O'Reilly v Precision Mining and Drilling Pty Ltd (Subject to Deed of Company Arrangement)
[2021] WASC 176
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: O'REILLY -v- PRECISION MINING AND DRILLING PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) [2021] WASC 176
CORAM: MASTER SANDERSON
HEARD: 28 MAY 2021
DELIVERED : 2 JUNE 2021
PUBLISHED : 2 JUNE 2021
FILE NO/S: COR 54 of 2021
BETWEEN: JORDAN CHRISTOPHER O'REILLY
Plaintiff
AND
PRECISION MINING AND DRILLING PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
First Defendant
PRECISION MINING AND DRILLING HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second Defendant
ROBERT ALLAN JACOBS in capacity as DEED ADMINISTRATOR OF PRECISION MINING AND DRILLING PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
ROBERT ALLAN JACOBS in capacity as DEED ADMINISTRATOR OF PRECISION MINING AND DRILLING HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Third Defendants
Catchwords:
Corporations law - Application to terminate Deeds of Company Arrangement - Whether material facts were disclosed - Corporation Act 2001 (Cth) s 4450
Legislation:
Corporations Act 2001 (Cth)
Result:
Application dismissed
Category: B
Representation:
Counsel:
| Plaintiff | : | T O'Leary |
| First Defendant | : | CRC Newlinds SC & J Abberton |
| Second Defendant | : | CRC Newlinds SC & J Abberton |
| Third Defendants | : | CRC Newlinds SC & J Abberton & CRC Newlinds & J Abberton |
| Intervening Creditors | : | W Zappia |
Solicitors:
| Plaintiff | : | Gilbert + Tobin |
| First Defendant | : | Lavan |
| Second Defendant | : | Lavan |
| Third Defendants | : | Lavan |
| Intervening Creditors | : | LVA Legal |
Case(s) referred to in decision(s):
Nil
MASTER SANDERSON:
By originating process lodged 1 April 2021, the plaintiff sought to have deeds of company arrangement (DOCAs) between the first defendant and the third defendant and the second defendant and the third defendant terminated. Although there were two separate DOCAs with two separate companies, there was only one set of relevant facts. For ease of reference, I will refer to the first and second defendants as 'Precision Mining' unless it is necessary to draw a distinction between the two companies. I will refer to the third defendant as 'Mr Jacobs'. In keeping with this nomenclature, I will refer to plaintiff as 'Mr O'Reilly'.
The details of the application as set out in the originating process are as follows:
A.DETAILS OF APPLICATION
This application is made under s 445D and s 447A of the Corporations Act.
It is an application for orders that deeds of company arrangement (DOCA) between:
(a)the first defendant, Precision Mining and Drilling Pty Ltd (ACN 136 261 053) (Precision Mining), and its deed administrator, the third defendant, be terminated and (consequentially and pursuant to s 459A and s 459P of the Corporations Act 2001 (Cth)) that Precision Mining be wound up in insolvency; and
(b)the second defendant, Precision Mining and Drilling Holdings Pty Ltd (ACN 161 952 361) (Precision Holdings), and its deed administrator, the third defendant, be terminated and (consequentially and pursuant to s 459A and s 459P of the Corporations Act 2001 (Cth)) that Precision Holdings be wound up in insolvency.
The insolvency of each of the first and second defendants is apparent from the opinion of the administrator in the reports issued pursuant to s 75-225(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth), the failure of Precision Mining to pay the plaintiff's debt as and when it fell due, and from the companies' most recent financial statements as reported in the administrator's section 75-225(3) reports. On the facts stated in the supporting affidavit(s), the plaintiff claims:
1.The DOCA dated 26 March 2021 between the first defendant, Precision Mining and Drilling Pty Ltd (subject to Deed of Company Arrangement) and the third defendant, Mr Robert Allan Jacobs, be terminated.
2.The DOCA dated 26 March 2021 between the second defendant, Precision Mining and Drilling Holdings Pty Ltd (subject to Deed of Company Arrangement) and the third defendant, Mr Robert Allan Jacobs, be terminated.
3.The first defendant be wound up in insolvency.
4.The second defendant be wound up in insolvency.
5.Mr John Allan Bumbak be appointed as liquidator of the first defendant.
6.Mr John Allan Bumbak be appointed as liquidator of the second defendant.
7.The first defendant pay the plaintiffs costs of the proceedings (including reserved costs, if any) out of the Companys property in accordance with section 466(2) of the Corporations Act 2001 (Cth).
8.Such further or other orders as the Court considers appropriate.
