter into a DOCA and to order a winding up, the Court could apply by analogy any one or more of the principles applicable to s 445D. In that respect, the observations of Gordon J in TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789 [58] (TiVo) are relevant. There, her Honour held that s 445D(1)(g) may be available where (inter alia) the proposal for the DOCA has a fraudulent or wrongful purpose, or the DOCA offers an unconscionable premium as a bribe to creditors to support an arrangement the consequence of which is that the directors’ conduct will not be investigated (citing Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) (2005) 228 ALR 598, 609 [63]; Young v Sherman (2002) 170 FLR 86, 104 [67], 109 [92]). A conclusion that the DOCA process is being used to forestall an investigation into the directors’ conduct will be a significant factor to weigh in the assessment as to whether the DOCA is in the interests of the creditors as whole. Her Honour added (at [59]) that the circumstances in which a DOCA will be terminated are not closed, and each case will depend upon its own facts and combination of circumstances.
By itself, s 445D confers power on the Court to terminate a DOCA in a broad range of circumstances. In particular, s 445D(1)(g) provides:
445D When Court may terminate deed
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
…
(g) the deed should be terminated for some other reason.
The authorities concerning the application of this provision reveal that it may be used by the Court:
(a)where there has been an abuse of the provisions of Pt 5.3A: Mighty River International Ltd v Hughes (2018) 265 CLR 480, 490 – 491 [13]; Chalmsbury Nominees v Alita [47];
(b)where the DOCA is contrary to the “public interest”, which involves considerations of commercial morality and the interests of the public at large: Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd (subject to deed of company arrangement) (2020) 149 ACSR 1, 54 – 56 [409] – [410];
(c)where, as in the case of s 447A, the termination of a DOCA can be justified in the public interest even if it is not also in the interests of the creditors as a whole: ASIC v Midland Hwy at 222 – 223 [67] – [69], [73]; Guo v Song [150]; and
(d)where the DOCA has the consequence of preventing an effective investigation into the company’s affairs and the opportunity for a greater return in a liquidation scenario, as in such circumstances the DOCA is contrary to the creditors’ interests overall and the public interest at large: ASIC v Midland Hwy at 224 [74], citing Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783 [37].
Should the DOCA and the administration be terminated under either s 447A or s 445D(1)(g)?
Canstruct submitted that the real object of Project Sea Dragon and/or Seafarms Group Limited in putting the former company into administration and proposing the DOCA was “to avoid having to fund payment of the adjudicator’s decision that went against [Project Sea Dragon], while at the same time avoiding the scrutiny of [Project Sea Dragon’s] arguably insolvent trading over the previous two years that might occur in a liquidation”. This, so it was submitted, amounted to a relevant abuse of Pt 5.3A.
It is convenient to divide Canstruct’s case in relation to the application of ss 447A and 445D(1)(g) into two parts:
(a)the first concerns the alleged abuse of Pt 5.3A involved in Project Sea Dragon and Seafarms Group Limited having used the VA and DOCA process to avoid most of the debt owed to Canstruct; and
(b)the second concerns the alleged abuse of Pt 5.3A involved in Project Sea Dragon and Seafarms Group Limited having used the VA and DOCA process to avoid scrutiny into possible insolvent trading on the part of the former company.
Avoiding the debt owed to Canstruct
For the reasons that follow, the first part of Canstruct’s case in relation to the application of ss 447A and 445D(1)(g) of the Corporations Act should be accepted. The utilisation of the VA and DOCA process for the predominant purpose of expunging a particular trade creditor’s debt may suffice to enliven the power under either of those provisions. Part 5.3A was not enacted to provide an avenue by which a corporate group might rearrange its affairs in order to wipe the unwanted debts of an operating company before returning it to business as usual.
Identifying the predominant purpose
The evidence in this case established, rather unequivocally, that the predominant purpose of Project Sea Dragon and Seafarms Group Limited in entering into the VA and DOCA process was to disencumber the former company of its liability to pay the adjudication debt to Canstruct.
