Clifford Stuart Rocke as administrator of Noahs Rosehill Waters Pty Ltd (Subject to Deed of Company Arrangement) v Rosehill Land Investments Pty Ltd
[2019] WASC 489
•10 MARCH 2020
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: CLIFFORD STUART ROCKE as administrator of NOAHS ROSEHILL WATERS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) -v- ROSEHILL LAND INVESTMENTS PTY LTD [2019] WASC 489
CORAM: MASTER SANDERSON
HEARD: 23 DECEMBER 2019
DELIVERED : 23 DECEMBER 2019
PUBLISHED : 10 MARCH 2020
FILE NO/S: COR 237 of 2019
BETWEEN: CLIFFORD STUART ROCKE as administrator of NOAHS ROSEHILL WATERS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
JEREMY JOSEPH NIPPS as administrators of NOAHS ROSEHILL WATERS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Plaintiffs
AND
ROSEHILL LAND INVESTMENTS PTY LTD
Defendant
Catchwords:
Corporate insolvency - Application for order compulsorily acquiring shares - Application by defendant for adjournment - Turns on own facts
Legislation:
Corporations Act 2001 (Cth)
Result:
Adjournment refused
Category: B
Representation:
Counsel:
| Plaintiffs | : | W C J Zappia |
| Defendant | : | J A Robertson |
Solicitors:
| Plaintiffs | : | Lavan |
| Defendant | : | Williams & Hughes |
Case(s) referred to in decision(s):
Nil
MASTER SANDERSON:
On 9 December 2019 the plaintiffs, as the liquidators of Noahs Rosehill Waters Pty Ltd, filed an originating process seeking orders pursuant to s 444GA and s 447A(1) of the Corporations Act 2001 (Cth) and s 90‑15 of sch 2 of the Corporations Act 2001. Essentially the plaintiffs sought leave to transfer 490 issued shares in Noahs Rosehill Waters Pty Ltd (NRWPL) held by Rosehill Land Investments Pty Ltd (RLIPL) to Hartman No 1 Pty Ltd. The application was initially supported by an affidavit of Clifford Stuart Rocke sworn 9 December 2019 (First Rocke affidavit). The plaintiffs' position was supported by two further affidavits of Mr Rocke both sworn 18 December 2019 (Second Rocke affidavit and Third Rocke affidavit). Confidentiality orders were made with respect to all of these affidavits.
On 10 December 2019 I made programming orders which essentially allowed for any interested party to take part in the hearing of the substantive application. On 12 December 2019 RLIPL entered an appearance. They were subsequently joined as first defendant to these proceedings. After the filing of the first defendant's appearance four further affidavits of Mr Rocke were filed – two on 18 December 2019, one on 19 December 2019 and one on 20 December 2019. The defendant filed and relied upon four affidavits. These were the affidavit of John Andrew Robertson sworn 20 December 2019, the affidavit of Donald Victor Eftos sworn 22 December 2019, the affidavit of Mr Ran Mo sworn 22 December 2019 and the affidavit of Travis Styles sworn 22 December 2019. For their part the plaintiffs relied on an affidavit of Craig Carol sworn 20 December 2019. Both parties filed written submissions.
The plaintiffs' application as brought to comply with the requirements of a Deed of Company Arrangement (DOCA) entered into between NRWPL and its creditors. The DOCA proponent was Alceon Group No 50 Pty Ltd (Alceon 50) which was a first ranking secured creditor of NRWPL.
These reasons concern my refusal of the defendant's application to adjourn the plaintiffs' application. When I dismissed the defendant's application I indicated I would provide written reasons for that decision. These are those reasons. Having dismissed the defendant's application I made orders as sought by the plaintiffs. Although not consenting to those orders, counsel for the defendant acknowledged once the adjournment application was dismissed there was no reason why the orders sought by the plaintiff should not be made.
Essentially it was the defendants' position that given time it could arrange finance to pay out Alecon 50 and provide a better outcome than was anticipated by the DOCA. It was not quite clear how long the adjournment would be. During the course of his submissions I discussed this issue with counsel for the defendant. Given the time of the year, the amount of money involved and matters which still needed to be resolved between the defendant and potential lenders an adjournment of at least four weeks was likely. Even that was a very optimistic timeframe. But for the purposes of the application I was prepared to accept an adjournment of four weeks was the order sought by the defendant.
As I have indicated above the first three of Mr Rocke's affidavits were confidential. No confidentiality orders were made with respect to his subsequent affidavits. During the course of the hearing counsel for the plaintiffs did provide to counsel for the defendant a copy of one of Mr Rocke's confidential affidavits. Other than to refer to Mr Rocke's affidavits to background the application, it is not necessary nor appropriate for me to go into the affidavits in detail. The focus of the hearing was the position of the defendant – could it credibly maintain that if an adjournment was granted the outcome for the shareholders of NRWPL would be better than the outcome under the DOCA. There were two aspects of the plaintiffs' evidence which were important and I will come to these below. But the real focus in this application was on the evidence led by the defendant.
