Mighty River International v Bryan Hughes and Daniel Bredenkamp as Deed Administrators of Mesa Minerals Ltd (Subject to Deed of Company Arrangement) [No 2]

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION:   MIGHTY RIVER INTERNATIONAL -v- BRYAN HUGHES AND DANIEL BREDENKAMP AS DEED ADMINISTRATORS OF MESA MINERALS LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) [No 2] [2018] WASC 368
CORAM:   LE MIERE J
HEARD:   17, 18, 20, 25, 26 SEPTEMBER 2018
DELIVERED          :   29 NOVEMBER 2018
FILE NO/S:   COR 96 of 2017
MATTER:   Mesa Minerals Ltd (Subject to Deed of Company Arrangement)
BETWEEN:   MIGHTY RIVER INTERNATIONAL
Plaintiff
AND
BRYAN HUGHES AND DANIEL BREDENKAMP AS DEED ADMINISTRATORS OF MESA MINERALS LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
First Defendant
MESA MINERALS LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second Defendant
MINERAL RESOURCES LTD
Third Defendant

FILE NO/S: COR 242 of 2017
BETWEEN: BRYAN HUGHES AND DANIEL BREDENKAMP AS DEED ADMINISTRATORS OF MESA MINERALS LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
First Plaintiffs
MESA MINERALS LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second Plaintiff

Catchwords:

Corporations law - Voluntary administration - Deed of company arrangement - Whether administrators are justified and acted reasonably in negotiating deed of company arrangement - Whether administrators properly investigated claims of value the company has against other parties - Whether administrators properly investigated proof of debt given by a related party

Corporations law - Related party transactions - Whether deed of company arrangement is a related party transaction to which chapter 2E of the Corporations Act applies

Corporations law - ASX Listing Rule 10.1 - Whether transaction part of deed of company arrangement breaches ASX Listing Rule 10.1 - Whether such a finding should be made by the judge when the application of ASX Listing Rules is a matter for the ASX

Legislation:

Corporations Act 2001 (Cth), s 9, s 208, s 209. s 210, s 216, s 218, s 219, s 224, s 228, s 299, s 444G, s 447A, s 447D, s 491, s 1317H, s 1324, pt 5.3A, ch 2E
Insolvency Practice Schedule, s 90-15

Result:

COR 96 of 2017 - Application dismissed
COR 242 of 2017 - Application allowed

Category: A

Representation:

COR 96 of 2017

Counsel:

Plaintiff	:	Mr C R C Newlinds SC & Mr D Sulan & Mr P Gaffney
First Defendant	:	Mr M D Howard SC & Mr B C Gauntlett
Second Defendant	:	Mr M D Howard SC & Mr B C Gauntlett
Third Defendant	:	Mr S Penglis & Dr B Kremer

Solicitors:

Plaintiff	:	Nova Legal
First Defendant	:	Clayton Utz
Second Defendant	:	Clayton Utz
Third Defendant	:	Bennett + Co

COR 242 of 2017

Counsel:

First Plaintiffs	:	Mr M D Howard SC & Mr B C Gauntlett
Second Plaintiff	:	Mr M D Howard SC & Mr B C Gauntlett

Solicitors:

First Plaintiffs	:	Clayton Utz
Second Plaintiff	:	Clayton Utz

Case(s) referred to in decision(s):

Australian Securities and Investments Commission (ASIC) v Australian Investors Forum Pty Ltd [No 2] (2005) 53 ACSR 305
Chahwan v Euphoric Pty Ltd (2008) 245 ALR 780
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503
Deputy Commissioner of Taxation (NSW) v Mutton (1988) 12 NSWLR 104
In the Matter of AWA Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2014] NSWSC 249
Kennedy v Anti-discrimination Commission of the Northern Territory (2006) 226 FLR 34
Mighty River International Ltd v Hughes [2017] WASC 69
Mighty River International Ltd v Hughes [2017] WASCA 152
Mighty River International Ltd v Hughes [2018] HCA 38
Plan B Trustees Ltd v Parker [No 2] (2013) 11 ASTLR 242
R v Young (1999) 46 NSWLR 681
Re Ansett Australia Ltd and Korda (2002) 115 FCR 409
Re Boart Longyear Ltd [No 2] (2017) 122 ACSR 437
Re Owen; RiverCity Motorway Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) v Madden [No 3] (2012) 201 FCR 360

LE MIERE J:

Summary

There are two applications. First in time is COR 96 of 2017 in which the plaintiff, Mighty River International Ltd (Mighty River), seeks relief in relation to a deed of company arrangement between the second defendant, Mesa Minerals Ltd (Mesa), and the first defendants, Bryan Hughes and Daniel Bredenkamp, as deed administrators (the Administrators). Mighty River is a shareholder in Mesa. The third defendant is Mineral Resources Ltd (MRL). MRL is the major shareholder and creditor of Mesa.
Mighty River seeks a declaration that the deed of company arrangement is a related party transaction to which the provisions in ch 2E of the Corporations Act 2001 (Cth) apply. Mighty River also seeks an injunction under s 1324 of the Corporations Act preventing the Administrators performing or giving effect to the deed of company arrangement and that the deed be terminated. Mighty River also seeks an order that Mesa be wound up under s 491 of the Corporations Act.
The second proceeding is COR 242 of 2017 in which the plaintiffs, the Administrators and Mesa, seek directions pursuant to s 90‑15 of the Insolvency Practice Schedule to the effect that the Administrators are justified and acted reasonably in negotiating agreements outlined in a terms sheet executed by the Administrators, Mesa and Auvex Resources Ltd (Auvex), and are justified and will be acting reasonably by entering into, and giving effect to, the agreements outlined in the term sheet.
The Administrators seek alternative relief pursuant to s 447A of the Corporations Act that s 90‑15 of the Insolvency Practice Schedule is to operate in relation to the directions they seek. It is not necessary to further refer to that relief because s 90‑15 of the Insolvency Practice Schedule applies of its own force in this case.
For the reasons which follow the court will give the directions sought by the Administrators in COR 242 of 2017. Mighty River's claims in COR 96 of 2017 will be dismissed.

Mesa goes into voluntary administration

Mesa is a mining company whose key assets include a 50% joint venture interest in two manganese projects (the Joint Venture). MRL is the parent company of Mesa's joint venture partner, Auvex Resources Limited (Auvex), and holds approximately 59.4% of the issued share capital of Mesa. Mighty River holds approximately 13.53% of the issued share capital of Mesa.
On 13 July 2016 Mesa was placed into voluntary administration and the Administrators were appointed as administrators.

The original DOCA

The Administrators issued a report to creditors on 13 October 2016. The Administrators said that they had progressed their investigation into various matters including the use by MRL and other third parties of the company's port capacity at Utah Point and access rights to the Lot 7 load out facility and the Boodarie lease, the decisions not to commence operations at the Ant Hill and Sunday Hill manganese projects following the trial shipments, the debt owing by the company to MRL and related entities and the potential recovery actions available to a liquidator. The Administrators said they considered further investigations into those matters was required. The Administrators recommended that the creditors vote in favour of executing a proposed deed of company arrangement. The proposed deed was what is colloquially known as a holding DOCA, that is a deed of company arrangement that provides for the company to essentially be put into a holding pattern, with a moratorium on claims by its creditors, while its administrators pursue investigation of other means of reconstructing the company.
At the resumed second meeting of creditors on 20 October 2016 the creditors resolved, amongst other things, that the company enter into the proposed deed of company arrangement. On 3 November 2016 the Administrators and Mesa executed a deed entitled Deed of Company Arrangement ‑ Recapitalisation (the original DOCA). The deed provided that the Administrators were to carry on the administration of the company whilst seeking proposals to reconstruct the company, with a view to reaching a position where the company's securities might be requoted for trading on the ASX, including proposals for partial or full sale of the company's assets. The deed imposed a moratorium and deferral of debts until termination of the deed. The deed had a sunset date of 3 May 2017. The Administrators were required to report back to creditors with details of any proposals received prior to the expiry of the sunset date and convene a further meeting of creditors, at which creditors would make a decision on the future of the company.

Mighty River challenges original DOCA

On 16 November 2016 Mighty River commenced COR 247 of 2016 in this court. The defendants were the Administrators and Mesa. Mighty River sought declarations that the original DOCA was of no force and effect, and orders terminating or setting aside the original DOCA and setting aside the resolution passed by the creditors at the second meeting.
On 3 February 2017 MRL commenced COR 13 of 2017. The defendants were Mesa, the Administrators and Mighty River. MRL claimed that the original DOCA complied with pt 5.3A of the Corporations Act and alternatively, if there were any defects in the original DOCA then those defects should be cured under s 445G(2) and (3) of the Corporations Act.
On 16 March 2017 Master Sanderson dismissed Mighty River's claim in COR 247 of 2016: Mighty River International Ltd v Hughes [2017] WASC 69. The Master decided it was not necessary to make any orders in COR 13 of 2017. Mighty River unsuccessfully appealed to the Court of Appeal: Mighty River International Ltd v Hughes [2017] WASCA 152. Mighty River's appeal to the High Court was dismissed on 19 June 2018: Mighty River International Ltd v Hughes [2018] HCA 38.

Original DOCA varied

Meanwhile, the Administrators issued a report to creditors of 3 May 2017. The Administrators reported that they had continued to progress their investigations into the various matters previously identified as requiring further investigation and, based on information they had reviewed they considered the most promising claim to be the claim in respect of the use of the Boodarie lease. The Administrators said they had sought legal advice on each of those matters and had recently received high level, preliminary advice from their lawyers but as the advice was preliminary only they would be seeking a more definitive view. The Administrators said they had engaged PCF Capital to assist in the marketing and realisation of the company's assets. They had received offers for certain assets as well as for the recapitalisation and restructure of the company. The most significant of the offers received was for a recapitalisation and restructure of the company including its assets. That is a reference to what came to be referred to as the Norris proposal. The Administrators said that the options available to creditors included to vary the original DOCA to extend the sunset date by three months, that is to 3 August 2017, or to terminate the original DOCA and wind up the company. The Administrators recommended that the creditors vote to vary the original DOCA to extend the sunset date by three months.
At the third meeting of creditors on 11 May 2017 the creditors resolved that the company vary the original DOCA on the terms substantially outlined in the Administrators' report of 3 May 2017.
The original DOCA was varied on 18 May 2017 by a deed entitled Deed of Company Arrangement ‑ Variation (DOCA1) to give effect to the creditors' resolution.