The application was supported by two affidavits of Janelle Louise Sputore, the first sworn 31 March 2021 and the second sworn 1 April 2021. There was also an affidavit of Mr O'Reilly sworn 1 April 2021. These three affidavits effectively grounded the application. As at the date of the first directions hearing, Mr Jacob's solicitors were in possession of virtually all of the evidence relied upon to support the application. At that directions hearing, counsel for Mr Jacobs submitted it was not entirely clear which subsections of s 445D Mr O'Reilly relied upon. Accordingly, I ordered Precision Mining to file a statement of issues. That statement of issues read as follows:
Pursuant to order 1 of the programming orders made on 22 April 2021 by the Honourable Master Sanderson, the Plaintiff, Mr O'Reilly, files this Statement of Issues (Statement) identifying the substantive issues that will require determination at the special appointment on 28 May 2021.
Mr O'Reilly does not, by signing this Statement, in any way abandon or limit his right to rely on the grounds for his application set out in the Amended Originating Process filed 30 April 2021, nor does the statement amend or qualify that application.
The issues that will require determination at trial are as follows:
1Should:
(a)the DOCA dated 29 March 2021 between the first defendant, Precision Mining and Drilling Pty Ltd (subject to Deed of Company Arrangement) and the first named third defendant, Mr Robert Allan Jacobs; and
(b)the DOCA dated 29 March 2021 between the second defendant, Precision Mining and Drilling Holdings Pty Ltd (subject to Deed of Company Arrangement) and the second named third defendant, Mr Robert Allan Jacobs,
be terminated on the basis of any or all of the following?
(c)the proponent of the DOCAs, Drilling and Mining Survey Tools Pty Ltd, has issued shares to certain creditors, in circumstances where the issue of shares was not disclosed in the DOCA and was not disclosed by the administrator, Mr Jacobs, in any material provided to creditors;
(d)the administrator, Mr Jacobs, has neither identified the reason, nor inquired as to the reason, for the administration of the companies, such that the administrator's report to creditors was false or misleading in a material respect, alternatively was subject to an omission that would have been material to creditors. The administrator has subsequently been evasive as to the issue;
(e)the administration was only undertaken to avoid the claims by Mr O'Reilly (Claims) and so was an abuse of Part 5.3A of the Corporations Act 2001, which is apparent when one assesses the prospects of Mr O'Reilly succeeding on the Claims;
(f)the material available to this Honourable Court reveals that the companies had no defence to the Claims, which informs both the circumstances in which the administration was undertaken, the conduct of the administration and the assessment of the DOCAs. In that sense, the DOCAs proposed by Drilling and Mining Survey Tools Pty Ltd (an entity controlled by Mr Pugh) are just the latest attempt by Mr Pugh to defeat the legitimate exercise by Mr O'Reilly of his rights as a shareholder and as a creditor of the companies;
(g)the DOCAs are supported by related party secured creditors who, on the face of the DOCA, receive no return under the DOCA: that is a 'weighty consideration' where (as here) other creditors prefer that the companies be wound up (per Lindgren J in Deputy Commissioner of Taxation v Alternative Business Solutions [2006] FCA 400, [9]). Section 440A speaks of creditors' interest as creditors, so 'it is not in their financial or commercial interest to forego their debts': Lindgren J's observation informs the motivation of related party secured creditors to forego their debts to avoid the Claims (see (e) above), in the context of undisclosed issue of shares (see (c) above);
(h)the evidence here, including the DOCA, does not disclose how the company will be run and how it expects to meet its obligations into the future; similarly the contents of the 'Information Memorandum' dated 25 January 2021, raise a question as to the bona fides of that 'sales process' conducted by the administrator;
(i)the administrator has refused to provide information about:
(A)entities to which it has supplied north seeking gyros (notwithstanding that the administrator informed creditors at the second creditors meeting that he would provide that information) and communications regarding the supply of north seeking gyros; and
(B)its communications with related entities (including the proponent of the DOCAs);
(j)in circumstances where the company's records reveal transfers of hundreds of thousands of dollars from the company's account to related parties (being entities in which the companies' sole director Mr Pugh is an officer and/or has an interest), the administrator's examination of these transactions appears to be materially inadequate. The administrator does not comment on the relationship between the companies and these related entities. The administrator did not disclose that a trade debtor which Mr Pugh assessed to have a 'nil recoverable value' (see Mr Jacobs' report at [6.3]) was in fact a related entity named Global Mining and Drilling Pty Ltd, which is controlled by Mr Pugh. The administrator qualified that statement subsequently saying that the debt 'was not recoverable during the administration period as the term of the loan was 1 year', but has declined to answer further requests for information regarding Global Mining and Drilling. Further investigations are warranted and can be pursued in a liquidation; and
(k)the circumstances here indicate that the DOCAs were contrary to part 5.3A of the Corporations Act 2001 and the court ought, having regard to the interest of creditors as a whole and the public interest, exercise its discretion to terminate the DOCAs.