From the point of view of the companies’ directors, the process effectively permitted the debt to be discharged by the payment of a substantially smaller sum while the position of Project Sea Dragon remained otherwise the same. Mr Dyer explicitly acknowledged as much during his evidence, albeit with some initial resistance:
[MR O’DONNELL KC]: The substantial difference before the administration and after the administration was that PSD would be released from its liability to Canstruct for the adjudication determination; correct?
[MR DYER]: Part — in part.
[MR O’DONNELL KC]: That was the only practical difference, wasn’t it?
[MR DYER]: No, there would be more cash in our bank to be able to enable Project Sea Dragon and Seafarms to survive.
[MR O’DONNELL KC]: Because it hasn’t been paid to Canstruct?
[MR DYER]: Correct, or court.
[MR O’DONNELL KC]: So you’re keeping the cash rather than paying it to Canstruct, but you’re also getting a release from all liability of Canstruct by the deed; correct?
[MR DYER]: Yes.
[MR O’DONNELL KC]: In terms of looking at the situation before the voluntary administration and after, that’s the big difference, isn’t it, in Project Sea Dragon’s position?
[MR DYER]: Yes.
[MR O’DONNELL KC]: Indeed, it’s the only difference, isn’t it?
[MR DYER]: Yes.
To be more specific, upon the execution of the DOCA the following events occurred: control of Project Sea Dragon was immediately returned to the company’s directors; Seafarms Group Limited signalled its intention to recommence its funding of the project; Project Sea Dragon continued its commercial relationships with several trade creditors whose debts were paid, or were to be paid, in full; arrangements between Project Sea Dragon and its lessors and employees remained in place; and Project Sea Dragon effectively resumed its pursuit of the project. The only real difference in the company’s position after the VA and DOCA process was that, as acknowledged by Mr Dyer, the liability to Canstruct had now been discharged.
In support of its claim that it has a real right to have a liquidator inquire into the conduct of Project Sea Dragon’s directors and of Seafarms Group Limited, Canstruct has, as mentioned, deposited $150,000 into its solicitor’s trust account to be made available to any liquidator, if appointed, to undertake the investigation. It also promises to provide additional funding for any recovery action, so long as it is satisfied that there is a reasonable prospect of recovery. This demonstrates a degree of purpose and bona fides in Canstruct to assist in the pursuit of the recovery of the amounts it claims is owed to it, though it is, perhaps, unsurprising given that it has a significant financial incentive to do so.
It should be mentioned that there are differences in the evidence as to the total cost of undertaking inquiries and any future litigation. Again, those come from the solicitors for the respective parties, Mr Cliff and Mr Guthrie. It is not, however, necessary to reach any conclusion as to that disagreement. It can be accepted that the litigation will be a costly exercise and, as Seafarms Group Limited and the directors of Project Sea Dragon have insurance, it may well be hard fought. Nevertheless, Canstruct is greatly prejudiced by the DOCA and the circumstances suggest that it should be permitted the opportunity for the claim against the Project Sea Dragon directors and Seafarms Group Limited to be pursued. That is especially so given that all of the unsecured creditors, save for Freehills and Canstruct, have been paid in full and will not suffer any detriment if the litigation is not as successful as Canstruct hopes.
Should the DOCA be terminated under s 445D(1)(e)?
Canstruct also relied upon s 445D(1)(e) of the Corporations Act as a basis to terminate the DOCA. Under that subsection, an order terminating a deed of company arrangement may be made if “effect cannot be given to the deed without injustice or undue delay”.
Canstruct submitted that an injustice is established in the present case as the effect of the DOCA is to avoid a proper investigation of the relevant transactions of Project Sea Dragon: see Guo v Song [146]: and further, it will deny it the prospect, in a liquidation, of a much greater return than 10 cents in the dollar.