Deed further varied

The Administrators issued a report to creditors of 3 August 2017. The Administrators reported on the progress of their investigations. They reported that based on the information they had reviewed, including information provided by Mighty River, they considered the most promising claim to be the claim in respect of the use of the Boodarie lease. They reported on the progress on their programme for realisation of assets. They referred to the Norris proposal. They said that in order for the proposal to be successfully implemented it required the approval of the company's joint venture partner, Auvex, and its largest shareholder, MRL, and that they had engaged with those parties in relation to the offer. In response, MRL had advised that it did not consider the offer was in a form capable of binding the parties or had a sufficient likelihood of completing. The Administrators reported that Auvex had since approached the Administrators in relation to exercising its rights under the Joint Venture to acquire the company's interest in the Joint Venture by a variation to the then current DOCA. The Administrators said that those negotiations had substantially progressed and would continue during the period of the recommended extension to the sunset date. Auvex had undertaken to provide the final terms of its proposal to the Administrators by 18 August 2017. The Administrators recommended that the creditors vote to vary the then current DOCA to extend the sunset date to 21 August 2017.
A further meeting of creditors was held on 11 August 2017. The creditors resolved that the company vary the then current DOCA on the terms substantially outlined in the Administrators report of 3 August 2017.
On 14 August 2017 the company and the Administrators executed a deed entitled Deed of Company Arrangement - Variation (DOCA2) to vary the then current DOCA in accordance with the creditors' resolution.

Administrators execute Term Sheet

On 20 August 2017 the Administrators and Auvex executed a Term Sheet (Term Sheet) setting out the terms of an agreement for Auvex to acquire Mesa's assets excluding defined Excluded Assets (Auvex Transaction).
The Term Sheet contained two operative parts. Part 1 contains terms for the sale and purchase of the company's 50% interest in the Ant Hill and Sunday Hill tenements and all of the other assets and undertakings of the company, including but not limited to the company's choses in action except for the Excluded Assets. The Excluded Assets are payments paid by Auvex to the company pursuant to the sale and purchase agreement entered into under the Term Sheet, the benefit of any costs order in favour of the Administrators or the company made or arising from proceedings against them after the appointment date and any non‑assignable choses in action. The consideration for the sale is the Non‑Refundable Payment, that is the payment of $2,027,500 to be paid by Auvex to the Administrators on the following terms. If the deed of company arrangement as proposed in pt 2 of the Term Sheet, completes it will be taken to be consideration in accordance with pt 1 of the Term Sheet and any sale and purchase agreement contemplated under the Term Sheet and will be used as property of the company available for distribution in accordance with the deed of company arrangement terms, as proposed in pt 2 of the Term Sheet, at the discretion of the Deed Administrators. If the deed of company arrangement as proposed in pt 2 of the Term Sheet does not complete, it will be a loan limited in recourse to the Administrators' indemnity under cl 14.2 of the deed of company arrangement and expressly excluding any personal liability on the part of the Administrators, which shall be documented by way of separate agreement. The further consideration was the assumption of liability by Auvex in the amount of $6 million, being the $6 million debt which is a portion of the MRL proof of debt on terms agreed between Auvex and the Administrators in a deed of assumption of debt. Part 1 provided that the parties must use their reasonable endeavours to negotiate the terms of the sale and purchase agreement and if it is signed it will replace and supersede the provisions of pt 1 of the Term Sheet. However, the parties will be legally bound by the provisions of the Term Sheet, whether or not the sale and purchase agreement is signed. Further, the operation of pt 1 is not contingent on the operation of pt 2 of the Term Sheet.
Part 2 of the Term Sheet provides for the variation of the deed of company arrangement to enable the Non‑Refundable Payment to be distributed to certain creditors of the company. The deed of company arrangement will provide for pools of funds made available to pay creditors, estimated in full. The deed of company arrangement will further provide for the subordination of claims of related creditors of the company. The subordinated creditors are Auvex, MRL and related entities.
Completion is conditional on the satisfaction of the following conditions precedent. First, the Administrators obtain directions and/or orders and/or declarations from the court in relation to the proposal outlined in the Term Sheet to the effect that:
(a)the Administrators are justified and are acting reasonably by relying on any or all of subcls 5.1, 5.2(c), 9.4(a), 9.4(f) and 9.4(g) of the terms of the deed of company arrangement in place prior to the third variation to participate in negotiations in relation to the various agreements outlined in the Term Sheet; and
(b)notwithstanding the existence of COR 96 of 2017 proceedings, the Administrators are justified and are acting reasonably by entering into the various agreements outlined in the Term Sheet, including the variation to the deed of company arrangement outlined in pt 2 of the Term Sheet.
Secondly, the Debt, that is a portion of the debt owed by the company to MRL with a value of $6 million, is assumed by Auvex pursuant to the Deed of Assumption of Debt. Thirdly, the sale purchase agreement between the company and Auvex completes. Fourthly, the Administrators are successful in COR 96 of 2017, either in whole or in part. If any of the conditions precedent are not satisfied or waived by the Administrators the Administrators may terminate.

Deed varied a third time

The Administrators issued a further report to creditors on 21 August 2017. They stated that based on the information they had received, including the information provided by Mighty River, they currently assessed the only claim that had not yet been satisfactorily explained was the claim in respect of the related party use of the company's Boodarie lease. They noted however that PMI (a related company to MRL) and related entities considered they had counterclaims against Mesa which they believed exceed the value of any use of Boodarie. The Administrators said they had been advised that any such claim pursued by Mesa would be vigorously defended. The Administrators said they considered the claim may still have merit but if a claim was pursued there was a possibility that no recoveries would be made. They reported they did not consider there was sufficient evidence to support that claims into the other matters could be successfully pursued.
The Administrators confirmed that they had engaged PCF Capital to assist in the marketing and realisation of the company's assets and to undertake a marketing campaign in The West Australian and Australian Financial Review newspapers. They repeated that Auvex had approached the Administrators in relation to exercising its rights under the joint venture to acquire the company's interest in the joint venture by a variation to the current deed of company arrangement. The Administrators advised that these negotiations had been completed.
The Administrators summarised the broad terms of the Auvex proposal as follows:
•The proposal includes two elements:
a.the sale and purchase of all of the assets and undertakings of the Company, including its interests in the MMJV pursuant to clause 13.4 of the joint venture agreement, and any assignable chose in actions available to the Company ('SPA') ('Part 1'); and
b.a variation to the Current DOCA ('Part 2').
•In relation to Part 1, the consideration payable by Auvex comprises a non‑refundable payment of A$2,027,500 payable within three business days. Auvex will also assume A$6,000,000 of the debt owing by the Company to MRL on terms to be agreed.
•In relation to Part 2, the Current DOCA will be varied to enable the non‑refundable payment to be distributed to creditors of the Company. The DOCA will provide for pools of funds made available to pay Creditors. The DOCA will further provide for the subordination of claims of related creditors of the Company.
•Completion of Part 1 and Part 2 of the proposal will be conditional on the satisfaction of certain Conditions Precedent … including the Deed Administrators obtaining directions and/or orders and/or declarations from the Court in relation to this proposal to the effect that:
a.the Deed administrators are justified and are acting reasonably by relying on any or all of sub‑clauses 5.1, 5.2(c), 9.4(a), 9.4(f) and 9.4(g) of the Current DOCA to participate in negotiations in relation to the various agreements; and
b.notwithstanding the existence of the COR 96/2017 Proceedings, the Deed Administrators are justified and are acting reasonably by entering into the various agreements.
•If the DOCA variation does not complete, the non‑refundable payment referred to above will be a loan to the Company limited in recourse to the Deed Administrators' indemnity under clause 14.2 of the current DOCA and expressly excluding any personal liability on the part of the Deed Administrators.

