MICHAEL OSCAR BASEDOW AS ADMINISTRATOR OF FIRST GROWTH FUNDS LTD (ADMINISTRATOR APPOINTED) - [2011] SASC 132

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
MICHAEL OSCAR BASEDOW AS ADMINISTRATOR OF FIRST GROWTH FUNDS LTD (ADMINISTRATOR APPOINTED)
[2011] SASC 132
Reasons of Judge Burley a Master of the Supreme Court
16 August 2011
CORPORATIONS
Application for directions by Administrator – consideration of assets of company – whether approval should be given to dispose of certain assets prior to the second creditors meeting – difficulty of attributing value to assets – some assets consisted irrecoverable debts – agreements entered into by Administrator subject to the Court’s direction.
Held: directions sought granted.
Corporations Act 2001 437A(1)(c) and 447D(1), referred to.
Brash Holdings Ltd & Ors v Shafir Supreme Court of Victoria Practice Court (Unreported, 28 June 1994); Re eisa Ltd; Application of Love (2000) 35 ACSR 394, considered.

MICHAEL OSCAR BASEDOW AS ADMINISTRATOR OF FIRST GROWTH FUNDS LTD (ADMINISTRATOR APPOINTED)
[2011] SASC 132
JUDGE BURLEY:

In this matter the Administrator of First Growth Funds Ltd (“the company”) has applied for directions under s 447D(1) of the Corporations Act 2001. A declaration, purportedly pursuant to s 437A(1)(c) was also sought, but, for the reasons set out below, the Administrator’s application for directions pursuant to s 447D(1) was the appropriate course to pursue. That section is as follows:
447D Administrator may seek directions
(1) The administrator of a company under administration, or of a deed of company arrangement, may apply to the Court for directions about a matter arising in connection with the performance or exercise of any of the administrator’s functions and powers.
The powers which the Administrator wishes to exercise are those contained in s 437A(1)(c) of the Act, namely to dispose of certain assets of the company. The second creditor’s meeting has not yet been called. The convening period for that meeting is soon to expire and the Administrator intends to apply for an extension of the convening period.
This application was made in circumstances of urgency. On 2 August 2011, the Administrator entered into a Deed of Assignment with Noble Investments Superannuation Fund Pty Ltd (“Noble”), the secured creditor of the company. That agreement provides for the assignment of certain debts (totalling nearly $12 million) owed to the company by three of its subsidiaries to Noble Investments.
In addition, on the same day, a Share Sale and Purchase Agreement was entered into whereby the company has agreed to sell to Carbon Value Pty Ltd its shareholding in its three subsidiaries and an additional company (“Venture”) in respect of which it owns 50 per cent of the issued shares. The consideration in each instance is $1.
The circumstances of urgency arose because both the assignment and the share transfer agreement contain the following provision:
2.1Settlement … is subject to the following condition (Condition) being satisfied by 8 August 2011:
(a)The Administrator obtaining:
(i)directions from the Court pursuant to section 447D of the Corporations Act that he is entitled to cause the Assignor to complete the assignment of the Debts under this Deed of Assignment … and a declaration that he is empowered to dispose of the property of the Assignor which is to be transferred pursuant to this Deed without convening a general meeting of the members of the Assignor; or
(ii)confirmation from the Court that the above is a commercial decision for the Administrator to determine.
This application was issued on 3 August 2011 and set down for urgent hearing on 5 August 2011. Argument was unable to be completed on that day, so the application was adjourned to 8 August 2011. On that occasion, Mr Ryder, counsel for the Administrator, completed his submissions and I reserved my decision. On that day I announced my decision to give the directions sought. These are my reasons for that decision.
For the purposes of this application, it was necessary to consider two asset sources of the company: assets described as “carbon assets”, and the debts owing to the company which are the subject of the assignment agreement referred to above. At paragraph 34 of his affidavit sworn on 3 August 2011 (FDN2), the Administrator states that he has formed the view that the company is not in a position to trade or sell the company’s assets on the open market. He has expressed the view that the “true value of the company is in its loan accounts and not in its shares in subsidiaries and related entities”. The affidavit material supports that opinion. In particular, I have been provided with three consecutive reports prepared by a Mr Tyndall which sets out the nature of the carbon assets. It is not necessary to go into detail in relation to the facts referred to by Mr Tyndall and the opinions that he has expressed. It is sufficient to say that, to the extent that there are carbon assets, it is impossible now for the Administrator to dispose of same because it is equally impossible to state with any degree of certainty whether or not the potential of those assets will ever be realised. I should also mention that if the carbon assets were to be maintained by the company, the sum of approximately $35,000 per week is required to be expended to maintain that asset. The sum could be even higher, depending on the circumstances. This is apparent both from Mr Tyndall’s reports and the affidavit evidence adduced by the Administrator. The company has no income and consequently is not in a position to maintain the required payments. In those circumstances it seems to me that it would be impossible for the Administrator to maintain those assets.
