Minister for Environment v Eclipse Resources Pty Ltd (Administrator Appointed) - [2017] WASC 318

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: MINISTER FOR ENVIRONMENT -v- ECLIPSE RESOURCES PTY LTD (ADMINISTRATOR APPOINTED) [2017] WASC 318

CORAM: MASTER SANDERSON

HEARD: 12 OCTOBER 2017

DELIVERED : 12 OCTOBER 2017

PUBLISHED : 7 NOVEMBER 2017

FILE NO/S: COR 204 of 2016

BETWEEN: MINISTER FOR ENVIRONMENT
Plaintiff
AND
ECLIPSE RESOURCES PTY LTD (ADMINISTRATOR APPOINTED)
Defendant

Catchwords:

Corporation law - Application to adjourn winding up application because of appointment of administrator

Legislation:

Corporations Act 2001 (Cth)

Result:

Application adjourned

Category: A

Representation:

Counsel:

Plaintiff: Mr S M Davies SC
Defendant: Mr J A Thomson SC

Solicitors:

Plaintiff: State Solicitor for Western Australia
Defendant: HWL Ebsworth Lawyers

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

Lubavitch Mazal Pty Ltd v Yeshiva Properties (No 1) Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197
Watts v Albany Marine Centre Pty Ltd [2006] WASC 22