The Administrators noted that Auvex is acquiring substantially all of the company's assets including any assignment of choses in action under its proposal. The Administrators advised that pursuant to s 100‑5(3) of the Insolvency Practice Schedule an external administrator must give written notice to creditors of any proposed assignment of their right to sue conferred upon them by the Act. The administrators said that they thereby provided that notice.
The administrators stated that the key terms of the proposed variation to the current deed of company arrangement to facilitate the Auvex proposal included the following:
Subordinated Creditor
•For the purpose of the DOCA, the term Subordinated Creditor means Auvex, MRL, PMI, CSI, PIHA and Polaris.
Release of Claims
•All Creditors must accept their entitlements (if any) under the DOCA in full satisfaction and complete discharge of all Claims which they have or claim to have against the Company as at the Relevant Date on completion of the DOCA.
•On and from the date that the DOCA completes, all Claims of any Creditors and of the Company are released and extinguished to the maximum extent possible at law.
DOCA Conditions Precedent
•Completion will be conditional on the satisfaction of the following DOCA Conditions Precedent …
-the Deed Administrators obtain directions and/or orders and/or declarations from the Court in relation to the DOCA to the effect that:
a.the Deed Administrators are justified and are acting reasonably by relying on any or all of sub‑clauses 5.1, 5.2(c), 9.4(a), 9.4(f) and 9.4(g) of the terms of the current DOCA to participate in negotiations in relation to the DOCA; and
b.notwithstanding the existence of the COR 96/2017 Proceedings, the Deed administrators are justified and are acting reasonably by entering into the various agreements outlined in the SPA and the variation to the current DOCA; and
-Auvex will assume A$6,000,000 of the debt owing by the Company to MRL pursuant to a Deed of Assumption of Debt;
-the SPA between the Company and Auvex completes;
-the Deed Administrators are successful in the COR 96/2017 Proceedings, either in whole or in part (with 'success' being determined by the Deed Administrators).
Failure of DOCA Conditions Precedent
•If any of the Conditions Precedent are not satisfied or waived by the Deed Administrators by 1 December 2018, the Deed Administrators may convene a meeting of creditors of the Company to consider a resolution to vary the DOCA or terminate the DOCA and wind up the Company in liquidation.
Property available for distribution
•Any payment made to the Company under the SPA between Auvex and the company and the benefit of any costs order in favour of the Deed Administrators or the Company made or arising from proceedings against them after the Relevant Date and any non‑assignable chose in actions.
Priority of payment
•The DOCA will provide that the Property Available for Distribution will be applied in the following order of priority:
-    first, to the Administrators' and Deed Administrators' remuneration, costs, disbursements and expenses as approved by creditors or the Court in accordance with the Act;
-    second, to Priority Creditors, being those Creditors with claims admitted by the Deed Administrators, which, in a liquidation of the Company, would have been Claims that must be paid in priority to all other unsecured creditors or claims in accordance with sections 556, 560 561 of the Act, with the winding up taken to have commenced on the Appointment Date;
-    third, to 'Pool A' Creditors, being all Creditors with Claims that have been admitted, in whole or in part, by the Deed Administrators, save for Subordinated Creditors, provided such admitted Claims are less than $100,000 per individual Claim, up to a total pooled amount of $100,000 are paid in full;
-    fourth, to 'Pool B' Creditors, being Subordinated Creditors, which will be paid only if the Creditors in Pool A are paid in full.
•In the event that there is a surplus or balance in the Property Available for Distribution after the Creditors described above have received 100 cents in the dollar on their admitted Claims, such surplus or balance shall remain with or be paid by the Deed Administrators to the Company.
DOCA Completion
•DOCA Completion will occur when:
-    the DOCA Conditions Precedent are satisfied (to the satisfaction of the Deed Administrators) or otherwise waived by the Deed Administrators in writing; and
-    all things required by the DOCA to occur or be done at Completion occur or are done to the satisfaction of the Deed Administrators.
Effect of DOCA Completion
•On the DOCA Completion Date the DOCA will have been completed and effectuated and the Deed Administrators must certify to that effect in writing and must as soon as practicable (and, in any event, within 2 Business Days from the DOCA Completion Date) lodge with the ASIC a notice of performance of the DOCA in accordance with section 445FA of the Act.
Termination under the DOCA
•The DOCA will continue in operation until it is terminated:
-by an order of the Court under section 445D of the Act;
-by a resolution of the Creditors at a meeting convened under section 75 of the Insolvency Practice Rules (Corporations) 2016 (Cth) and in accordance with clause 16 of the DOCA; or in the event that:
a.any of the DOCA Conditions Precedent are not satisfied on or before 1 December 2018; or
b.Auvex advised the Deed administrators in writing that it cannot complete the SPA; or
c.the Deed Administrators are unsuccessful in the COR 96/2017 Proceedings, either in whole or in part (with 'success' being determined by the Deed Administrators),
the Deed Administrators must convene a meeting of the Creditors of the Company to consider a resolution to vary the DOCA or terminate the DOCA and wind up the Company.
Previous operation of DOCA preserved
•The termination or avoidance, in whole or in part, of the DOCA does not affect the previous operation of the DOCA.
The Deed of Assumption of Debt is a deed between Auvex, MRL, Mesa and the Administrators. By cl 3 the parties acknowledge and agree that, in consideration of, among other things, Mesa and Auvex entering into and agreeing to the transactions contemplated in the SPA, with effect from the Sale Completion:
(a)Mesa transfers and assigns to Auvex absolutely all of its rights, liabilities and obligations in respect of the Assumed Debt; and
(b)Auvex:
(i)irrevocably accepts and assumes all liabilities and obligations of Mesa in respect of the Assumed Debt;
(ii)must perform all obligations and discharge all liabilities in relation to the Assumed Debt (including the repayment of the Assumed Debt in full) which, but for the deed, Mesa would have been required to perform or discharge; and
(iii)is entitled to all rights and benefits of Mesa in relation to the Assumed Debt.
The Assumed Debt means the portion of the $6 million of the MRL proof of debt which is described in sch 2. Schedule 2 lists multiple items making up $6 million of MRL's proof of debt. They consist mostly of cash advances and management fees.
It is a term of the Deed of Assumption of Debt that Mesa acknowledges that the Assumed Debt is owed by Mesa to MRL and, but for the assumption of debt contemplated by the deed, Mesa is liable to repay the Assumed Debt to MRL.
The SPA is a sale and purchase agreement between Auvex and Mesa. The agreement provides that on the Completion Date Mesa must sell to Auvex, and Auvex must purchase from Mesa, the Sale Assets for the Consideration.
Sale Assets means:
(a)Mesa's 50% interest in the Ant Hill tenement lease M46/238;
(b)Mesa's 50% interest in the Sunday Hill tenement lease M46/237; and
(c)all of the above assets of Mesa, including but not limited to Mesa's chose in actions, save for the Excluded Assets.
Excluded Assets means:
(a)payments made by Auvex to Mesa pursuant to the SPA including the Consideration;
(b)the benefit of any costs order in favour of the Administrators or Mesa made or arising from proceedings against them after the Appointment Date;
(c)any non-assignable chose in action belonging to Mesa; and
(d)any non‑assignable right or obligation associated with or related to the ASX in relation to the Seller.
Consideration means:
(a)the Non‑Refundable Payment; and
(b)the assumption of liability by Auvex as agreed in the Deed of Assumption of Debt.
Non‑refundable payment means the payment of $2,027,500 paid by Auvex to the Administrators pursuant to the Term Sheet on or about 25 August 2017.
There are three conditions precedent to the transfer of the Sale Assets from Mesa to Auvex. The first is the Administrators providing notice to creditors of Mesa as required pursuant to s 100‑5(3) of the Insolvency Practice Schedule. The second is the Administrators obtaining directions in the same terms as the corresponding condition precedent in the Deed of Assumption of Debt. The third is Auvex and Mesa executing the Deed of Assumption of Debt to be effective only on Sale Completion. Sale Completion means the completion of the sale and purchase of the Sale Assets.
The Administrators said that in their opinion it was in the creditors' interest to vary the current deed of company arrangement to facilitate the Auvex proposal, on the basis that they consider that the Auvex proposal would provide for an improved return to creditors than from the winding up of the company. The Administrators set out a comparison of the estimated returns pursuant to the proposed variations to the then current DOCA as opposed to an estimate on liquidation. The Administrators estimated that the incoming funds to be paid under the Auvex transaction would be $2,027,500. The Administrators estimated the return from the piecemeal realisation of the assets of the company based on the offers received from interested parties for the Two Creeks project ($200,000) and its share of the interest in the Nullagine property ($20,000). The Administrators said that it is difficult to estimate the value of the company's remaining assets because they have not received offers for those assets despite the lengthy sales programme and accordingly they had estimated the value of those assets as $1 million for the purpose of the analysis. The overall consideration was discounted by 20% in a 'low scenario'. Accordingly, the Administrators estimated the incoming funds from the sale of assets on liquidation to be between $976,000 and $1,220,000. The other major differences were estimated future legal costs, estimated to be between $1,600,000 and $250,000 under the proposed variations to the DOCA and $1,280,000 to $210,000 on liquidation, and estimated deed administrators or liquidator's future remuneration estimated to be $400,000 to $100,000 under the proposed variations to the DOCA and $500,000 to $200,000 on liquidation. The Administrators estimated that the balance available for distribution to ordinary unsecured creditors under the proposed variation to the DOCA was $105,504 and there would be no balance available on liquidation. The Administrators said that they estimated that under the Auvex Proposal, priority and ordinary unsecured creditors (excluding subordinated creditors) may be paid in full whilst in a liquidation scenario they currently estimated that there would be no funds available for distribution to creditors.
A meeting of creditors occurred on 29 August 2017. The creditors resolved that the company vary the deed of company arrangement on the terms substantially outlined in the Administrator's report to creditors of 21 August 2017.
On 15 September 2017 Mesa and the Administrators executed a deed of variation entitled Deed of Company Arrangement Third Variation (DOCA3) which was substantially in the terms approved by the creditors' meeting and which incorporated terms required under the Auvex Transaction.
I will refer to the original DOCA as varied by DOCA1, DOCA2 and DOCA3 as the DOCA.

Mighty River commences proceeding

Mighty River raised issues with the Administrators concerning the administration of Mesa. The issues fall into two broad categories. First, Mighty River says that Mesa has potential claims of value against MRL and related parties and directors of MRL who were also directors of Mesa. Mighty River says that the Administrators have not properly or adequately investigated these claims. Secondly, Mighty River asserted that claims made by MRL in its proof of debt have not been established and the Administrators admitted those debts without adequate or proper investigation.
Meanwhile, on 10 May 2017 Mighty River had commenced COR 96 of 2017. That originating process was subsequently amended. By its further re‑amended originating process, Mighty River originally sought a number of declarations that are no longer pressed. The declaration pressed is a declaration that the DOCA is a related party transaction to which the provisions of ch 2E of the Corporations Act apply. Mighty River also seeks an injunction under s 1324 of the Corporations Act preventing the Administrators performing or giving effect to the DOCA and an order the DOCA be terminated. Mighty River also seeks an order that Mesa be wound up under s 491 of the Corporations Act. The Administrators and MRL oppose any relief being granted in COR 96 of 2017.

Administrators apply for directions

On 25 August 2017 the Administrators received the Non‑Refundable Payment from Auvex.
On 17 October 2017 the Administrators commenced COR 242 of 2017 in which they claim, pursuant to s 90‑15 of the Insolvency Practice Schedule, directions in substantially the form of the relevant conditions precedent in the Deed of Assumption of Debt and the SPA which I have set out above. Those orders are opposed by Mighty River. MRL supports making the orders.

Applicable legislation

The Insolvency Law Reform Act 2016 (Cth) amended the Corporations Act by inserting the Insolvency Practice Schedule as sch 2 to the Corporations Act and repealing certain provisions of the Corporations Act dealing with external administration. The Insolvency Practice Schedule is given effect by s 600K of the Corporations Act.
Transitional provisions govern the application of the pre‑amendment Corporations Act provisions or the Insolvency Practice Schedule provisions to corporations which enter external administration prior to the schedule coming into effect. The transitional provisions are complex. Senior counsel for the Administrators, Mr Howard SC, and senior counsel for Mighty River, Mr Newlinds SC, agreed with the analysis of the transitional provisions put forward by counsel for MRL, Mr Penglis. I accept that analysis.
The effect of the transitional provisions is that the amended Act, in the form which includes the Insolvency Practice Schedule, applies to the application by the Administrators and Mesa (COR 242 of 2017) because it was commenced after the commencement date specified in the transitional provisions. The application brought by Mighty River (COR 96 of 2017) was commenced before the commencement date specified in the relevant transitional provision and the pre‑amended Corporations Act provisions continue to apply to that application.