2If yes to 1, should a liquidator be appointed to the companies?
3If no to 1, should Mr O'Reilly's proofs of debt be admitted in the amounts claimed given the proper assessment of the Claims (see 1(e), (f))?
In written submissions filed prior to the final hearing, counsel for Mr O'Reilly further refined his client's position. Paragraph 5 of those submissions reads as follows:
5In summary Mr O'Reilly applies for the Precision DOCAs to be terminated on the basis:
(a)of misleading conduct by the administrator, including in information provided to creditors (s.445D(1)(a), (b)), regarding the failure to disclose the issue of shares in DMST to creditors, the failure to disclose that a creditor had edited Mr Jacobs' report to creditors regarding Precision Mining, and the failure to disclose that some creditors had been offered more than the DOCA stated they would receive if they undertook to vote in favour of the Precision Mining DOCA: see [79] to [118] below;
(b)that the misleading conduct described at paragraph 5(a) above were all, relevantly, omissions for the purposes of s.445D(1)(c): see [119] to [127] below;
(c)that the Precision DOCAs would be contrary to the interests of creditors as a whole for the purposes of s.445D(1)(f), such that Precision DOCAs should be set aside to enable further investigations to take place (including director-related transactions, the circumstances of the appointment and the conduct of Mr Pugh), and noting the deed would be unfairly prejudicial to one or more creditors: see [128] to [133] below; and
(d)that the Precision DOCAs should be set aside in the public interest and because they contrary to part 5.3A of the Corporations Act 2001 in the circumstances described below, pursuant to s.445D(1)(g): see [134] to [138] below.
Mr O'Reilly's written submissions raised further specific complaints. I will deal with these below.
Before attempting to distil precisely what issues fell for determination in this application, it is appropriate to look carefully at the provisions of s 445D. (In the originating process reference is made to s 447A. That section deals with the 'general power to make orders' given to the court. Section 447A is only activated when and if the court determines the DOCA ought be terminated under s 445D. For the purposes of these reasons, given the conclusion I have reached, s 447A can be put to one side.) Section 445D reads as follows:
445D When Court may terminate deed
(1)The Court may make an order terminating a deed of company arrangement if satisfied that:
(a)information about the company's business, property, affairs or financial circumstances that:
(i)was false or misleading; and
(ii)can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b)such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or
(c)there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d)there has been a material contravention of the deed by a person bound by the deed; or
(e)effect cannot be given to the deed without injustice or undue delay; or
(f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii)contrary to the interests of the creditors of the company as a whole; or
(g)the deed should be terminated for some other reason.
(2)An order may be made on the application of:
(a)a creditor of the company; or
(b)the company; or
(ba)ASIC; or
(c)any other interested person.
In any application made under this section it is necessary first to determine whether the applicant has standing. In fact, that was not an issue in this case. Mr Jacobs conceded Mr O'Reilly was a creditor of the company. There was an argument as to the extent of the indebtedness of the company to Mr O'Reilly but that did not alter Mr O'Reilly's standing.
Subsection (1)(a) embodies two concepts. First, information about the company's affairs must have been false or misleading and second, that information has to be 'material' to the creditors of the company that vote in favour of the DOCA. Both of these requirements must be satisfied. Subsection (1)(b) makes specific reference to documents accompanying a notice of meeting. This subsection embodies the concept of the document containing false or misleading information – in other words, an active misleading. Subsection (1)(c) embodies a passive misleading – omitting material from a document – that is, the document referred to in 1(b). So a plaintiff must establish not only that the information was not in the document but that the failure to include the information meant the document was false and misleading in a material way.
For present purposes subsections (1)(d) and (e) can be put to one side. They were not relied upon by Mr O'Reilly. The requirements of subsection (1)(f) again embodies two concepts. First, the idea that the DOCA was oppressive or unfair to one or more of the creditors. In the alternative, the concept that the DOCA was contrary to the interests of all of the creditors. A plaintiff has only to satisfy one of these two requirements. In this case, as I understand Mr O'Reilly's position, it was said he satisfied both of these requirements.
Subsection (1)(g) is what might be called a catch all provision. In this case, Mr O'Reilly maintained the DOCAs were contrary to the public interest. Counsel for the defendants agreed there could be cases where a DOCA was terminated because it was against the public interest. He gave, as an example, a situation where the DOCA proponent had a history of using DOCAs to resurrect so‑called 'phoenix companies'. What he did not concede was that this was a case where the DOCAs should be terminated in the public interest. Mr O'Reilly's submissions on this issue focused on whether or not an administrator ought to have been appointed at all. The argument was that if the evidence established an administrator ought not to have been appointed under s 436A then it was in the public interest to terminate the DOCA. I will examine that issue in some detail below but before doing so I will set out the relevant background facts and circumstances.