MASTER SANDERSON: This is the plaintiff's application to wind up the defendant in insolvency. The plaintiff filed and served the originating process on 30 September 2016. On 27 September 2017 the defendant's directors appointed an administrator to the defendant. On 11 October 2017 the defendant filed an interlocutory process to adjourn the plaintiff's application to wind up. On 12 October 2017, after hearing argument and over strenuous objection from counsel for the plaintiff, I adjourned the matter until 2 November 2017. I said I would provide reasons for that decision. These are those reasons.
The relevant background facts are as follows. The defendant is a wholly owned subsidiary of PRM Pty Ltd which in turn is a wholly owned subsidiary of Marford Group Pty Ltd. Bayardo Pty Ltd and Man O War Resources Pty Ltd are both wholly owned subsidiaries of PRM. A dispute arose between the plaintiff and the defendant as to the defendant's liability to pay certain charges for the disposal of waste material. On 9 March 2016 Beech J found in favour of the plaintiff. He awarded damages payable by the defendant in an amount of just over $21 million. An appeal was lodged against his Honour's decision. That appeal was dismissed. On 14 September 2017 the defendant was denied special leave to appeal. It had been agreed between the parties that the application to wind up the defendant would be held over pending the defendant's exercise of its rights to appeal. That explains the delay between the issue of the winding up application and the first return date.
Based on the administrator's preliminary investigations into the assets, property and affairs of the defendant it appears the defendant is insolvent. The administrator holds funds in an amount of $454,849 with further recoveries expected of $361,978.34. The administrator believes the unsecured creditor liabilities total just over $111 million. The disparity between the assets and liabilities - in other words the extent of the defendant's insolvency - is a factor which was highlighted by counsel for the plaintiff. It is a matter to which I will return later in these reasons.
The administrator is presently investigating two transactions which may be voidable transactions and which took place on 24 February 2012. One transaction involved a transfer of certain property to Man O War, the other involved a transfer of property to Bayardo. The merits of any potential recovery actions will be considered as part of the report the administrator is preparing. The administrator says in his evidence that the transactions are complicated and require further investigation before an informed recommendation can be made regarding their merits. The administrator understands that the two properties together have a substantial value - in the region of $70 million if the properties were sold undeveloped and in the region of $200 million if the two properties were subdivided.
By correspondence dated 10 October 2017 the solicitors for Marford and Bayardo informed the administrator that Marford has net assets in excess of $100 million and that Bayardo intends to submit a proposal for a deed of company arrangements (DOCA): See Annexure 'MK 13' to the affidavit of Mervyn Jonathan Kitay sworn 11 October 2017. Relevantly the letter read as follows:
(a) Bayardo (supported by Marford) intends to submit a proposal for a Deed of Company Arrangement in respect of Eclipse Resources Pty Ltd (administrator appointed) (Eclipse Resources);
(b) Bayardo will work with the Administrator to formulate the terms of the proposal including the structure of the proposed payment under a Deed of Company Arrangement. The final proposal will take into account any assets of Eclipse Resources or statutory claims that may be available to any liquidator;
(c) any proposal will be structured to enable the business of Eclipse Resources to continue to trade; and
(d) the intended proposal will be structured to provide a better return to the creditors of Eclipse Resources when compared to the position they would be in if Eclipse Resources were to be placed into liquidation.
In relation to Bayardo's financial capacity to pay, the letter went on to say:
Bayardo has the financial capacity to complete a transaction of the nature proposed. In that regard:
(i) Marford is the ultimate holding company of Bayardo.
(ii) Marford and Bayardo have no debt. Marford and Bayardo have a very substantial asset base, including assets that can be readily converted to cash. The net assets of Marford are in excess of $100 million. If the Administrator requires any further information as to Bayardo's capacity, please let us know.
(iii) Marford is prepared to give an undertaking to Bayardo to document its support for Bayardo as a DOCA proponent.
The defendant sought to have the application adjourned pursuant to s 440A(2) of the Corporations Act 2001 (Cth). In the alternative it sought the adjournment under s 467(1)(b) of the Act. In indicated I would grant the adjournment under the first of these two sections. Section 440A(2) of the Act is in the following terms:
The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.
What the section really requires is an evaluation by the court as to whether it is 'in the interests of the company's creditors for the company to continue under administration rather than be wound up'. What that assessment involves must necessarily vary from case to case. However the authorities indicate it is for the party seeking the adjournment to satisfy the court it is appropriate. This was the approach adopted by EM Heenan J in Watts v Albany Marine Centre Pty Ltd [2006] WASC 22. His Honour referred to the decision of Austin J in Lubavitch Mazal Pty Ltd v Yeshiva Properties (No 1) Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197. Austin J examined the relevant cases. EM Heenan J then concludes:
In these cases the emphasis is plainly upon the comparative advantages for the creditors of the company for a continuation of an administration as opposed to the immediate appointment of a liquidator. In one passage ([74]) Austin J draws attention to the most influential factor being the prospect that a deed of company arrangement might emerge that would give the creditors a quicker or better dividend in a winding-up [8].
It is clear on the evidence in this case that there is a real prospect of the defendant entering into a DOCA. Marford and its related entities say they have sufficient assets to make the prospect of a DOCA real. Against that it is early days in the administration and the correspondence from Marford's solicitors has not yet fleshed out any proposal. However, on balance, it seemed to me it would be in the interests of the defendant's creditors to allow the administration to continue.
Although I approached this matter on the basis that it was for the defendant to establish an adjournment was warranted it is convenient to consider the matter in the light of the arguments advanced by counsel for the plaintiff. It should however be borne in mind I concluded there was a real prospect of a DOCA being advanced.