Court directions

Section 90‑15 of the Insolvency Practice Schedule empowers the court to make such orders as it thinks fit in relation to the external administration of a company. That power is wide enough to empower the court to give directions concerning matters that have arisen in the external administration of the company.
There are limitations upon the availability of directions under s 90‑15 of the Insolvency Practice Schedule as there were upon the power of the court to give directions under Corporations Act s 447D. A court will not generally give directions where the directions sought relate to the making and implementation of a business or commercial decision, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to the decision: Re Ansett Australia Ltd and Korda (2002) 115 FCR 409 [66] (Goldberg J). It is insufficient to justify giving directions that the administrator wants reassurance about a commercial decision; some issue such as a question of law or procedure, or power, propriety or reasonableness, is required to justify approaching the court for directions: In the Matter of AWA Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2014] NSWSC 249 [14] (Brereton J).
This is a proper case for making directions if the court is satisfied the directions sought are appropriate. The transaction into which the Administrators propose to enter involves the sale of the company's principal assets to a wholly owned subsidiary of its principal creditor and shareholder, for a consideration which includes the assumption of a debt owed to the principal shareholder, in circumstances where the second largest creditor and shareholder alleges it would be unlawful and unreasonable for the Administrators to enter into the transaction.
Mighty River alleges that it would be unlawful and unreasonable for the Administrators to enter into the proposed transaction. Insofar as Mighty River says that the Auvex transaction would contravene ch 2E of the Corporations Act, the lawfulness of the course proposed by the Administrators is called into question. Insofar as Mighty River asserts that the Administrators have not properly or adequately investigated Mesa's potential claims against MRL and related parties, and directors of MRL and Mighty River asserts that claims made by MRL in its proof of debt have not been established and the Administrators have admitted those debts without adequate or proper investigation, issues of propriety and reasonableness arise in relation to the Administrators proposed course of action.
Whether an administrator is justified and acts reasonably in entering into an agreement depends upon all the circumstances of the case. In this case the matters which call into question whether the Administrators are justified and acting reasonably by entering into the Auvex transaction fall into two broad categories. The first is that Mesa would contravene s 208 of the Corporations Act and ASX Listing Rule 10.1. In relation to that matter the standard against which the proposed actions of the Administrators is to be assessed is their lawfulness.
The second broad category is that by entering into the transaction, the Administrators would dispose of the company's assets at an under‑value and the transaction is not fair and reasonable. In relation to that matter the standard against which the Administrators' conduct is to be assessed is reasonableness. In considering the question of reasonableness, the court does not second guess the business judgment of the Administrators or the creditors who approved entry into the transaction. The court is concerned whether the Administrators' negotiation of and entry into the transaction is made in good faith and for a proper purpose, with no material personal interest in the transaction, after they had informed themselves about the proposed transaction to the extent they reasonably believed to be appropriate and with a rational belief that the decision is in the best interest of the creditors and the company. Further, the court will consider whether the transaction is objectively reasonable in the sense that it is supported by reason and within the limits of what is rational or sensible to expect in all the circumstances.

Mighty River opposes directions

Mighty River submits that the court ought not give its approval to the Auvex transaction and should not give the directions sought and instead should make the orders sought by Mighty River terminating the DOCA and placing Mesa into liquidation. Mighty River opposes the directions on a number of grounds. First, the Auvex transaction will involve the giving of a financial benefit by a public company (Mesa) to a related party (MRL and Auvex). If the Auvex transaction occurs without non‑related member approval in accordance with ch 2E of the Corporations Act, Mesa would contravene s 208 of the Corporations Act. Secondly, the Auvex transaction will involve Mesa disposing of a substantial asset to an associate (Auvex) of a substantial holder in Mesa (MRL) without the approval of holders of Mesa's ordinary securities and thereby break Listing Rule 10.1 of the ASX Listing Rules. Thirdly, by the Auvex transaction Mesa would be disposing of assets at an under value. Fourthly, the court cannot be satisfied that the Auvex transaction is fair and reasonable. Mighty River says it is not sufficient that the transaction is in the interest of creditors; the interest of members must be taken into account. The court could not be satisfied that the Auvex transaction is fair and reasonable in circumstances where the assumed debt allegedly owed by Mesa to MRL forms $6 million of the $8 million consideration for the sale of Mesa's assets and the purported debt is dubious. Further, the choses in action will be transferred to Auvex for nil consideration and neither the administrators nor the court can properly conclude that those choses in action have no value.

Mighty River's claim that the transactions contravene Corporations Act s 208

Mighty River submits that the court should not make directions that the Administrators are justified and acted reasonably and properly by entering into, and giving effect to, the Auvex transaction because they would be unlawful so far as they contemplate giving a financial benefit to a related party in contravention of s 208 of the Corporations Act. Mr Newlinds submits, and I accept, that the court would not generally give directions approving a transaction that is inconsistent with other statutory requirements under the Corporations Act.
I further understood Mr Newlinds to submit that the court would not give directions in relation to a transaction where it is reasonably arguable that the transaction is unlawful. It is not necessary to determine whether this principle extends to the position where it is merely reasonably arguable that a transaction would be unlawful or inconsistent with the Corporations Act because I find that the relevant transactions are not unlawful.
Mighty River contends that Mesa would contravene s 208 of the Corporations Act by entering into the Auvex transaction. Mighty River's contention is as follows. First, Mesa is a public company and MRL and Auvex are related parties for the purposes of the Auvex transaction. The provisions in Corporations Act s 228(6) provide that an entity is a related party if they believe they will likely become a related party of the public company in the future. MRL, at least, accepts that following the effectuation of the DOCA Mesa will fall back under the control of MRL nominee directors. It follows that s 228(6) is satisfied. Secondly, Mesa is conferring a financial benefit upon MRL and Auvex within the meaning of s 229. The definition of giving a financial benefit expressly includes 'providing the related party … property' and 'selling an asset to the related party'.
The Administrators and MRL submit that the DOCA and the Auvex transaction are not related party transactions which breach s 208 of the Corporations Act for a number of reasons. First, ch 2E does not apply where the transaction is to occur through a part 5.3A process. Secondly, if ch 2E applies, the exception in s 210 applies and therefore no member approval is required and there would be no contravention of s 208 or s 209. In addition, the Administrators say that ch 2E should not significantly feature in the court's consideration of whether or not to grant the orders under pt 5.3A sought by the Administrators. In effect, that is a matter that should be left to the Administrators.
MRL says that the DOCA and the Auvex transaction will not breach s 209 of the Corporations Act for further reasons. First, there is no financial benefit received and therefore s 208 does not apply. Secondly, the Administrators have also applied under s 447A. The effect of that application, in conjunction with s 216 if necessary, is that, even if s 208 would otherwise apply, s 208 would not apply and there would be no contravention of s 209.
The Administrators and MRL submit that s 208 does not apply to the proposed transactions to be executed pursuant to the DOCA. Section 208(1) provides relevantly that for a 'public company' to give a financial benefit to a related party the public company must obtain the approval of the public company's members in the way set out in s 217 to s 227 or the benefit must fall within an exception set out in s 210 to s 216. In essence, the Administrators and MRL seek to read down the words 'a public company' as excluding a public company that is the subject of a deed of company arrangement and hence s 208(1) does not apply to a transaction entered into by a public company under a deed of company arrangement.