From about 2007, Mr O'Reilly invented survey and laser alignment tools (Tools) that he intended to patent and market to the hard rock exploration industry in Australia. On or about 27 March 2009 Mr O'Reilly incorporated Precision Mining as a vehicle by which to commercialise the Tools. Precision Mining was known as 'Precision Alignment Equipment Pty Ltd' until 4 September 2018.
On or about 14 December 2012, Mr O'Reilly, Mr Michael Pugh, Western Advance Pty Ltd and Precision Mining entered into an agreement entitled 'Agreement for Subscription of Shares, Precision Alignment Equipment' (Shareholder Agreement). Mr Pugh is the sole director of Western Advance and with Mrs Susan Pugh, he holds all the shares issued by Western Advance. On or about 15 January 2013, Mr O'Reilly incorporated Precision Holdings for the purpose of holding the intellectual property rights in the Tools which company was known as 'Precision Alignment Holdings Pty Ltd' until about 4 September 2018. Precision Holdings holds the intellectual property rights to the Tools including, pursuant to various patents which have been registered in the name of Mr O'Reilly and/or Precision Holdings.
On or about 8 February 2013, pursuant to the Shareholder Agreement, Precision Mining issued 57,500 shares to Mr Pugh for a subscription price of $390,000. As of that date, Mr O'Reilly held 42,500 shares in Precision Mining and Mr Pugh held 57,500 shares. On or about 28 February 2015, Mr Pugh acquired a further 6,250 in Precision Mining for an amount of $60,000. His total shareholding then was 63,750. On 25 August 2016, Mr Pugh transferred his entire shareholding in Precision Mining to Stellar Heights Pty Ltd. On or about 22 August 2016, Stellar Heights acquired a further 18,750 shares in Precision Mining for the sum of $180,000. According, as at 25 August 2016 Stellar Heights held 82,500 in Precision Mining, Mr O'Reilly held 42,500 shares and Mr Pugh, in his personal capacity, held no shares. As at that date, Stellar Heights held shares in Precision Holdings that were proportional to its shareholding in Precision Mining. That is, Stellar Heights held 825 shares in Precision Holdings and Mr O'Reilly held 425 shares. Mr Pugh, in his personal capacity, held no shares. A copy of the Shareholders Agreement appears as attachment JLS3 to the first affidavit of Ms Sputore. For the purposes of this application, it is cl 18 of the Shareholders Agreement which is important. It reads as follows:
18.BUYOUT OPTION
18.1At any time on and from 1 January 2017 either AFT or Icon (Electing Party) may by notice in writing (Buyout Notice) to the other (Non-Electing Party) give the Non-Electing Party the option to purchase all of the shares that the Electing Party may then own in PAE and PAH (Electing Party's Interest) failing which the Non-Electing Party will be required to sell all of the shares that the Non-Electing Party may then own in PAE and PAH (Non-Electing Party's Interest) to the Electing Party on the same terms and conditions (per share).
18.2The Non-Electing Party shall have 30 days from receipt of the Buyout Notice in which to confirm to the Electing Party whether it shall purchase the Electing Party's Interest or not.
18.3Completion of the sale of the Electing Party's Interest or Non-Electing Parties Interest (as the case may be) shall occur on the date 60 days after the issue of the Buyout Notice.
18.4At Completion, in accordance with clause 16.3(c), any Shareholder loans of the Shareholder required to dispose of its shares in PAE and PAH shall be repaid in full.
18.5Clause 2.9 of Schedule 1 shall apply mutatis mutandis, should an Electing Party or Non‑Electing Party default in completing a transfer of their shares in PAE and PAH pursuant to this clause 18.
On 25 January 2018, Mr Pugh purported to issue to Mr O'Reilly a buyout notice. A copy of the buyout notice appears as attachment JLS8 to the first affidavit of Ms Sputore. The purchase price for each share, in both companies, was 20 cents. Mr O'Reilly says the buyout notice was invalid. However, Mr Pugh acted on the buyout notice and transferred Mr O'Reilly's 42,500 shares in Precision Mining and Mr O'Reilly's 425 shares in Precision Holding to Stellar Heights. The transfer of these shares was subsequently registered. It is Mr Pugh's position, Mr O'Reilly is no longer a shareholder in either of the two companies and Stellar Heights now holds all the shares formerly held by Mr O'Reilly. It is Mr O'Reilly's position the alleged transfer was improper and ineffective and he is still the holder of these shares.