As set out above, the entry into the DOCA had the consequence of avoiding scrutiny into whether Project Sea Dragon had engaged in insolvent trading and had incurred debts in respect of which its directors and parent company might become liable. This avoidance of a proper investigation of the transactions of Project Sea Dragon is enough to establish the element of injustice under s 445D(1)(e), and further enliven the Court’s discretion to terminate the DOCA.
Additionally, Canstruct’s further submission that there is an injustice in the DOCA’s effect of denying it the prospect of a greater return in a liquidation may also be accepted. For the reasons previously referred to, there are grounds on which a liquidator might pursue Project Sea Dragon’s directors and Seafarms Group Limited for insolvent trading, and there is a not unrealistic prospect of Canstruct recovering more in a liquidation by a liquidator pursuing such a claim than it would receive if the DOCA were performed.
Each of these injustices are, as Canstruct submitted, aggravated by two factors. First, by the fact that the vote by the majority of creditors in value in favour of the DOCA was achieved by the votes of related party creditors. Secondly, by the fact that there is an inference open on the material that the votes by the majority of creditors in number may have been influenced by the discrimination in the DOCA to pay all creditors in full, save for Canstruct.
Should the DOCA be terminated under s 445D(1)(b)?
Canstruct also relied upon s 445D(1)(b) as a justification for terminating the DOCA. That subsection, together with subsections (a) and (c), relevantly provide:
(1) The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company’s business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii) can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or
The application of this section does not require intention on the part of the person making the misrepresentation and that is important here where the misrepresentations are alleged to have been made in the administrators’ report to creditors, namely the 14 March 2023 Report: see Sino Group [62]. Necessarily, in the preparation of the report and, in particular, the making of statements concerning any proposed DOCA, the administrators are, to a degree, reliant on information provided to them by the deed proponents and the company. It follows that misleading or false statements can be made in the administrators’ report which were unintentional and for which the administrators might bear little responsibility. That said, for the most serious and egregious misrepresentation in this case, the administrators would appear to be solely at fault.
Canstruct relied upon the misstatement in the 14 March 2023 Report that purports to justify the distribution of the Deed Fund under the proposed DOCA. The passage is referred to above, but it is convenient to repeat it:
Employee and Small Claim Creditors (being claims of $300k or less) will be paid at 100c in the dollar in accordance with the priorities set out in sections 556, 560 and 561 of the Act as though those priorities were applied (in priority to Admitted Claims that are not Small Claim Creditors). Current Estimate of $420k.
The erroneous part is the suggestion that creditors whose debts are $300,000 or less are referred to as Small Claim Creditors, and that payment to them of 100 cents in the dollar was in accordance with the priorities set out in ss 556, 560 and 561 of the Corporations Act. As identified above, there is no question that the statements were misleading and were intentionally made to provide some justification for the differential treatment of Canstruct and the other unsecured creditors.
It is necessary to record that the Court was informed that Canstruct had reached an agreement with the administrators to expressly say to the Court, “We do not submit there was any deliberate misleading by the administrators, or deliberate misrepresentation to the creditors.” Be that as it may, the administrators were parties to the action and were entitled to defend themselves as they saw fit. Even if they did not fully participate in the hearing, they were entitled to make submissions about any issue. They chose not to participate in any manner. That leaves it open for the Court to make any findings against them as the evidence discloses. However, in light of Canstruct’s submission, there is no reason to determine whether the statements were deliberately misleading. All that needs to be said has been articulated above.
In Sino Group, the Full Court dealt (at [62]) with the principles to be applied when determining whether an omission from a document given to creditors was false or misleading and can reasonably be expected to have been material to creditors deciding to vote in favour of a DOCA. Relevantly, the Court observed that it is the objective quality of the information that is to be assessed and not whether any person was, in fact, misled. Further, an omission (or in this case a misrepresentation) which can reasonably be expected to have been material to a creditor’s decision to vote in favour of a DOCA, may justify termination. In this context, “material” means something that was relevant and did affect, or might have affected, the decision to vote in favour of the DOCA.