Chapter 2E does not apply to a company under a deed of company arrangement

In Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 French CJ, Hayne, Crennan, Bell and Gageler JJ said:
This court has stated on many occasions that the task of statutory construction must begin with a construction of the [statutory] text. So must the task of statutory construction end. The statutory text must be considered in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself [39].
In R v Young (1999) 46 NSWLR 681 Spigelman CJ noted at [25] that the 'process of reading down general words is a well‑established means of construction'. In Chahwan v Euphoric Pty Ltd (2008) 245 ALR 780 the New South Wales Court of Appeal held that the word 'company' in pt 2F.1A of the Corporations Act did not apply to a company in liquidation. Tobias JA, with whom Beazley and Bell JJA agreed, said:
In my opinion the context as well as the extrinsic materials identifying the mischief which part 2F.1A was intended to remedy, namely, the restrictions relating to the exceptions to the rule in Foss, are indicative of an intention that the statutory derivative action was intended to apply only to a company as a going concern and not one under the control of a liquidator. This is because the rule in Foss and its exceptions did not apply and were irrelevant to a company in liquidation [124].
Section 237 is only concerned with the situation where the company will not itself bring the relevant proceedings, a decision which, where the company is in liquidation, can only be made by the liquidator. It is therefore beside the point for the appellant to submit that if a liquidator does wish to bring proceedings then leave would ordinarily not be granted under s 237(2). That is not, with respect a relevant safeguard in the event that pt 2F.1A extends to a company in liquidation.
The Administrators and MRL submit in effect that the 'literal' interpretation of s 208 must give way to the appropriate construction determined by reference to the context, purpose and objects of the legislation.
The words 'public company' are defined in s 9 of the Corporations Act to mean:
a company other than a proprietary company and:
(a)in section 195 and Chapter 2E, includes a body corporate (other than a prescribed body corporate) that:
(i)is incorporated in a State or an internal Territory, but not under this Act; and
(ii)is included in the official list of a prescribed financial market; and
(b)in chapter 2B does not include a company that is not required to have 'limited' in its name because of section 150 or 151.
Definitions in an Act apply except so far as the context or subject matter otherwise indicates or requires. Pearce and Geddes in the 8th edition of Statutory Interpretation in Australia at [6.67] suggest that the proper approach is to assume that the expression is used as defined and then ask whether, in the particular context in which it appears, a contrary intention can be shown. In Deputy Commissioner of Taxation (NSW) v Mutton (1988) 12 NSWLR 104 at 108 Mahoney JA, after noting that there is no simple formula for determining what is a contrary intention, referred to some circumstances in which displacement of a definition might occur including:
•where the definition provides that one thing shall be done and the Act provides that another shall be done;
•where the context of the Act as a whole indicates that the definition is not to apply;
•where, if the definition were to be applied, the provisions of or the procedure established by the section which the defined term is used would not appropriately work.
For this test to be made out, it is not necessary that it is impossible for the provision to operate. It is sufficient if the application of the definition would result in the operation of the section in a way which clearly the legislature did not intend: Kennedy v Anti-discrimination Commission of the Northern Territory (2006) 226 FLR 34 [29]; Re Owen; RiverCity Motorway Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) v Madden [No 3] (2012) 201 FCR 360 at [37].
In my opinion the context in which the words 'public company' are used in ch 2E indicates that the definition is not intended to apply to a company under a deed of company arrangement. Furthermore, the provisions of ch 2E and pt 5.3A, and particularly s 444G, do not work harmoniously if the s 9 definition of 'public company' applies to those words in ch 2E.
The purpose of ch 2E is to protect members from the risk that the interests of a related party may influence the decision‑making of directors to the detriment of the interests of members of the company as a whole when the company is considering entering into a transaction with a related party, by requiring member approval for giving financial benefits that could endanger member's interests. A related party, or an associate of a related party, may not vote on a proposed resolution to approve a financial benefit to be given to the related party, except in limited circumstances. The risk that the interests of a related party may influence the decision‑making of directors to the detriment of the interests of members of the company as a whole does not arise when a company is subject to a deed of company arrangement and is under the control of the deed administrators and the creditors. When a company is subject to a deed of company arrangement the decision to enter into a transaction is made by the deed administrators and the creditors, not by the directors whose decision‑making may be influenced by the interests of a related party.
The purpose of ch 2E is confirmed by relevant extrinsic material. The authors of the 17th edition of Ford, Austin and Ramsay's Principles of Corporations Law at [9.470] explain:
Section 234 was replaced by Pt 3.2a, which was enacted following the Companies and Securities Advisory Committee's Report on the Reform of the Law Governing Corporate Financial Transactions (July 1991). Part 3.2A became Ch 2E in 1998 as a result of amendments enacted by the Company Law Review Act 1998. The report of the Companies and Securities Advisory committee referred to evidence arising out of the corporate collapses of the 1980s that some corporate controllers had abused their positions of trust by arranging for the shifting of assets around and away from companies and corporate groups, and into their own hands. It was said that this was achieved by various means, including remuneration payments, asset transfers and loan arrangements. In the Committee's view, the lack of specific provisions of the Corporations Law on these matters could be interpreted as a 'statutory licence' to engage in such conduct.
Chapter 2E is directed at directors and controlling shareholders abusing their positions by arranging the shifting of assets around and away from companies and corporate groups and into their own hands. That has no application to a company which is not under the control of the directors and shareholders.
The provisions of pt 5.3A would not be harmonious with the provisions of ch 2E if a 'public company' in ch 2E includes a company subject to a deed of company arrangement. Part 5.3A establishes a regime for an orderly dealing with the company's affairs. The 'future of the company is committed to a body of all creditors as a whole': Mighty River International Ltd v Hughes [2018] HCA 38 [6] (Kiefel CJ & Edelman J). The creditors may resolve that the company execute a deed of company arrangement. If so, the administrator must prepare an instrument setting out the terms of the deed and where the creditors have made appropriate resolutions the instrument must be executed by the company and the proposed administrator. When executed the deed becomes a deed of company arrangement. By s 444G the deed of company arrangement binds the company, its officers and members and the deed's administrator. Control of the company passes from the directors and members to the creditors. An interpretation of 'public company' in ch 2E to include a company subject to a deed of company arrangement would not be harmonious with s 444G, in so far as it requires a transaction provided for in a deed of company arrangement to require approval by the members if it gives a financial benefit to a related party or the company.
The procedure for obtaining member approval in ch 2E div 3 assumes that the company is under the control of its members and directors. Section 208 provides for the members to give their approval but when a company is under a deed of company arrangement s 444G provides that the members and the company are bound by the deed of company arrangement. Thus, where the administrator and the company, pursuant to a resolution of creditors, enter into a deed of company arrangement providing that the company enters into a transaction that would otherwise contravene s 208, there will be inconsistency between s 444G and ch 2E in so far as the latter will permit members to vote against the transaction provided for in the deed of company arrangement.
Section 218(1) requires the company to lodge with ASIC a proposed explanatory statement satisfying the requirements of s 219 and s 221 requires the company to send the statement to members together with the notice convening the meeting. Section 219 requires the statement to set out in relation to each director if the director wanted to make a recommendation about the proposed resolution ‑ the recommendation and his or her reasons for it or if not why not or if the director was not available to consider the proposed resolution why not. Further, s 219 requires the statement to set out whether the director had an interest in the outcome of the proposed resolution and if so what it was. Such statements are not apposite to the approval of a decision that was made by external administrators and creditors and not the directors. Section 219 further requires that the statement should set out all other information that is known to the company or any of its directors. Where a company is subject to a deed of company arrangement the information relevant to the approval decision will be known to the administrator and creditors not the directors.
Section 224 prohibits from voting on the proposed approval any related party of the company to whom the resolution would permit a financial benefit to be given or an associate of such a related party. The purpose is that the related party or associate does not participate in the decision to enter into the proposed transaction. But that has no purpose where the company is under a deed of company arrangement because the decisions are made by the deed administrator and the creditors.
It is strictly not necessary to consider the other arguments of the Administrators and MRL that the DOCA and the Auvex transaction is not a related party transaction which breaches s 209 of the Corporations Act because I have found that ch 2E does not apply to the DOCA and the Auvex transaction. However, I will set out in summary form my conclusion in relation to the other arguments advanced by the Administrators and MRL.

Financial benefit received

MRL says that for the purposes of ch 2E there is no financial benefit given or received in the Auvex transaction. The argument is put this way. Section 229(1)(b) of the Corporations Act provides that 'the economic and commercial substance of conduct is to prevail over its legal form. The economic and commercial substance of the conduct is such that it is not a provision of a financial benefit of the kind ch 2E and s 208 are concerned with. This is not a case where the decision to enter into the transaction is made by the board, in which case it is appropriate that there should be oversight by the members. This is a wholly different case, where independent registered liquidators and administrators ‑ who owe duties to the court ‑ were appointed and conducted significant investigations, culminating in the proposed Auvex transaction. In such circumstances the substance of the transaction is a transaction proposed by independent deed administrators and voted on and accepted by creditors pursuant to and in fulfilment of the statutory object in s 435A and pt 5.3A. It is an open market sale where there is no other competing bid. As a matter of fact, the court should find that there is no financial benefit provided to any related party of Mesa. There is a fair, market value sale of the assets for their market value. It is a transaction arrived at under pt 5.3A and compliant with that part. Section 208 does not apply.
I have found that s 208 does not apply to the proposed transaction because s 208 only applies to a public company that is under the control of the directors and shareholders and does not apply to a company that is subject to a deed of company arrangement and under the control of the deed administrators and creditors. The arguments advanced by MRL support that finding. However, if that finding is wrong then the proposed transaction does involve Mesa giving a financial benefit to a related party. The definition of giving a financial benefit under s 229(3) includes giving the related party property, buying an asset from or selling an asset to the related party and taking up or releasing an obligation to the related party.

Section 210 exception

The Administrators and MRL say that if s 208 of the Corporations Act would otherwise apply, the exception in s 210 would be engaged.

Onus of proof concerning breach of s 208

There is a difference between the parties concerning where the onus of proof rests concerning whether the proposed transactions contravene s 208 of the Corporations Act.
The issue of onus of proof arose in a similar context in Re Boart Longyear Ltd [No 2] (2017) 122 ACSR 437. Section 411(6) of the Corporations Act provided that the court could grant its approval to a compromise or arrangement between a company and its members or creditors subject to such alterations or conditions as the court thought just. The first plaintiff was a drilling company which defaulted on certain loans and was, or is likely to become, insolvent. The first plaintiff and its associated companies sought orders in the Supreme Court of New South Wales approving two independent schemes of arrangement, and subsequently sought that those schemes be approved in an altered form. The court approved the schemes. One issue that arose was that the Snowside companies, which were shareholders in the first plaintiff, contended that the court should not approve the schemes because they would be unlawful so far as they contemplated an issue of shares to a related party for the purposes of ch 2E or s 606 of the Corporations Act or the ASX Listing Rules. Dr Austin, counsel for the Snowside Companies, submitted, and Black J accepted, that the court would not generally sanction a scheme that is inconsistent with other statutory requirements under the Corporations Act. Dr Austin went further to submit that the court would not approve a scheme where it was reasonably arguable that the scheme was unlawful. Black J held that it was not necessary to determine whether this principle extends to the position where it is merely reasonably arguable that a scheme would be unlawful or inconsistent with a Corporations Act provision because the Snowside companies had not established either that the relevant schemes are unlawful or that it was reasonably arguable that they are unlawful.