In or about April 2019, Precision Mining issued a total of 8,400 shares to third parties at an issue price of $59.5238 per shares. Mr O'Reilly says it is a point of some significance as he was paid only 20 cents per share. At the value of $59.5238 per share the value of Mr O'Reilly's 42,500 shares was $2,529,761.50. On or about 21 February 2020, Precision Mining issued 28,211 shares in the share capital of Precision Mining to Jayleaf Holdings Pty Ltd. Jayleaf Holdings had provided a loan of $1,050,000 to Precision Mining. Allowing for these share issues, it is Mr O'Reilly's position that at present he holds a 22.59% interest in the shareholding of each company. In other words, Mr O'Reilly acknowledges the issue of shares to both the third parties and Jayleaf Holdings were proper. What he does not acknowledge is the transfer of his shares to Stellar Heights was proper.
By letters dated 21 February 2020, 28 February 2020 and 19 March 2020 to Precision Mining and Precision Holdings, Mr O'Reilly requested the register of members of both companies be rectified to acknowledge his entitlement to the shareholding in the respective companies. Both companies declined to rectify their registers. Mr O'Reilly then issued notices of dispute to both companies on 14 April 2021. He did this pursuant to cl 21 of the Shareholder Agreement. He also demanded repayment of outstanding loan monies owed to him.
By cl 10.1 of the Shareholders Agreement the parties acknowledged that Mr O'Reilly had loaned Precision Mining the sum of $322,023.42 (loan amount). By cl 10.2 of the Shareholders Agreement, Precision Mining was obliged to pay Mr O'Reilly an amount of $150,000 upon 'completion' which occurred on or about February 2013. It is Mr O'Reilly's position, Precision Mining has paid him only $145,470 of the $150,000. There is a dispute over the precise figure but the parties are agreed Mr O'Reilly has not been paid the full $150,000. Repayment of the remaining amount is covered by cl 10.3 of the Shareholders Agreement. That clause reads as follows:
PAE shall also pay the additional amount of $172,023.42 when it is financially capable of doing so without effecting its financial viability. The time and date of the payment shall be determined by a unanimous agreement of the company directors.
This is an odd clause. It has no real temporal component. Repayment is due when two requirements are satisfied. First, when the company 'is financially capable' of making repayment. Presumably that means when it has cash at bank which would allow the payment to be made. The second requirement is that when the payment is made it must not affect the 'financial viability' of the company. There is no mechanism for determining how it is to be determined payment will affect the financial viability. Furthermore, the directors of the company are given absolute discretion to determine the time and date upon which payment should be made. It is possible then at some point in time for the company to have funds available and for the payment to be made without affecting the financial viability of the company. Without demand, that would trigger the liability – there is nothing in this clause or elsewhere in the agreement which says demand must be made before any liability crystallises. But when and if liability does arise, independent of any acts of either Mr O'Reilly or the company, the timing of the payment rests exclusively with the directors who must reach unanimous agreement. Presumably then, the directors could agree that if repayment liability arose on 1 January 2021 they would not actually made repayment until 1 January 2031. Even then, if there were more than one director and they could not agree upon a date, Mr O'Reilly might never be paid. It may be possible to imply a term into the agreement but it is not entirely clear whether or not the conditions necessary to imply a term could be satisfied. It might be the case this clause is void for uncertainty or void for some other reason. If that were the case, the loan to Mr O'Reilly would be payable within a reasonable time of a demand being made.
Having said all of that, I do not wish it to be thought I have reached a final conclusion as to the proper interpretation of the clause. It was not necessary to do so to resolve this dispute. But it is important to note the uncertainty surrounding the clause and to appreciate the difficulties which it occasioned. In some ways Mr O'Reilly's case was bedevilled by an inability of counsel to settle on just how the clause should be interpreted. I will expand upon these difficulties below.
In his letters of 28 February 2020, 19 March 2020 and 7 April 2020, Mr O'Reilly requested repayment of the money he had lent to the company. In other words, Mr O'Reilly in these letters took the view the requirements of cl 10.3 had been satisfied and he was entitled to repayment of his loans. By letter dated 5 April 2020, the company denied it was liable to make repayment under cl 10.3 because it was not financially capable of doing so and there had been no unanimous agreement between the directors: Attachment JLS17 to Ms Sputore's first affidavit. I note in passing the reference is to the company not being financially capable of making repayment and there being no unanimous agreement of directors. Perhaps it follows if the company was not financially capable of making a repayment, to make such a repayment would affect its financial viability. In any event, the company made it plain it did not consider the requirements of cl 10.3 had been satisfied.