It is worthy of remark that the operative effect of s 445D(1)(a) – (b) should not be underestimated. Like other statutory provisions which turn on behaviour which is misleading, its scope is wide and not limited by the intention of the maker of a statement, or to misstatements which are untrue, or which actually cause creditors to vote in favour of a resolution to enter into a DOCA. Whilst the misleading statements must be of a quality that they can reasonably be expected to have been relevant and might have affected the outcome, that is the limit of any causality. Further, as was identified in Sino Group (at [62]) the test of what is material is also objective and the omission (or misleading information) does not need to be material to all creditors. There, the Court identified that, though the intention or conduct of the person who made the statement in question is not relevant to the inquiry, where it is apparent that the misleading statement was objectively intended to influence a decision to vote in favour of a DOCA, it is easier to draw the inference that it was material to the creditors’ decision.
The fact that the information in this case was contained in the 14 March 2023 Report, being a report written by the administrators, is objectively likely to accord it greater weight. Whilst it is undoubted that the creditors were likely to vote in favour of the DOCA because they were offered a return of 100 cents in the dollar, the assertion that they would otherwise be entitled to that on a winding up was likely to give them comfort. Additionally, the erroneous statement that the differential payments were the same as found in the Corporations Act on a winding up, was likely to have provided succour to the creditors in the sense that they would perceive the existence of a justification or fairness for their favoured position. It can, and should be, concluded that the statements were material to the creditors’ decisions to vote in favour of the DOCA.
Here, the elements of subsection (b) are satisfied. The information in the 14 March 2023 Report was false or misleading and it can be reasonably expected to have been material to creditors in deciding whether to vote in favour of the DOCA. It was in a document given to the creditors which accompanied the notice of the meeting at which the resolution was passed. On that basis, the discretion to terminate the DOCA arises under s 445D(1)(b) as well.
Should the DOCA be terminated under s 445D(1)(c)?
Canstruct also relied upon the existence of a material omission from the 14 March 2023 Report as a ground for setting the DOCA aside pursuant to s 445D(1)(c). That subsection is set out above.
The first asserted omission was that of the real and intended purpose of the DOCA, being to circumvent the payment of the adjudicated amount to Canstruct, save for 10 cents in the dollar, whilst continuing with the maintenance of the project. On the basis of the findings made earlier in these reasons, that true purpose of the DOCA was omitted from the 14 March 2023 Report. Undoubtedly, that would be material to the creditors in deciding whether to vote in favour of the resolution to enter into the DOCA. If told of the true purpose, the creditors would have been likely to have questioned the propriety of entering into the DOCA, and may well have been concerned as to what adverse consequences might arise in the future, including that it might be set aside. The omission was in a document within the scope of subsection (c). Again, the discretion to terminate the DOCA arises in this way as well.
The second omission relied upon was the absence of a statement to the effect that there existed a real question as to whether Project Sea Dragon had been trading whilst insolvent for a number of years, that this was a matter which a liquidator might properly investigate, and that there were avenues of recovery from both Seafarms Group Limited and Project Sea Dragon’s directors of the amount of the debts incurred whilst the company was insolvent and which have not been satisfied. The materiality of that alleged omission was said to be heightened by reason of the inclusion of statements in the 14 March 2023 Report which were to the effect that Project Sea Dragon was solvent until 13 February 2023 as a consequence of Seafarms Group Limited’s ongoing financial support, that it was only when the support was withdrawn on 13 February 2023 that Project Sea Dragon became insolvent, and that nothing could be recovered if an insolvent trading claim was pursued.