At [315] Black J held that the court should not determine any question as to any application of ch 2E of the Corporations Act in the proceedings on any final basis, where that would need to be determined in substantive proceedings and by reference to adequate evidence to support any allegation of acting in concert, which in that case was necessary in order to establish the giving of a financial benefit. However, Black J held that he must address the question whether the issue, having been raised, provided a reason not to exercise the court's discretion under s 411 of the Corporations Act in favour of approval of the schemes.
Black J was not persuaded that the relevant entity was a related party of the applicant and that was sufficient to have the result that the Snowside companies' contention that the schemes were unlawful under ch 2E of the Corporations Act cannot be accepted [328]. However, his Honour held that it could not be accepted for other reasons. One of them concerned the exception under s 210 of the Corporations Act.
Section 210 provides that a public company may give a financial benefit to a related party if the financial benefit is given on terms that:
(a)would be reasonable in the circumstances if the public company and the related party were dealing at arm's length; or
(b)are less favourable to the related party than the terms referred to immediately above.
This is an integral part of the scheme of ch 2E because it allows a transaction justifiable on arm's length terms to go ahead without a shareholders meeting.
In Re Boart Black J referred to the onus of proof to establish that the exception under s 210 was or was not established. Counsel for the company accepted that the onus to establish an exception would be on the party asserting it in a substantive proceeding alleging a contravention of s 208 of the Corporations Act, but contended that that was not the case where the Snowside companies sought to establish the unlawfulness of the schemes. Black J held that it was not necessary to determine where the onus of proof lies because, in that case, even if the onus of proof lay on the company or the alleged related party, his Honour would readily draw the inference that the arm's length exception was satisfied in the circumstances [329].
In Re Boart Dr Austin contended that the question is not whether the negotiations which led to the schemes were conducted at arm's length but whether the result was terms that would be reasonable if BLY and First Pacific were dealing at arm's length. In response to that submission Black J said:
While that proposition accurately reflects the statutory test, it seems to me to neglect the practical reality that, all things being equal, parties that in fact at arm's length are likely to reach arrangements on arm's length terms. If section 208 of the Corporations Act were otherwise capable of applying in these circumstances, then I readily infer, as a matter of fact, that a negotiation between First Pacific on the one hand and the BLY Group and Centrebridge on the other generated a resolution on arm's length terms when those entities plainly had different commercial interests and have been in an adversarial relationship throughout the proceedings [331].
In Re Boart Dr Austin also referred to Australian Securities and Investments Commission (ASIC) v Australian Investors Forum Pty Ltd [No 2] (2005) 53 ACSR 305 (ASIC v AIFP at [455] ‑ [458], where Palmer J observed that s 210 required the court to assess the terms of the subject transaction against objective standards and that the party's understanding as to the reasonableness of the terms was not decisive as to whether the terms were reasonable for the purposes of that section. In ASIC v AIFP, Palmer J noted that, in applying that test, the court would assume that the comparator transaction was entered into by a public company which was unrelated to the other party to the transaction in any way financially or through ties of family, affection or dependence; free from any undue influence or pressure; through its relevant decision‑makers, sufficiently knowledgeable about the circumstances of the transactions, sufficiently experienced in business and sufficiently well advised to be able to form a sound judgment as to what was in its interests; and concerned only to achieve the best available commercial result of itself in all of the circumstances. Palmer J observed that the terms of the transaction in question would then be tested against the terms of a transaction that would reasonably be achieved by hypothetical public company in that position.
The Administrators say that for the purposes of s 210, the Auvex Transaction comes after proper, independent processes and assessments by the Administrators. Therefore, the Administrators submit, the court may be satisfied that the Auvex transaction is effectively within s 210 because the decision maker for Mesa, the Administrators, is at arm's length from each of Auvex, MRL and Mighty River. I am satisfied that the Auvex transaction was in fact negotiated at arm's length.
In applying s 210 the court is required to assess the terms of the transaction against objective standards. What the parties themselves thought about the reasonableness of the terms is relevant as an explanation of the transaction but it is not decisive as to whether the terms were reasonable for the purposes of the section: ASIC v AIFP at [455] (Palmer J).
Regard must be had to the realisable value of the assets being sold. The major asset is Mesa's interest in the JV. PCF Capital Group provided an indicative valuation for the manganese projects as a whole at $8.5 million to $15.2 million by multiplying the Australasian Joint Ore Reserves Committee 2004 resources (in kilotonnes of manganese) by a range of price multiples per tonne. The asset being sold to Auvex is Mesa's half‑interest in the projects which equates to between $4.25 million and $7.6 million on the PCF indicative valuation. Further, the value of the tenements should be assessed on the basis that a purchaser will not be acquiring title to the tenements outright, but will be acquiring a 50% interest to hold together with Auvex. Further, Auvex is the manager of the Joint Venture. The fact that a purchaser will not control the tenements will affect their value and is a reason to value them at less than 50% of the value of the project. Importantly, the transaction is proposed in circumstances where the Administrators have spent two years trying to find a buyer for the tenements but have been unable to, other than Auvex.
The Administrators have investigated the MRL proof of debt. They found the debt to have been proved. Importantly, the $6 million which constitutes the assumed debt is made up principally of cash advances and management fees. The Administrators' investigation showed that the cash advances had been made, that the management services had been provided and the fees charged were reasonable. Auvex is providing consideration of over $2 million cash plus $6 million in assumed debt. The SPA will pay out all creditors other than MRL and companies related to MRL. That is part of the Consideration for the assets.
The assets being sold include the assignable choses in action. Mesa retains the non‑assignable choses in action. The Administrators have investigated the claims which are the foundation for the choses in action which Mighty River says have significant value. That has not been demonstrated. The Administrators have spent more than 550 hours investigating the claims. The Administrators do not have funds to litigate or further investigate these claims and have reasonably formed the view they will not be able to obtain litigation funding to do so.
I find that the s 210 exception is established. The relevant transactions were in fact negotiated at arm's length. The transactions were negotiated between MRL and the Administrators whose interest and duty was to achieve the best commercial result for the creditors of the company. Furthermore, I am satisfied by the evidence of Mr Hughes that he achieved the best commercial result that he was able to achieve in the negotiations. The evidence available to the court supports that assessed against objective standards, the transaction would be reasonable in all the circumstances if Mesa and Auvex were dealing at arm's length.

Section 447A application

Mr Newlinds submitted that the Administrators have not invoked s 447A to seek an order that ch 2E not apply in this case. I agree.

Chapter 2E conclusion - no reason not to make directions sought

In summary, I find that it has not been established that by executing the Auvex transactions and the DOCA Mesa would contravene s 208 of the Corporations Act or that there is a sufficient likelihood that it would do so to justify the court refusing to make the directions sought for that reason.

ASX Listing Rule 10.1

Mighty River says that the court should refuse to make the directions sought because if Mesa carries out the Auvex transaction it would breach ASX Listing Rule 10.1 and the ASX might require Mesa to take corrective action to cancel the transaction or seek the approval of holders of ordinary securities to the transaction.
Mighty River says that MRL is a substantial holder referred to in r 10.1.3, Auvex is an associate (as defined in ch 19 of the Listing Rules) of MRL, the Auvex transaction involves Mesa disposing of a substantial asset (defined in r 10.2) to Auvex and therefore by entering into the Auvex transaction Mesa would break r 10.1 if it does so without the approval of holders of Mesa's ordinary securities. Counsel for Mighty River says that pursuant to r 10.8 'one can dis‑apply these rules by getting written consent, in effect, from the ASX' but the Administrators have not done so. Counsel says that under r 10.9 the ASX may require Mesa to take corrective action if it breaches r 10.1 and the corrective action, at the option of the entity (Mesa) is either cancelling the transaction or seeking the approval of holders of ordinary securities to the transaction.
The Administrators submitted that the Listing Rules do not apply where the transaction is to occur through a part 5.3A process. They referred to the explanatory note to ch 10 of the Listing Rules which says that the chapter deals with transactions between an entity and persons in a position to influence the entity. In this case it is the Administrators, not the directors of Mesa, who are involved in the decision making for Mesa. The approval of the Auvex transaction is committed to the creditors and not to the members which contrasts with the situation envisaged by the Listing Rules. The purpose of the member approval process under the Listing Rules is inapposite for a process under part 5.3A. Further, the Administrators say that the responsibility for obtaining an irregular pre‑approval rests with Auvex as the purchaser.
Counsel for the Administrators submitted that if there is an issue to do with the Auvex transaction breaching the ASX Listing Rules that is a matter which the court may leave to Mesa and the ASX to be dealt with later. Counsel said that the Administrators received advice from their lawyers as to how the ASX might deal with a potential breach of ch 10 of the Listing Rules. That advice was to the effect that the ASX did not always seek to apply its Listing Rules to transactions occurring when the relevant company was in administration or in the control of receivers.
Counsel for the Administrators referred to the judgment of Black J in Boart Longier where Black J said:
Dr Austin also refers to several Listing Rules which the Snowside Companies contend may be applicable to the transactions contemplated by the schemes, unless waivers are granted by ASX. The plaintiffs also made submissions as to the application of the ASX Listing Rules, which I do not consider it necessary to address, where ASX would have the capacity to waive the application of those rules if it considered it appropriate to do so. I need not, and should not, address those matters, where it will be a matter for ASX to form any view as to the application of its rules and whether they should be waived in the particular circumstances [339].
I should not determine the application of the ASX Listing Rules. It will be a matter for the ASX to form any view as to the application of its rules and whether they should be waived or it will require corrective action by Mesa to either cancel the Auvex transaction or seek the approval of holders of ordinary securities to the transaction. It would then be a matter for the Administrators and Auvex to determine how to proceed.

Matters raised by Mighty River going to reasonableness

Mighty River has raised a number of matters going to the reasonableness of, and whether the Administrators are justified in, entering and completing the Auvex transaction based on the value of, and the consideration for, the assets being sold by Mesa to Auvex.
In his affidavit sworn on 17 October 2017, Mr Hughes identifies Mesa's assets and what the Administrators have done to market and attempt to sell those assets. Mr Hughes referred to MRL's proof of debt and the steps taken by the Administrators to investigate and assess that debt. Mr Hughes referred to the claims which Mighty River alleges may exist against the directors of Mesa and MRL. Mr Hughes referred to the Administrators' investigation of and analysis of those claims. Mr Hughes set out the terms of the Auvex proposal and his belief that the transactions present a better alternative to Mesa's creditors than liquidation. Mr Hughes considers that they Auvex transaction is superior to any offer made by Mighty River.
I find that the Administrators' negotiation of, and decision to enter into, the Auvex transaction was made in good faith and for a proper purpose, with no material personal interest in the transaction. There is no evidence to the contrary.

Value and consideration for the assets being sold

Mighty River asserts that the Administrators have not properly informed themselves about the value of the assets to be sold and the consideration to be received under the Auvex transaction. Further, Mighty River says that objectively the transaction is not reasonable. Mighty River puts its case in various ways. In essence, it says that Mesa would be disposing of its assets at undervalue and that the court cannot be satisfied that the Auvex transaction is fair and reasonable.
The sale and purchase agreement between Auvex and Mesa provides that Mesa sell to Auvex the Sale Assets for the Consideration. The Sale Assets are Mesa's 50% interest in the Joint Venture tenements and all of the other assets of Mesa including other mining interests and Mesa's choses in action except for the Excluded Assets. The choses in action include assignable rights of action.
Mighty River complains on the one hand that the Consideration has not been apportioned between Mesa's interest in the Joint Venture and its other assets, and in particular the choses in action, but on the other hand asserts that nil consideration is to be received for the choses in action. The first assertion is correct, the second is not. It is not correct that nil consideration is to be received for the choses in action. The Consideration is to be paid for all of the Sale Assets, including the assignable choses in action. The SPA does not apportion the Consideration between the assets being sold and purchased.