It is convenient at this point to say something more about the buyout notice. It is Mr O'Reilly's position the buyout notice was invalid for at least two reasons. First, when the notice was issued, Mr Pugh was not the holder of any shares in the companies – they were held by Stellar Heights. That being so, Mr O'Reilly says the buyout notice could not be issued. Second, it was said the notice was not in a proper form and was therefore ineffective. At this hearing, Mr Jacobs did not engage with those arguments. Accordingly, for the purposes of this hearing, and for no other purpose, I will proceed on the basis the shareholding in the companies is as Mr O'Reilly alleges. It is important to note this qualification. The DOCA proposal anticipates an acquisition of shares pursuant to s 444GA. That application has been commenced. In the context of that application there may (or may not) be a dispute as to what shares Mr O'Reilly holds. Nothing in these reasons is intended to determine that issue. But it was an important aspect of Mr O'Reilly's case in this action he was entitled to a 22.59% interest in the shareholding of each company.
After the notices of dispute were issued under the Shareholders Agreement, the mandated mediation took place. It covered both Mr O'Reilly's claim to have the registers rectified and his claim to be entitled to repayment of the loans. The mediation was unsuccessful. Mr O'Reilly was then in a position to issue proceedings if he chose to do so. In fact, before those proceedings could be issued, both companies went into administration.
In response to this application, Mr Jacobs filed an affidavit sworn 12 May 2021. Prior to the hearing of the application, counsel for Mr O'Reilly lodged objections to certain paragraphs of Mr Jacobs' affidavit. I dealt with these objections at the commencement of the hearing. I struck out pars 60.4, 68 and 69 of his affidavit. Essentially, I was satisfied each of the objections taken by counsel for Mr O'Reilly was made out. There were a number of other objections which I did not uphold. A flavour of these objections, which really were variations on a theme, can be illustrated by reference to par 6 of Mr Jacobs' affidavit. That paragraph reads as follows:
In my experience, it is commonplace for directors and/or employees of a company to meet with me ahead of a proposed appointment as voluntary administrator. When I meet with directors and/or employees I always make sure to adopt ARITA's Code of Professional Practice (specifically Practice Statement 1.6.1-1.6.2).
The objection taken by counsel for Mr O'Reilly was expressed in the following way:
1.Paragraph 6, first sentence – Opinion evidence which is inadmissible as no basis is stated for the opinion; Irrelevant: so vague as to be meaningless thus inadmissible.
In my view, there is nothing objectionable in what Mr Jacobs has to say in that paragraph. He is providing background. He specifically refers to his experience. The following paragraph ties back into par 6. Having outlined his usual practice he then says he followed that usual practice in this case. Really he was making two interrelated points. First, he does have a standard or usual practice. That practice has been built up over the years. He then followed that usual practice in this case. In other words, this administration did not differ from many other administrations he had undertaken. The real evidence in this case is what he actually did. Paragraph 6 provides background and explains why he did it.
In pars 8 through to 12 of his affidavit, Mr Jacobs explains the process which led to his appointment as administrator. These paragraphs read as follows:
8.On or about 6 May 2020 I attended a meeting with Mr Pugh, Adam Tonkin (secretary of PMD and PMH), David Miitel (of PMD) and Mr van Aardt of LVA Legal (PMD and PMH's solicitors). This was the first time I had met Mr Pugh and Mr Tonkin. At that meeting various conversations occurred, in relation to PMD only, including conversations between myself, Mr Pugh, Mr Tonkinand Mr Miitel in relation to:
8.1my experience as to insolvency practitioners;
8.2PMD's research and design background;
8.3PMD's 'gyro' tool used for the drilling industry;
8.4PMD's solvency, specifically, I recall Mr Pugh being concerned that PMD may be insolvent or likely to become insolvent at some future time;
8.5PMD's disputes, specifically, I recall Mr Pugh informed me of a dispute with a supplier regarding a payment plan and an unresolved shareholder dispute;
8.6the options which were available to Mr Pugh due to PMD's current financial position including:
8.6.1the safe harbour protections which were available to PMD;
8.6.2voluntary administration or liquidation; or
8.6.3awaiting further action until the Government's temporary measures as a result of COVID‑19 concluded.
9.On or about 29 May 2020, I attended a further meeting with Mr Pugh, Mr Tonkin, Mr Miitel, and LVA Legal and had a conversation regarding largely the same items discussed in paragraph 8 above.
10.Between May 2020 and December 2020, I had no further correspondence with Mr Pugh or anyone from PMD.
11.On or about 15 December 2020, I attended a meeting with, amongst others, Mr Pugh and Mr Tonkin. We discussed:
11.1the COVID-19 stimulus and insolvency law moratoriums likely coming to an end on 31 December;
11.2the possible changes to the insolvency laws in Australia regarding the adoption of the DIP restructuring laws similar to the United Kingdom to assist insolvent companies in restructuring;
11.3the same options available to Mr Pugh which we had discussed at the 9 May 2020 and 29 May 2020 meetings;
11.4further options available to Mr Pugh including raising capital funds from shareholders or putting the business and IP on the market; and
11.5the voluntary administration process generally, how to instigate appointment and the possible outcomes of the voluntary administration process.