As I understand it, the assignment and share transfer agreements are interdependent and it is for this reason that the questions of whether or not the carbon assets have any value and whether or not such an asset could ever be realised is a material consideration on this application. Noble is prepared to purchase the debts owing to the company on the basis that, as part of the deal, the company shareholding in its subsidiaries and Venture are transferred to Carbon Value Pty Ltd. The Administrator wishes to have his agreement to assign the debt and to transfer the shares confirmed by the Court pursuant to the direction sought under s 447D of the Act because he considers that the debts owing by the subsidiaries and venture are irrecoverable and the carbon assets are not able to be disposed of.
At this stage it is appropriate to mention briefly my view as to the applicability of s 437A of the Act. Invoking that section, the Administrator sought a declaration that he could dispose of the property belonging to the company. Reference was made to the unreported decision of Beach J in Brash Holdings Ltd & Ors v Shafir.[1] In that matter the administrator sought a declaration that he was entitled to dispose of assets and, in the circumstances of the case, Beach J granted the declaration. Orders were sought in the alternative, including directions pursuant to s 447D(1) of the Act. In what I take to be an ex tempore decision, his Honour did not deal with the inter-relationship of s 437A(1) and s 447D of the Act. In my opinion, the two sections are inter-related in that the former confers certain powers of disposal on the administrator and the latter enables the administrator to seek the guidance of the Court in relation to the exercise of those powers. This is a case where the Administrator, in effect, seeks the approval of the Court in respect of the assignment and shares transfer agreement. He has taken care to include within each of those agreements a condition that the agreement is subject to a direction being given by the Court that it is appropriate for such an agreement to come into effect. The condition is a condition precedent and unless and until the Court’s direction is obtained, the agreement does not come into effect. In those circumstances, I think the proper approach is that taken by Bryson J in Re eisa Ltd; Application of Love.[2] In circumstances of urgency, his Honour considered the administrator’s application for directions pursuant to s 447D of the Act in relation to a Sale and Purchase Agreement. He said:[3]
I am satisfied that carrying out the Sale and Purchase Agreement is the appropriate response to the imperatives of eisa’s situation.
[1] Supreme Court of Victoria Practice Court (Unreported, 28 June 1994).
[2] (2000) 35 ACSR 394.
[3] At [13].
In this case the Administrator wishes to dispose of the carbon assets, which may not ever be able to be realised and may not ever achieve a value and the further asset consisting of debts owed to the company which appear to be irrecoverable. A proposal has been put to him, which has been reflected in the two agreements that were entered into, subject to the Court’s direction. The only benefit conferred by the two agreements is that the sum of $340,000 is to be paid for the assignment of debts which total nearly $12 million but which, on the evidence before me, almost certainly are irrecoverable. The consideration of $340,000 is not payable all in cash. Approximately $140,000 is to be paid in cash and that happens to represent the total claims of priority creditors. The balance of approximately $200,000 is to be offset against a secured loan owed by the company to Noble amounting to, it is said, approximately $1.9 million. $500,000 of that $1.9 million consists of a presently unsupported claim for indemnity costs. Viewed in that light, I consider that whether the amount of the debt be $1.9 million or $1.4 million, the offset of $200,000 pursuant to the assignment agreement is the important consideration.
I have also considered whether accumulated losses sustained by the three wholly-owned subsidiaries of the company might, if retained by the parent company, constitute an asset in that the application of the losses would achieve a taxation benefit for the parent company. This was raised late in the hearing on 8 August. It appeared that the Administrator was of the view that no financial benefit could be derived by the company by retaining these debts in the subsidiaries. That has subsequently been confirmed by both email of 9 August 2011 sent to my Clerk and a subsequent affidavit sworn by the Administrator.
In all the circumstances, I thought it was appropriate for the Administrator to have entered into the assignment and share transfer agreement and accordingly I made the orders sought in the minutes of order provided to me.