Administrators efforts to realise assets

The Administrators identified Mesa's assets. The principal asset is the company's interest in the Ant Hill and Sunday Hill tenements (ML46/238 and ML46/237 respectively). Auvex acquired a 50% interest in the tenements under a farm‑in and joint venture agreement. The agreement gives each party a pre-emptive right to purchase the interest of the other if the other has received an offer to purchase its interest.
After the first creditor's meeting on 25 July 2016 Mr Hughes caused advertisements seeking expressions of interest for the sale of the assets, or a recapitalisation of Mesa, to be placed in The West Australian on or about 18, 20, 23, 27 and 30 July and 6, 10 and 13 August 2016 and in the Australian Financial Review on 21, 23, 28 and 30 July and 4, 6, 11 and 13 August 2016. On 29 July 2016 Mr Hughes engaged PCF Capital to carry out a marketing campaign. PCF is a leading specialist in the area of mining assets across the world and has a list of contacts that could be interested in manganese projects such as the Ant Hill and Sunday Hill tenements. PCF Capital opened an electronic data room. Over the period September 2016 to December 2016 PCF Capital invited a number of parties to execute confidentiality agreements and to seek password access to the data room. PCF Capital requested that final offers be made before 31 January 2017. Mr Hughes received regular reports from PCF Capital. As at 16 December 2016 seven parties signed confidentiality agreements and were provided with an information memorandum and data room access.
On or about 13 February 2017 LC Mining Pty Ltd, a company represented by Wayne Norris, made an indicative offer (Norris proposal). Mr Hughes and his team devoted more than 25 hours negotiating and meeting with Mr Norris. On 19 June 2017 LC Mining presented a final term sheet dated 6 June. As a result of his discussions and enquiries Mr Hughes was concerned that Mr Norris and LC Mining did not have the financial capacity to complete the proposal.
On 11 July 2017 Mr Hughes met Mr Ellison, the principal of MRL. Mr Hughes asked if Auvex would be interested in purchasing Mesa's assets. Mr Ellison said that Auvex wanted to acquire all of Mesa's assets, including its choses in action constituted by its claims against the directors of Mesa, MRL and third parties. Mr Ellison said he wanted to finally resolve the long fight they had been in. That was a reference to the conflict between MRL and Mighty River.
Mr Hughes wrote to MRL enclosing the Norris proposal because MRL would need to approve the proposal as the parent company of Auvex, Mesa's joint venture partner. After some discussions MRL informed Mr Hughes it considered the Norris proposal was not in a form capable of binding the parties and it did not have sufficient likelihood of completing.
There were further negotiations between the administrators and MRL. They resulted in the Term Sheet being executed.

Value of mining assets

Mighty River says that there is no valuation evidence in respect of the mining assets other than the interest in the joint venture with Auvex; no independent valuation has been sought or obtained. Further, Mighty River says there is no evidence of any current valuation of the Joint Venture assets.
Mr Hughes obtained an indicative valuation of the Joint Venture assets from PCF Capital Group in June 2016. I have referred at [85] to the valuation. Mr Hughes did not obtain a valuation of the balance of Mesa's mining assets.
It is not unreasonable for the Administrators to negotiate and enter into the Auvex transaction without having received a more recent or more definitive valuation of Mesa's interest in the joint venture and of its other mining assets. Mr Hughes had obtained an indicative valuation of the joint venture assets from the company he engaged to market the assets, PCF Capital. PCF Capital is a leading, independent firm specialising in mining asset sales. Mr Hughes offered the assets for sale. He undertook a thorough sales campaign. Mr Hughes tested the market and determined it was not necessary to obtain a further valuation of the assets. I find nothing unreasonable in that.
Mr Hughes undertook a proper and sufficient marketing campaign. The only proposal that was received, apart from the Auvex proposal, was the Norris proposal. Mr Hughes pursued the Norris proposal as far as he reasonably could. It was not a viable proposal and did not proceed. The only viable proposal received by the Administrators, after a proper marketing campaign, was the Auvex proposal.

In cross examination Mr Hughes maintained that he had pushed Mr Ellison, of MRL, as hard as he could to get the best deal he could and believed he had negotiated the best deal he could with Auvex. I find that Mr Hughes negotiated the best deal he could with Auvex.

Mighty River proposals

Mr Hughes received a proposal from Mighty River after 7.00 pm on 28 August 2016, that is after the Term Sheet had been executed and the day before the 29 August creditors' meeting. Mr Hughes gave proper consideration to the proposal and concluded that it would not result in a better outcome for creditors than the transactions contemplated by the Auvex proposal. Mr Hughes detailed his reasons. I find them convincing. I find that Mr Hughes gave proper consideration to the Mighty River proposal and properly chose to pursue the Auvex proposal in preference.
On or about 11 September 2017 the Administrators received a further offer from Mighty River which was to purchase the choses in action available to Mesa for $400,000. Mr Hughes considered that he could not accept that proposal because Auvex had paid the Non‑Refundable Payment to Mesa on 25 August 2017 in return for the sale of the assets including the choses in action which were the subject of the Mighty River offer. In any event, Mr Hughes considered that the Auvex transaction, taken as a whole, was superior to any offer made by Mighty River. The sale of the assignable choses in action to Auvex was an integral part of the Auvex transaction. I accept Mr Hughes' evidence to the effect that Mr Ellison would not have caused Auvex to proceed with the Auvex proposal if the assignable choses in action being assigned to Auvex were not part of the transaction.
The Administrators honestly and reasonably believe, based on proper grounds, that the Auvex transaction is the best option available to them to realise Mesa's assets and the Auvex transaction provides a better outcome for Mesa's creditors than liquidation. Nevertheless, Mighty River maintains that it is not reasonable for the Administrators and Mesa to enter into the Auvex transaction. I turn now to consider the grounds for Mighty River's contentions.

The choses in action

The sale to Auvex includes all assignable choses in action. Mighty River says that they have value and ought not to have been sold or included in the assets sold to Auvex for the Consideration under the sale and purchase agreement. The choses in action are described by Mighty River as:
(a)claims associated with MRL and PMI's use of the Boodarie lease;
(b)claims associated with MRL and PMI's use of Utah Point and the Pad 7 loading facility; and
(c)claims associated with the management fees incurred to MRL and PMI.

Mighty River says no legal advice produced

The first point made by Mighty River is that the Administrators have not provided to the court any legal opinion about the sustainability and value of the choses in action. In response, the Administrators say that such legal advice is not required, nor of great assistance when all of the matters relevant to the Administrators' application have been the subject of scrutiny by Mighty River and in these contested applications.
Mr Howard SC for the Administrators referred to Plan B Trustees Ltd v Parker[No 2] (2013) 11 ASTLR 242. That was a case where a trustee sought directions pursuant to s 92 of the Trustees Act 1962 (WA). Edelman J said at [39] that when directions are sought concerning the justification for legal action the court will usually have to look to legal opinion on the prospects of success. In that case the trustees were seeking a direction that they would be justified in not commencing legal proceedings in respect of certain payments from the trust. Edelman J referred to the historical roots and the common practice of providing a legal opinion but then said at [42] that the better view today may be that it should not be the practice of courts to assess the prospects of success of an action by reference to an expert opinion from senior counsel. His Honour gave a number of reasons for that view. First, his Honour distinguished between ex parte applications and proceedings between the parties [43]. In the latter case, matters which could be contained in an expert opinion could also be made in submissions. Secondly, his Honour said that an expert opinion from counsel on a matter of local law would not generally be admissible evidence for its content [44]. Thirdly, his Honour distinguished between cases where the directions sought are that the trustee is justified in commencing legal action and cases where the directions sought is that the trustee would be justified in not commencing legal action [45]. In the former case, it will generally be necessary for the trustee to obtain a legal opinion before approaching the court because the trustee should have taken reasonable steps to form its own opinion on the subject about directions which are sought before approaching the court for directions and legal action should never be commenced unless the trustee is satisfied that it is properly arguable. On the other hand, where the direction sought is that the trustee is justified in not commencing legal action, it is less essential for the trustee to form an opinion about whether the cause of action is properly arguable:
This is because there are other reasons for not commencing legal action independent of the strength of the claim. In such a case, whether the trustee has obtained a legal opinion is one matter the Court will consider in assessing whether the trustee has taken appropriate preliminary steps to approaching the Court [49].
These applications, and the previous proceedings between these parties, have been hotly contested. The court can be reasonably satisfied that every legal argument that the causes of action included in the assignable choses in action is properly arguable has been put before the court.

Choses in action assigned

The causes of action Mighty River says Mesa might pursue are claims, principally for an account of profits made by MRL entities arising from related party transactions.
The Auvex Transaction does not include general releases. The Term Sheet refers to Excluded Assets. The effect is that there is no transfer of non‑assignable choses in action to Auvex. What is a non‑assignable chose in action is not defined in the sale and purchase agreement or the DOCA.
The Administrators accept that Mesa may have statutory causes of action available to it under the Corporations Act and other Acts. The Administrators further accept that such causes of action include those concerning previous related party transactions which may allow Mesa to claim the profits made by the other party. The Administrators say, and I accept, that certain statutory claims cannot be assigned. An unassignable chose in action would include a claim under s 1317H of the Corporations Act, the key provision relied upon by Mighty River as the basis of the claims held by Mesa. The Administrators say that any such statutory causes of action are non‑assignable choses in action, which remain with the company after the Auvex transactions. Further, the Administrators say that if the directors of Mesa are not minded to prosecute those actions after the completion of the Auvex transaction they will be available to Mighty River via derivative proceedings. After the Auvex transaction is completed and the DOCA is terminated, Mighty River might bring derivative proceedings to have Mesa pursue a claim under s 1317H.

Mesa's alleged causes of action

As I have said, Mighty River contends that Mesa has potential claims that are assigned under the Auvex transactions and hence will no longer be available to Mesa and that Mesa has not obtained any or any adequate consideration for the assignment. The claims are for the use of the Boodarie assets, the use of port assets at Utah Point and the MRL alleged debt.