12.Mr Pugh provided me with a Balance Sheet and Creditors' List for PMD which indicated to me, in my experience, that PMD was insolvent or likely to become insolvent. I formed the view that PMD was at least balance sheet insolvent as the total Liabilities exceeded the total Assets and the Current Liabilities exceeded the Current Assets. Further, the Creditors' List showed that creditors were overdue for payment.
In my view, the process undertaken by Mr Jacobs was a textbook example of the process which leads to a company being placed in administration. The only persons who can decide if a company is to be placed in administration are the directors. In this case there was only one director, Mr Pugh, and so it was only Mr Pugh who could decide whether or not to go down the administration path. Under s 436A to place the company in administration, Mr Pugh had to be satisfied the company was 'insolvent or likely to become insolvent at some future time'. In reaching that conclusion directors no doubt take into account all manner of facts and circumstances. Front and centre of course must be the consideration of whether or not the company is able to pay its debts as and when they fall due. But answering question requires consideration of a range of factors – the cash available at the moment, the number and amount of debts, the possibility of shareholders contributing further funds, the potential sale of assets and so on. Each case is different. But in the end it is a matter for the directors – they are the ones best placed to make that decision. The decision is not and cannot be made by the proposed administrator. It is possible to postulate a scenario where it would be improper for an administrator to accept an appointment. As Mr Jacobs says, it is both proper and appropriate for a potential administrator to discuss the affairs of the company with the directors and the company's staff. If, during the course of those discussions, and when considering the company's accounts, the administrator formed the view, not only was the company presently solvent but there was no real potential that in the foreseeable future it would become insolvent, then it would be improper for him to accept the appointment. If, in those circumstances, the directors purported to appoint an administrator, they would be acting contrary to s 436A. A fully informed administrator who accepted the appointment would be effectively engaging in a conspiracy. It is not difficult to imagine that if the result of that conspiracy was a DOCA, the DOCA would be set aside in the public interest. But that is not this case.
Mr Jacobs had three important matters which he took into account before accepting the appointment. First, Mr Pugh, as the sole director, had resolved to appoint an administrator. Mr Jacobs then could be satisfied Mr Pugh had considered the requirements of s 436A and concluded the appointment of an administrator was consistent with the provisions of that section. Second, Mr Jacobs had discussions with Mr Pugh and he had satisfied himself appointment of an administrator was appropriate. Thirdly, and perhaps most importantly, Mr Jacobs considered the balance sheet and satisfied himself the company was actually or potentially insolvent.
Oddly enough, the balance sheet Mr Jacobs saw was not attached to his affidavit. But during the course of the hearing it was tendered and became Exhibit 7. It shows total assets of $2,602,527.26 and total liabilities of $5,074,817.02. During the course of the hearing not much attention was paid to this balance sheet but it is worth considering in some detail. The current assets are put at $418,099.07. The main asset is cash at bank of $322,271.34. In other words, the company has a reasonably healthy cash balance. Among the non‑current assets there is $1,519,254.79 being 'fixed assets clearing account'. There is a further $575,000 for 'equipment rental' and $248,896.20 for 'innovation patents'. As to current liabilities 'accruals' at $175,385.46 and 'creditors control' at $208,190,63 are the largest items. Under non‑current liabilities there is a loan of $1,796,351.36 due to Western Advance, a loan of $1,022,674.59 due to Mr Pugh and a loan of $1,050,000 due to Jayleaf. Mr O'Reilly is shown as being owed $151,890.11.
In all probability the company was insolvent. But even if it was not insolvent as at December 2020, it was potentially insolvent. If either Western Advance, Mr Pugh or Jayleaf demanded repayment of their loans the company could not make repayment. More than that, Mr O'Reilly had demanded repayment of his loan. If he was repaid just under half of the company's available cash would be gone. Matching current assets against current liabilities, there would be no doubt the company was insolvent. All in all, it is little wonder Mr Jacobs, an experienced accountant, on seeing the balance sheet, had no doubt appointment of an administrator was appropriate.
At this point I should note Mr Jacobs was cross‑examined at some length on his affidavit. From the first it was clear Mr Jacobs was puzzled by counsel's line of questioning. Mr Jacobs had satisfied himself the conditions precedent to the appointment of an administrator were met before he accepted the appointment. It was clear he could not quite see how counsel could suggest otherwise. He was also questioned at some length about the dispute as to Mr O'Reilly's shareholding. Mr Jacobs made it plain he did not see this as an issue which was in any way relevant to the administration. The position was not helped by the fact Mr Jacobs was not loquacious. In fact, he appears to be someone who converses mainly by pauses. The cross‑examination was punctuated by long silences which were a result of counsel and Mr Jacobs forgetting who had spoken last. All in all, this was not a riveting cross‑examination.