The first point made by the plaintiff was the extent of the defendant's insolvency. It had no assets beyond the cash held by the administrator and it was difficult to see, so the plaintiff submitted, why any proposal would be advanced to restructure the defendant. There is considerable merit in that submission. However it must be linked in with the second submission made by the plaintiff. That had to do with what the plaintiff said were the uncommercial transactions effected by the defendant to related parties. The plaintiff submitted that these transactions were prima facie uncommercial and that a liquidator, if appointed, could take steps to recover funds or assets to the advantage of the defendant's creditors. As I have indicated above the administrator was aware of the questionable nature of the transactions but indicated they were complex and would take some time to investigate.
That then meant there were two options. Either a liquidator could be appointed and the liquidator could take whatever steps he thought necessary in relation to the uncommercial transactions. If, after investigation, he was satisfied steps should be taken to recover from either Bayardo or Man O War, or both, then a demand could be made and if necessary proceedings commenced. It is clear the liquidator would not have sufficient funds to pursue those proceedings beyond perhaps an examination of the directors. If the liquidator was to take an action claiming the transactions were uncommercial he would necessarily have to obtain funding. Looking at the list of creditors the only creditor likely to provide funding is the plaintiff. Whether or not it would be appropriate for a government agency to provide funding to a liquidator is open to question. The alternative would be for the liquidator to obtain funding from a litigation funder. While it is far too early to assess the merits of any claim which may be advanced against Bayardo, Man O War or any other entity it does seem reasonable to assume that litigation funding might be available.
There are always difficulties associated with externally funded litigation. The very fact that there is litigation which takes time and may drag on for years is to the disadvantage of the creditors. Moreover, the eventual return to creditors will necessarily be reduced by the fees payable to the litigation funder. The liquidator's capacity to control the litigation and determine whether it should be settled may well be limited by the litigation funding agreement. So while litigation funding may be available to the liquidator it is not an approach without its difficulties.
As against that approach an administrator can put to creditors a proposed DOCA. In this case it seems reasonable to assume that the only parties likely to propose a DOCA are Marford, Bayardo, Man O War or a combination of the three. Presumably the only reason they would do so is to forestall any action the liquidator may take in relation to the alleged uncommercial transactions. If a DOCA is to be advanced then it will have to be accepted by the unsecured creditors in accordance with the Corporations Act. It seems most unlikely that Marford, Bayardo or Man O War would be in a position to vote on the acceptance or otherwise of the DOCA. So for the DOCA to have any reasonable prospect of success it would have to offer a better alternative to unsecured creditors than what the liquidator might reasonably expect to recover if he took action. Further, if a DOCA is to be advanced it will have to be put forward within a reasonable timeframe. So if a proposal is put forward and accepted it is likely to result in a payment to the unsecured creditors much sooner than if litigation took place.
The plaintiff also raised the fact that as a consequence of holding off advancing the winding up application until the defendant's rights of appeal had been exhausted the limitation date for taking action in relation to alleged breaches of directors' duties would expire in March 2018. The plaintiff was quite rightly concerned this may prejudice its position. Counsel for the defendant indicated the defendant would be prepared to agree to extend the limitation period. Although I did not make such agreement a condition of the granting of the adjournment I did order the parties to confer on this issue and indicated that if no agreement could be reached I would reconsider the position.
Earlier in these reasons I dealt with the text of s 440A. It is also worth mentioning the context in which that section is found. It is in pt 5.3A of the Corporations Act which is entitled 'Administration of a Company's affairs with a view to executing a Deed of Company Arrangement'.
Section 435A is in the following terms:
Object of Part
The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
Note: Schedule 2 contains additional rules about companies under external administration.
Clearly in this case it is s 435A(b) which is relevant. Indeed that is reflected in the terms of s 440A(2). What is striking about the administration process is the extent to which it allows the company's directors, its shareholders, the administrator and the creditors, both secured and unsecured, to determine what will happen to the company. Under s 436A(1) it is the directors who decide whether or not to appoint an administrator. They can do so if they believe the company is insolvent or is likely to become insolvent. To reach that conclusion the directors must consider carefully the affairs of the company and make a decision. The directors must then approach someone to act as administrator. There are a number of firms who provide services as administrators and they compete with one another for appointments. It may be thought directors will appoint an administrator who will treat the directors or their associated entities most favourably. Doubtless the legislature was alive to this possibility but it nonetheless decided the decision should be made by the directors rather than the directors applying to the court which would then appoint administrators.
The DOCA itself must be approved by the creditors in conformity with the provisions of the Corporations Act. But once again it is the administrator, those proposing the DOCA and the creditors who determine whether or not the DOCA will be put in place or the company will go into liquidation. The court has no role in that decision. Of course the DOCA can in certain circumstances be terminated but generally speaking if the DOCA fails it is because there has not been compliance with its terms.
Contextually then everything points to the legislature being of the view the parties should try and work out the company's affairs in such a way that satisfies their needs. Of course sometimes it is in the interests of a creditor the company be wound up even when an administrator has been appointed. For instance the Deputy Commissioner of Taxation who upon a company becoming insolvent has certain rights against the directors may have no interest in an administration. But those particular circumstances aside allowing the parties the opportunity to attempt to reach a compromise must generally be in the best interests of creditors.
For these reasons I was prepared to adjourn the winding up application until 2 November 2017. I reserved the costs of the application.