Use of Boodarie assets claims

Mighty River says that MRL and related parties used Mesa's general purpose lease at Boodarie for their own purposes. Mighty River says that the use occurred without any written agreement between MRL and its related parties and Mesa. Further, Mighty River says that at the time MRL was a related entity and the use constituted Mesa giving a financial benefit to MRL, which was required to be but was not approved by Mesa's members as set out in s 217 to s 227 of the Corporations Act. Mighty River says there is a reasonable basis for concluding that there was a contravention of s 208 of the Corporations Act and there are potential claims of value for breaches of directors' and other duties against the directors of Mesa and against MRL and its subsidiaries. Mighty River says that Mesa has claims for an account of profits.
The claims were the subject of detailed analysis in the Administrators report of 17 March 2017. In that report the Administrators confirmed that they had undertaken investigations into the alleged use by MRL and other related parties of the company's general purpose lease at Boodarie on other than commercial terms. The Mesa board had informed the Administrators that there was an informal arrangement whereby PMI and related entities were able to use surplus land at Boodarie for no monetary consideration because of the value adding functions provided by PMI including:
•the rectification of non‑compliance with the local government's development guidelines;
•undertaking all statutory approvals necessary for development of the Boodarie yard;
•marketing, drafting, negotiating, securing and managing third party leases; and
•the provision of the registered mine manager.
The board had informed the Administrators that site works and other tasks of significant value had been undertaken by PMI and related entities for which Mesa was not charged and were an additional factor in considering the informal arrangement with Mesa. The board had informed the Administrators that it considered the value adding functions of PMI to be substantial. The Administrators reported that notwithstanding the information supplied by the board and that all rental income derived from the third party leases managed by PMI were forwarded to Mesa:
Based on the information that we had reviewed to date, we currently consider that the Company may have a claim for the use of Boodarie by PMI and related entities. Based on the 'stockpile area' of the Boodarie yard alone, which we are not aware of any party other than PMI and related parties using, at the rates charged to third parties with leases over similar areas at Boodarie, the Company may have a claim against PMI and related parties for up to approximately $3.4 million.
The Administrators went on to note that that was their most optimistic assessment of the claims and did not take into consideration any of the potential counterclaims that PMI and related entities consider they have against Mesa and which they believe exceeds the value of any usage of Boodarie. The Administrators said that they considered any potential realisations 'will likely be less than the estimate discussed above, if anything'.
Mr Hughes was cross‑examined about his investigation of and consideration of potential counterclaims that MRL might have against Mesa as a factor in determining the potential value, if any of a claim in relation to Boodarie. Mr Hughes gave two principal reasons. First, he was able to identify a number of services that MRL had performed for Mesa that were not charged for. These included a lot of in house counsel work performed by MRL for Mesa on the negotiating of various contracts, the sheeting and commissioning of Utah Point and other work done in response to specific written requests by Mesa. Secondly, MRL and Mesa had each done things for the benefit of the other. Mesa would be precluded by, for example, conventional estoppel from resiling from that understanding and if it did resile then MRL could do the same. Counsel for MRL submitted that such a claim might act as an equitable set off brought as a defence to any claim by Mesa. In any event an equitable set off or a counterclaim would reduce the value of the claim to Mesa.
Mr Hughes devoted substantial resources to investigating the Boodarie claim. He concluded that the claim was highly speculative and contentious such that it was of no, or little, value when the risks of pursuing it were considered. He considered that the claim was very difficult to prove on the evidence that was available to him and in the light of the investigations which he had undertaken. He was aware that he would face significant difficulties obtaining and assembling evidence to support the claims. He considered that, as a best case, the claim that Mesa may have in relation to Boodarie was worth no more than $3.4 million. The Administrators did not have funds available to them to pursue litigation over the Boodarie lease. Mr Hughes considered that litigation funding would not be available for a speculative claim for a relatively small gain.
I find that Mr Hughes formed the opinion that any claim would not be worth pursuing and that that is a reasonable opinion in the circumstances. Furthermore, Mr Hughes said that the Administrators did not have funds to pursue such an action and did not believe that he would be able to obtain funds from a litigation funder. I find those views to have been reasonable.

Use of port assets at Utah Point

Mighty River says that between 2011 and 2016 MRL and related parties used Mesa's port capacity at Utah Point and access rights to Lot 7 for their own purposes. Again, Mighty River says that that was done without any written agreement and was a related party transaction.
The Administrators reported to the creditors on their investigation in their report of 17 March 2017. The Administrators had been informed by Mesa's board that Mesa approved PMI to use Lot 7 in order for it to remain compliant with its agreement with the Pilbara Ports Authority (PPA), that is to ensure Mesa was not running the risk of losing its facility rights and pre‑payments totalling approximately $1.32 million pursuant to the 'use it or lose it' provisions of the facility agreements. Further, the board had informed the Administrators that the use of Lot 7 was inconvenient for PMI given the load out from Lot 7 was considerably slower and the costs were approximately 40% higher than that of the lots it leased in its own right. The board said that the only reason for PMI using Lot 7 was to assist Mesa in retaining its facility rights. The board had informed the Administrators that MRL and related entities had sufficient capacity at Utah Point to fulfil its export requirements. The Administrators confirmed that the company on charged all of the direct costs it was charged by the PPA in relation to the shipments from Lot 7 to PMI and PMI reimbursed the company for all of these costs, as well as a fee of $1,000 per shipment when Mesa was listed as the shipper by payments into the company's bank account. The Administrators had been unable to determine if there was a secondary market for the company's port rights or otherwise the value of its port rights. The Administrators concluded that Mesa received a benefit from PMI using Lot 7 by remaining in compliance with the 'use it or lose it' provisions of the facility agreements and retaining its facility rights when it did not have any product from its own operations to put through the facility, as well as in preserving the value of its prepayments. The Administrators said they have not found sufficient evidence to support a claim against the company's directors, MRL or related entities that could be successfully pursued in respect of related parties' usage of its port rights or capacity at Utah Point.
It has not been established that there is reasonable cause to believe that Mesa has a viable cause of action which it is feasible and practical for the Administrators to pursue. So far as a claim for profits is concerned, the evidence does not establish that MRL made any profits attributable to the alleged breach. That is because it has not been shown that MRL made any gain from using Lot 7 rather than its own facilities.

MRL alleged debt

Mighty River says that the debt incurred by Mesa to MRL was incurred in circumstances where MRL and Mesa were related parties and Mesa was required to but did not obtain the approval of its members as set out in s 217 to s 227 of the Corporations Act before incurring the MRL debt. It is said that there is a reasonable basis for concluding that there has been a contravention of s 208 of the Corporations Act which gives rise to potential claims of value under s 209 and there are potential claims of value for breaches of directors and other duties against the directors of Mesa and against MRL and its subsidiaries.
I am not satisfied that it has been established that it is not reasonable for the Administrators to have formed the view, after their investigations, that there is not a practically viable claim which is commercially worth pursuing. Put another way, it was reasonable for the Administrators to conclude that there was no claim worth pursuing in relation to the claim relating to the incurring of the MRL debt.

Auvex JV claims

Mighty River also says that between 2011 and 2016 Auvex breached its joint venture agreement with Mesa in various ways. In essence, the claims relate to decisions to not commence mining operations and to allow port rights to elapse.
Again, these claims were investigated by the Administrators. They reported on it in their report to creditors of 17 March 2017. The Administrators said:
… In our view, these decisions are commercial decisions and based on our investigations, we consider that the board took a commercial approach to both these issues.
The Administrators then gave consideration to the manganese price and the cost and feasibility of restarting operations. In relation to the decision to allow the company's port rights to lapse, the Administrators noted that the board considered an extension of the company's lease and decided it was not in the interests of shareholders to renew the lease given the expenses associated with holding the lease and the limited prospect of the lease being used for the next 12 months, if at all, over the proposed lease extension without a significant improvement in the manganese market. The Administrators said that they did not intend taking any further action in relation to that matter. It has not been demonstrated that the Administrator's approach to that matter is not reasonable.

Consideration

To consider whether the realisable value of the Sale Assets is reasonably proportional to the Consideration it is necessary to make some assessment of the Consideration. The Consideration has two components. The first is cash of $2,027,500. The second is the assumption of $6 million of the MRL proof of debt.

MRL alleged debt

The Consideration for Mesa's sale of the Sale Assets under the sale and purchase agreement includes the assumption of liability by Auvex as agreed in the Deed of Assumption of Debt, that is proportion of $6 million of the MRL proof of debt described in schedule 2 to the Deed of Assumption of Debt.
MRL lodged a proof of debt in the deed administration of Mesa in the amount of $8,106,226.05 comprising:
(a)     $3,418,000 in cash advances;
(b)$2,001,214 in monthly management fees (at a rate of approximately $45,000 per month excluding GST);
(c)     $1,518,833 in interest charges;
(d)     $620,081 in tenement expenses paid for and on behalf of Mesa;
(e)     $501,709 in other expenses paid for and on behalf of Mesa; and
(f)     $46,389 in amounts owed to MRL subsidiaries.
Mr Hughes instructed his staff, particularly an accountant and senior accountant director employed by his firm, to undertake a review of the MRL proof of debt under Mr Hughes' supervision. In his sworn evidence Mr Hughes said that he had verified the cash advances and the invoicing of the management fees from Mesa's financial accounting software, the bank account statements for Mesa's bank account and invoices issued by MRL between 30 November 2012 and 30 June 2016. Mr Hughes, and his staff, investigated the reasonableness of the management fees and concluded they were reasonable. Mr Hughes verified that the tenement expenses in the amount referred to were paid for by MRL on behalf of Mesa. Mr Hughes, and his staff, investigated the other amounts in the MRL proof of debt and found them to be substantiated. The Assumed Debt under the Deed of Assumption of Debt consists of the cash advances, monthly management fees and tenement expenses. I find that Mr Hughes has properly considered those items reasonably amount to a consideration of $6 million.

Consideration reasonably proportional to realisable value of Sale Assets

Mr Hughes has properly considered the realisable value of the Sale Assets to Mesa, taking into account the PCF Capital indicative valuation of the JV assets, the failure to attract any viable offer other than the Auvex proposal for the JV assets and the other mining assets after a thorough marketing campaign, his investigation and assessment of the assignable choses in action, his lack of funds to pursue litigation and his assessment of the unlikelihood of obtaining litigation funding. I find that Mr Hughes' assessment that the debt owing by Mesa to MRL is at least $6 million is reasonable. I find that Mr Hughes' assessment that the Consideration is reasonable consideration for the sale of the Sale Assets is reasonable. Furthermore, the effect of the transaction is to relieve Mesa of the balance of the MRL debt.
I find that objectively the Consideration is reasonable and the transaction is reasonable in the sense that it is within the limits of what would be rational or sensible to expect in all the circumstances. Auvex assuming the Assumed Debt, together with a cash payment of $2 million, is reasonable compensation for the assets to be transferred to Auvex under the Auvex transaction.
It is not, of course the task of the court to consider the commercial desirability of the transaction as if it and not the Administrators were deciding to enter into the transaction.
I am satisfied that the Administrators were justified and were acting reasonably and properly in participating in negotiations in relation to the various agreements outlined in the Term Sheet. I am satisfied that the Administrators are justified and are, or will be, acting reasonably and properly by entering into and giving effect to the various agreements outlined in the Term Sheet. The directions sought by the Administrators in COR 242 of 2017 should be made.

COR 96 of 2017

Senior counsel for Mighty River, Mr Newlinds, informed the court that if the court was satisfied that it should make the directions sought by the Administrators it necessarily follows that Mighty River's claims in COR 96 of 2017 must fail. I agree. Mighty River's claims in that proceeding will be dismissed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
RK
ASSOCIATE TO THE HONOURABLE JUSTICE LE MIERE
29 NOVEMBER 2018

[2018] WASC 368

29 NOVEMBER 2018

Key Legal Topics

Areas of Law

Corporate Law & Governance

Legal Concepts

Voluntary administration

Deed of company arrangement

Related party transactions

Corporate governance

Proof of debt

ASX Listing Rule 10.1