Based on the findings above, there is no question that the matters identified existed and were not included in the 14 March 2023 Report. There are more than reasonable grounds to support the existence of a liquidator’s claim to recover from Seafarms Group Limited and Project Sea Dragon’s directors amounts equal to the debts incurred whilst Project Sea Dragon was insolvent, and those recoveries are possibly extensive. In this respect, the 14 March 2023 Report vastly understated the potential for recovery from insolvent trading claims and no qualifying statements were made by the administrators which could justify the absence of any reference to that potential. That is especially true in circumstances where the contrary information was advanced.
The third alleged omission was that the creditors were not told:
that the real purpose of the discrimination in distribution to the arms-length trade creditors, was to bribe the majority in number of trade creditors to vote “yes”, so as to achieve the majorities required to oppose [sic] the DOCA.
In broad terms and correcting the error in Canstruct’s written submissions, this asserts that the 14 March 2023 Report did not identify that the reason for the substantial difference in the treatment between Canstruct and the other unrelated, unsecured creditors, was to provide an irresistible incentive or bribe for those other creditors to vote in favour of the DOCA. There is force in this and its materiality was increased by reason of the serious misstatements made in the 14 March 2023 Report which suggested that the discrimination was justifiable by reference to the priorities which arise in a liquidation. For similar reasons to those referred to above in relation to the failure to identify the true purpose of the DOCA, this omission was also misleading and material to the creditors’ decision whether to vote in favour of the DOCA. It too, enlivens the discretion to terminate the DOCA in this case.
The fourth omission relied upon was that the creditors should have been told that if the DOCA was approved and Project Sea Dragon was returned to the directors’ control, it would continue to incur debts and no arrangement was in place for meeting them. The evidence indicates that Seafarms Group Limited would resume its previous method of funding Project Sea Dragon, being one which did not require it to provide funding, to give any assurance of funding, or to make any commitment at all. In other words, Project Sea Dragon would continue with the financial arrangements which it had in place prior to the VA and DOCA process. It is correct that an omission was made in relation to Project Sea Dragon’s future financial circumstances following the completion of the DOCA.
In this context it is relevant that, at the second meeting of creditors, Mr Guthrie from Thomson Geer, the solicitors for Canstruct, inquired of the administrators as to how Project Sea Dragon would be able to meet its ongoing debts if the DOCA were passed and what information about that funding would be available. There was no substantive response to that questioning and Mr Dyer on behalf of Seafarms Group Limited or Project Sea Dragon declined to provide any information.
Despite that omission, it was not material in the circumstances. It is true that the creditors were not told that, if Project Sea Dragon were returned to the control of the directors through the DOCA process, it would resume an insolvent position in the absence of any sufficient arrangement for meeting its future debts. However, it is unclear why that should be of concern to Project Sea Dragon creditors or why it would impact their decision to vote in favour of the DOCA. Those unrelated unsecured creditors, which were to receive more than 100 cents in the dollar, were not concerned to know how the company would operate into the future. Their concern would arise, if at all, if those creditors were to re-engage with Project Sea Dragon in the future. Indeed, even Canstruct had no apparent commercial interest as it was unlikely to be engaged in any further commerce with Project Sea Dragon.
Therefore, the omission to inform the creditors of Project Sea Dragon’s future financial position was not material in the sense required by s 445D(1)(c). Despite that, the first three omissions relied upon are sufficient, either individually, collectively or in some combination, to further enliven the discretion to terminate the DOCA.
The exercise of the discretion
The manner in which s 445D operates is that the discretionary power is conditioned upon the satisfaction of a subjective fact, being the Court reaching the state of satisfaction required of any of the subsections. As indicated, that state of satisfaction has been reached in relation to subsections (b), (c), (e) and (f), and the discretion has been enlivened accordingly. However, that discretion is not to be exercised in a vacuum. In particular, it arises because the Court is satisfied that an event or events have occurred which have infected the DOCA process. That state of satisfaction is, of itself, a powerful consideration in the exercise of the discretion. For instance, the Court’s satisfaction that the DOCA is unfairly prejudicial to a major creditor is necessarily a significant factor to weigh in determining whether it should be terminated.