By way of background NRWPL was a property development company whose primary activity was the completion and development of property situated 16 kms north east of Perth CBD on West Parade in Sough Guildford. The property was developed for residential housing and was known as Rosehill Waters Estate. The project was initially financed by Westpac with the first sale of lots occurring in November 2016. In December 2016 NRWPL refinanced the Westpac facility from funding obtained by Alceon 50. The funding was secured by a first ranking mortgage over the project.[1]
[1] Plaintiff's outline of submissions filed 18 December 2019 par 9 – 11.
The project was a six stage development project.[2] The plaintiffs were appointed voluntary administrators on 17 October 2019.[3] At that time stages one and two had been completed and the titles for these lots had been issued. Some rectification work was being undertaken. Stage three was nearing completion with titling and some civil works still required. Stages four to six were undeveloped and no development approval had been obtained.[4]
[2] Plaintiff's outline of submissions filed 18 December 2019 par 12.
[3] First Rocke affidavit par 9; Annexure CSR1.
[4] Plaintiff's outline of submissions filed 18 December 2019 par 13.
During their tenure as administrators the plaintiffs sought expressions of interest for the recapitalisation or purchase of NRWPL's business. The administrators received nine offers to purchase some or all of NRWPL's assets outright. That would have resulted in NRWPL being placed in liquidation. Two offers were received – one being from Alceon 50 – for the recapitalisation of NRWPL via a deed of company arrangement. Only four of the offers to purchase NRWPL's assets were for all of the assets and none of these would have resulted in discharge of the secured debt in full. On that basis the plaintiffs recommended acceptance of the Alceon 50 proposal as being the best available.[5]
[5] Plaintiff's outline of submissions filed 18 December 2019 par 15 – 19.
It is unnecessary to go into the terms of the DOCA other than to say Alceon 50 had the right to demand the transfer of all the shares in NRWPL from existing shareholders and the removal and replacement of the existing directors. Upon execution of the DOCA, Alceon 50 exercised its rights to require the removal and replacement of the directors of NRWPL.[6] The plaintiffs have given effect to that requirement. Alceon 50 also demanded that 490 of the 1,000 ordinary shares in NRWPL be transferred to its nominee. Rather than there be a prorated reduction in shareholding of the existing shareholders, Alceon 50 has requested that only the shares held by RLIPL (which happens to hold exactly 490 shares) be transferred to its nominee, Hartman No 1 Pty Ltd. Alceon 50 justified this approach because it would result in RLIPL no longer having any ongoing relationship with NRWPL. The other 510 shares are held by the second ranking secured creditor and its related entities.[7]
[6] Plaintiff's outline of submissions filed 18 December 2019 par 21, 23.
[7] Plaintiff's outline of submissions filed 18 December 2019 par 24 – 25.
Although as I indicated above, these reasons concern why I refused the defendant's application for an adjournment. For the sake of completeness I should set out the relevant principles. In par 29 through to 37 of his written submissions, counsel for the plaintiffs deals with the leading authority on s 444GA(3) and the relevant principles. I can do no better than quote these paragraphs. They read as follows:
29Section 444GA(1) of the CA provides that a deed administrator may transfer the shares in a company either with the consent of the shareholders or with the leave of the Court.
30 This Court's discretion to grant leave is only enlivened if it is satisfied that the interests of the shareholders are not unfairly prejudiced by the transfer of their shares: see 444GA(3).
31 The key principles on an application invoking s.444GA are relatively settled. They were recently surveyed and distilled by Vaughan J in Centennial Mining Ltd [[2019] WASC 411, 14 ‑ 22] (subject to deed of company arrangement) as follows.
32 First, the requirement that the transfer not unfairly prejudice the interests of members directs the court to consider the impact of compulsory transfer on shareholders where there may be some residual value in the company.
33 Second, the question of unfairness only arises if prejudice is established. If the company has no residual value to the members – such that the shares have no value – and the members are unlikely to receive any distribution in a winding up, it is difficult to see how the members could suffer prejudice. That, of course, assumes that winding up is the only practicable alternative to the DOCA proposal of which the transfer is an aspect.
34 Third, one relevant consideration is whether a full and accurate description of the proposal has been given to shareholders and whether shareholders have been given a full opportunity to appear in opposition to the application.
35Fourth, while there is an evidentiary onus on the shareholders to raise any consideration telling against the exercise of the discretion, the ultimate onus of satisfying the court that the discretion should be exercised remains on the deed administrator. This requires the deed administrator to satisfy the court that the transfer would not unfairly prejudice the interests of the members of the company.
36 Fifth, whether or not 'unfair prejudice' will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to existing shareholders if leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company will continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer the shares is granted.
37 Sixth, an assessment that there was no residual value and there would be no return to creditors might not in every case, be sufficient to allay concerns about unfair prejudice to members. There may, for example, be a potential benefit to shareholders from further investigation being carried out by a liquidator.
In its application for an adjournment the defendant argued that given time it could establish that by paying out Alceon 50 it could demonstrate there was residual value in the shares the plaintiffs wished to transfer. There was a related but subsidiary argument that Alceon 50 was opportunistically using the DOCA process to both improve its position as a creditor and to take for itself the benefit of continuing development of the project: See par 5 of the defendants' submissions. Although it was not directly alleged Alceon 50 was acting in bad faith that was certainly the tenor of both the written and oral submissions made by counsel for the defendant. In fact there was nothing at all in the evidence to suggest Alceon 50 had acted inappropriately let alone in bad faith. Throughout Alceon 50 had acted consistent with the loan agreement. The consequences for NRWPL may have been unfortunate but there can be no suggestion that by enforcing the terms of a contract Alceon 50 acted in bad faith.
The starting point of the defendant's submissions was that the plaintiffs had undervalued the project. The plaintiffs' valuation was contained in the affidavit of Mr Carol. Mr Carol is an experienced valuer who first prepared a valuation report in August 2019. He prepared a supplementary valuation report dated 5 December 2019. Both reports appear as attachments to his affidavit. For the August 2019 report Mr Carol was asked to provide a valuation of the various components that make up the development including residual stock lots on an 'as if complete' basis and the residual land. His total aggregate value exclusive of GST was $101,280,000.[8] In addition Mr Carol undertook a discounted cashflow valuation with a prescribed internal rate of return of 16%. That gave a value of $53,300,000 exclusive of GST. Mr Carol says that figure constitutes a value that any incoming purchaser may pay if the whole development was offered for sale as a single transaction. The assessment takes into account selling costs, holding costs, project timeframe, any outstanding costs, profit and risk that any purchaser would incur in order to achieve the total aggregate value.[9] When he undertook the December valuation Mr Carol came to a slightly higher figure of $55,000,000.[10]
[8] Affidavit of Craig Carroll sworn 20 December 2019 par 6.
[9] Affidavit of Craig Carroll sworn 20 December 2019 par 8.
[10] Affidavit of Craig Carroll sworn 20 December 2019 par 10.
Mr Eftos is also a very experienced valuer. At par 5 of his affidavit to says he agrees with Mr Carol that the gross realisations market value for the project is $101,280,000 exclusive of GST. However, he does not agree that a discounted cashflow analysis is an appropriate method of valuation. He prefers what he terms a 'static valuation approach'. This approach he says 'is based on a snapshot of the value of a property at a particular point in time taking into account current prices, costs and market conditions using current sales rates to determine value of the site after allowing for a profit and risk an entrepreneur would be prepared to accept knowing sale prices and sale volumes without the uncertainties of development and construction that has already been completed': See par 8 of Mr Eftos' affidavit. Using that approach Mr Eftos puts the value of the project at $75,000,000.[11]
[11] Affidavit of Donald Victor Eftos sworn 22 December 2019 par 13.
Both valuers have undertaken what appears to be a thorough analysis of the project using conventional valuation principles. It is not possible nor appropriate to prefer the evidence of one valuer over the other. For the purposes of this application I was prepared to accept it was arguable the value of the project was $75,000,000. I was satisfied it was proper and appropriate in the circumstances of this case to adopt the position most favourable to the defendant.
The affidavit of Mr Ran Mo sets out his efforts to obtain finance for the project. He is of the view that it would be possible to obtain finance in an amount of $65,000,000. The affidavit of Mr Styles, who is a finance broker, supports that view. It is clear from the evidence of both Mr Styles and Mr Ran Mo that the availability of finance was not certain. There were a number of matters which needed to be completed before any offer of finance was made. Once again, for the purposes of this application I was prepared to accept there was a real prospect that finance in an amount of $65,000,000 would be available. In passing I would note this amount exceeded the valuation put on the project by Mr Carol and was concerningly close to the valuation of the project by Mr Eftos.
In the Second Rocke affidavit, Mr Rocke puts the total indebtedness of the project at just under $100,000,000.[12] That includes secured creditors and unsecured creditors. That figure is dangerously close to the aggregate valuation agreed by both Mr Carol and Mr Eftos. Assuming then that the defendant could obtain funding in an amount of $65,000,000 there was no explanation as to how the demands of unsecured creditors would be met and how funds would be available to continue the development. Really all the defendant was looking to do was to pay out Alceon 50 and then set about solving the remaining problems. It is difficult to believe that replacing one financier with another would not result in the same problems as presently exist, perhaps with a slightly different complexion.
[12] Second Rocke affidavit; Annexure CSR19 (cl 4.9).
In the end what was determinative of my decision was the failure of the defendant to present a coherent and comprehensive alternative to the plaintiffs' application. I appreciate the defendant had to put forward its position in haste at a difficult time of the year. But the fact remains it was not possible, taking the defendant's position as a whole, to see a coherent plan which could, in the end, show a return to shareholders. The defendant's proposals, taken at their best, were highly speculative and most unlikely to yield a significant return to shareholders.
Against that was the prospect Alceon 50 may take the option of terminating the DOCA and forcing NRWPL into liquidation. If that were to occur it is almost certain the realisation of the project would not return anything like the $75,000,000 anticipated by Mr Eftos.
In all the circumstances then I was satisfied it was not appropriate to adjourn this application. I was also satisfied it was appropriate to make orders under s 444GA.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CB
Associate to Master Sanderson10 MARCH 2020
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