In this case, each of the conclusions that s 445D(1)(b), (c), (e) and (f) are satisfied are weighty considerations in favour of terminating the DOCA. Indeed, each or any combination of them support the exercise of the discretion to terminate.
A second consideration is the protection of the public interest. As concluded above, the financial and corporate arrangements which Seafarms Group Limited and Project Sea Dragon put in place effectively permitted an insolvent company to continue to trade and incur substantial expenditure. Whether intentional or not, the structure allowed a continuously insolvent company to operate over an extended period and accumulate substantial indebtedness to its related entities, and to unrelated entities. It was, therefore, in a position whereby it might incur a large debt which it determined it should not pay and, with the overwhelming voting power in value and resources of its related entities, it could use the VA and DOCA process to cause that debt to be released, and then continue business as before. On the basis of the first and third defendants’ submissions put to this Court, Project Sea Dragon might operate in this manner without risk of liability to its directors or holding company for insolvent trading.
On any view, Project Sea Dragon was, and is, essentially, a stalking horse for undertaking high risk business and one which presents a real risk to others who might deal with it. Were the Court not to terminate the DOCA and wind it up, it would be allowed to continue to trade whilst insolvent which is contrary to the public interest.
Further, as a result of the conclusion that Project Sea Dragon has been trading whilst insolvent since June 2020, several causes of action against its directors and Seafarms Group Limited might exist. There is a realistic possibility that they will provide a substantial return which will be available to be used to meet the claims of the two remaining creditors. As Canstruct submitted, it does not accord with the protection of the public interest or the proper administration of Pt 5.3A, to permit those whose conduct deserves to be investigated to use their voting power, via related entities, to avoid investigation. It is also correct that Seafarms Group Limited, which voted in favour of the DOCA, did not do so because it enhanced its recovery position as a creditor. On the information which was apparently before the meeting, it would receive nothing and its $62 million debt would be released. Self-evidently, it voted to advance the group’s corporate interest rather than its interest as a creditor. The group’s interest is likely to have included the avoidance of the investigations which might arise on liquidation, particularly the possibility of actions against Seafarms Group Limited and the directors of Project Sea Dragon. In this manner, the voting on the DOCA was influenced by entities who were potentially at risk if the DOCA was not passed. On this topic, the observations of Santow J in Bathurst City Council v Event Management Specialist Pty Ltd (2001) 36 ACSR 732 are relevant. There, his Honour acknowledged (at 734 [6]) that the law did not prevent creditors voting at the second meeting despite having a particular interest in the outcome. Nevertheless, a court is entitled to examine the manner in which interested creditors voted. His Honour observed at 735 [8] – [9]:
Compare two examples. In the first, assume some creditors have an interest in promoting the DCA because they need money immediately. Whereas, others can more easily wait and would do so if this were more likely to produce a larger percentage in the dollar. That is a difference in interest. But it is ordinarily not of such degree as to cause the court to scrutinise the voting result more sceptically. The second case is where one group favours a DCA for truly extraneous reason — it wishes for example to resist recovery of preferential payments, or insolvent trading or, as is sometimes overlooked, breach of directorial duty where any criminal sanctions are not avoidable by a DCA. The other creditors are not potential defendants to recovery actions. They stand to benefit from such actions, if they are successful and there are assets to meet any judgment. Meantime those actions must be funded. The administrator will often know less about the legal case against those potential defendants than they do. Yet it is the administrator who must report to the meeting of creditors under tight time tables on the scope for successful recovery, at a meeting which may be stacked with such potential defendants who also claim as creditors. A good example was J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691.
In the present case, there is material before me to indicate that the vote was significantly influenced by a group of creditors with just such an extraneous interest. This was first when the DCA was originally put to the vote and then when it was put again following institution of these proceedings. The vote appears to have been influenced by the votes of those potentially vulnerable to such recovery actions. On the plaintiff’s calculation, if their votes were excluded (notionally as there is no warrant in the Corporations Law otherwise to do so) there would no longer be a majority of creditors in dollar amount in favour of the DCA. There would however still be a majority in number of creditors, many of whom had no such extraneous interest. That factor necessarily reduces the weight to be given to an affirmative vote in deciding how the court’s discretion should be exercised, though not by itself decisive.
To similar effect are the observations of the Full Court in Sino Group, where it was said at [143]:
In the circumstances of this case, where solvency is uncertain and taking into account the manner in which the company came to execute the DOCA against a background of an extant arbitration, where there had been a finding in relation to liability against Gymbaroo and the damages phase of the proceedings was pending, and where the trigger for placing the company into administration was the calling up of a debt to a Related Party Creditor, a debt which was very shortly thereafter subordinated and deferred, the public interest weighs in favour of terminating the DOCA to enable the affairs of the company to be investigated by a liquidator, including in relation to the dispute as to the quantum of the debt to the Sino Creditors.
Here, the votes of the debts by value were substantially increased by the related party creditors whose interests must have been influenced by the potential recovery actions which might occur in a winding up. If the votes of the related parties were notionally excluded, the value of the votes in favour of the DOCA was only $510,420 whereas the value of the vote against was $13.9 million. Indeed, even if only Seafarms Group Limited’s vote was excluded, the vote on the DOCA would have failed.
There is, in this case, no need to be concerned with the claims of the smaller unrelated creditors in the exercise of the discretion. The Court was informed that, despite the current injunction in place preventing the administrators from using the Deed Fund to make payments under the Deed, those creditors have been paid by Seafarms Group Limited in any event. That does not apply to Freehills, whose debt has been paid down to some extent, though the sum of $242,000 remains outstanding.
Nevertheless, a significant consideration is that the result of the DOCA is that Project Sea Dragon would resume trading albeit that it is insolvent. That is an especially good reason to set the DOCA aside. Save in the most extreme case, if any, courts should not permit insolvent companies to continue to engage in business. The first and third defendants submitted that Project Sea Dragon would have a greater financial backing from Seafarms Group Limited in the future such that insolvency will be avoided. Reference was made to the minutes of a meeting of Seafarms Group Limited of 21 June 2023, where it was “noted” that, since the administration of Project Sea Dragon had been completed, Seafarms Group Limited had paid an amount of $4.54 million to Project Sea Dragon in respect of the project and the Deed Fund. It was also noted that Seafarms Group Limited was “committed to continue its efforts to secure a future for [Project Sea Dragon] and the Project” and that it “wishe[d] to continue to raise further funds for the purpose of progressing the Project”. It was also “resolved” that Seafarms Group Limited “has sufficient reserves and will remain committed to the development and support of [Project Sea Dragon] and the Project” and that it would “continue its efforts of raising funds for the purpose of progressing the Project”. None of that suggests that Seafarms Group Limited has adopted any stance in relation to this issue which is different to that which it had prior to the VA and DOCA process. In the course of cross-examination, Mr Dyer agreed that Seafarms Group Limited’s intention was to resume funding after the DOCA and he did not suggest that those resumed funding arrangements would be any different to those which previously existed. He gave the following evidence:
All right. And was it discussed that, upon that occurring, then Seafarm, the parent, would resume funding of the subsidiary?---To continue operations, yes.
So it was a cessation of funding to tip the subsidiary into administration but with the expectation that, upon the DOCA being signed, the parent would resume funding?---Yes.
Therefore, the intention to fund into the future carried no greater assuredness than was the position prior to entry into the DOCA. That reinforces the conclusion that winding up Project Sea Dragon would be in the public interest.
Another matter relied upon was that, if the DOCA is terminated, then Project Sea Dragon will proceed to liquidation as if it was placed in voluntary liquidation under s 491 of the Corporations Act, without the directors having made a declaration of solvency under s 494: see s 446AA of the Corporations Act. In that situation it does not necessarily follow that that the only option for the liquidators is to cease the business and sell it. The liquidators are at liberty to appoint an administrator with a view to Seafarms Group Limited making a further DOCA proposal. Any further DOCA might be fair and not contravene the provisions of Pt 5.3A as does the present. Alternatively, the liquidation might be stayed if Project Sea Dragon is able to establish that it is solvent after rearranging its financial structures. In this way, the termination of the DOCA does not ineluctably lead to the cessation of Project Sea Dragon’s business. Whilst it may be true that a future liquidator might seek to appoint an administrator rather than pursue the winding up, any such decision would necessarily need to consider the issues raised in these reasons. They would include the apparent availability of substantial claims against Seafarms Group Limited and Project Sea Dragon’s directors. Whether a liquidator would seek the appointment in those circumstances may be questionable, but if that step is taken it must follow a proper analysis of all of the circumstances. The mere possibility is not a reason for not exercising the discretion to wind up Project Sea Dragon in this case.
A further and not insignificant factor in this regard is that the only two remaining unrelated creditors are Canstruct and Freehills. Canstruct wishes to have the DOCA set aside and Freehills, which has been notified of the proceedings but did not attend or make submissions, has not opposed that order. That has the result that the only known desire of the remaining unrelated creditors is for the DOCA to be set aside.
Given the foregoing, the relevant considerations weigh heavily in favour of terminating the DOCA and winding up Project Sea Dragon. In this case, the findings that the DOCA was an abuse of Pt 5.3A, that it was unfairly prejudicial to Canstruct, was entered into after false or misleading information was given to the creditors, and after relevant information was not given to them, show that the whole process was flawed. The setting aside of the DOCA is likely to lead to recovery actions against Seafarms Group Limited and Project Sea Dragon which have reasonable chances of success and, importantly, it will prevent Seafarms Group Limited and the Seafarms Group from using insolvent companies to assume the risks of its business to the potential wider prejudice of future creditors.
Canstruct is entitled to orders that the DOCA entered into on 13 March 2023 be set aside and that Project Sea Dragon be wound up.
THE RELIEF
On any of the bases for relief relied upon, Canstruct is entitled to relief which it seeks. In the first instance, pursuant to either s 447A or s 445D of the Corporations Act, the DOCA dated 23 March 2023 should be set aside and the administration which commenced on 14 February 2023 should be terminated.
Canstruct also applied pursuant to s 75-41 of the IPS for an order setting aside the resolution of creditors on 21 March 2023 that Project Sea Dragon execute the DOCA. There is a significant overlap between the considerations under that section and the earlier answered question of whether the DOCA should be set aside under s 445D(1)(f) of the Corporations Act. For the reasons which are given above, Canstruct is also entitled to the order it seeks under s 75-41 of the IPS.
Further, as Project Sea Dragon was and is insolvent, it ought now be wound up in insolvency. In that respect, Mr Robert William Hutson and Mr David Martin Johnstone have both consented to act as liquidators and it is appropriate that they be appointed joint and several liquidators of Project Sea Dragon.
Canstruct also seeks to be released from the undertaking given to the Court on 3 May 2023 in which it undertook to pay damages for any loss occasioned by the granting of the injunction restraining the administrators from completing the DOCA. In the circumstances of Canstruct’s success, there is no reason why it should not be released.
STAY
In the course of the hearing, it was accepted that, regardless of the outcome, it would be appropriate to grant an interim stay so that the unsuccessful party might consider their position in relation to an appeal. That is appropriate in these particular circumstances where the position of whichever party that was unsuccessful at first instance, would be irrevocably damaged were a stay not granted. In those circumstances, the orders which are made are to be stayed until the expiry of the appeal period, unless extended.
I certify that the preceding two hundred and sixty-six (266) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington. Associate:
Dated: 22 February 2024
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