During the course of cross‑examination, counsel put it to Mr Jacobs that if it were assumed the debt claimed by Mr O'Reilly was not payable then the company was not insolvent or even potentially insolvent. That line of questioning had about it a logical difficulty. Mr O'Reilly maintained he was entitled to repayment of his loan and he had made a demand to that effect. That demand was never withdrawn. Approaching the issue of solvency, by putting that demand to one side, was inconsistent with Mr O'Reilly's stated position. To then suggest the solvency issue ought to have been considered on the basis Mr O'Reilly's loan was not due, as counsel seemed to suggest should be done, was inconsistent with Mr O'Reilly's stated position. In my view, Mr Pugh, in his position as director, was quite entitled to take into account Mr O'Reilly's demand for repayment in assessing the solvency of the company. He may have thought he had a good defence to the claim. But that did not alter the fact demand had been made, Mr O'Reilly was of the view the demand was justified, and there was at least a potential liability to Mr O'Reilly.
From the time of his appointment, Mr Jacobs followed what might be regarded as standard practice for an administrator. Precision Mining had limited specialised assets which Mr Jacobs appreciated would be of interest only to a limited number of parties. In January 2021 he placed advertisements in the Australian Financial Review newspaper and The Western Australian newspaper seeking expressions of interest. Those parties who expressed interest were required to sign a non‑disclosure agreement. A number of parties signed the agreement and considered the assets available. They were assisted by an information memorandum dated 25 January 2021. Only one party made a firm proposal. That was expressed in term sheets dated 16 March 2021. Copies of these term sheets appear as attachments RAJ26 and RAJ27 to Mr Jacobs' affidavit.
In his submissions, counsel for Mr O'Reilly made some criticism of the sale process but that criticism was muted. He did not focus upon any particular aspect of the process which he said was defective or improper. There was a suggestion that Mr Jacobs declined to vary the terms of the non‑disclosure agreement as he was requested to do by one interested party. In cross‑examination, Mr Jacobs admitted that was the case but said he could see no justification for a variation of the terms. No evidence was led by Mr O'Reilly to suggest Mr Jacobs acted unreasonably. In all the circumstances, I am satisfied Mr Jacobs did all that he could to interest potential purchasers in the company's assets.
The one party who did make a firm proposal was Drilling & Mining Survey Tools Pty Ltd (DMST), a company associated with Mr Pugh. In the term sheet under 'available property' there appears the following:
Details
6.1A fund of approximately $4 million (Available Property) to be distributed in accordance with clause 9 below, will be paid to the Deed Administrators on completion of the DOCA, comprising:
(a)cash at bank and debtors at the time of signing the DOCA;
(b)a non-cash component of up to $3,630,471.33 (Released Amount). The Released Amount represents $4,033,857.03 (being the amount of the Secured Parties are claiming from the Company by way of secured loan amounts plus unpaid interest owing to them) less 10% of such amount pro rata between the Secured Parties, being $403,385.70 (Retained Amount);
(c)a non-cash component of $279,579.94, being the amount that Stellar Heights Pty Ltd as trustee for the ICON Investment Trust and Western Advance Pty Ltd are claiming from the Company by way of unsecured loan amounts owing to them (Icon Release); and
(d)a cash component of $50,000, to be paid by the Proponent (Cash Component),
In return for the transfer of all of the issued share capital of the Company to be Proponent or its nominee (subject to the court making the necessary orders under s444GA of the Act).
Under s 10 'Effect on Secured Creditors', there appeared the following:
10.1Jayleaf Holdings Pty Ltd as trustee for the Pollock Investment Trust (the First Secured Creditor) has the following security Interests registered over the Company (each a Security interest and collectively the Security):
(a)first-ranking security interest over the Company registered on the Personal Property Securities Register (PPSR) under the collateral class 'all present and after‑required property – no exceptions', bearing the registration number 202002180066323;
10.2Western Advance Pty Ltd (the Second Secured Creditor) has the following security interest registered over the Company (Security Interest and collectively the Security):
(a)first-ranking security interest registered on the Personal Property Securities Register (PPSR) under the collateral class 'all present and after‑required property – no exceptions', bearing the registration number 202005060042117;
10.3Michael John Pugh (the Third Secured Creditor) has the following security interests registered over the Company (Security Interest and collectively the Security):
(a)first-ranking security interest registered on the Personal Property Securities Register (PPSR) under the collateral class 'all present and after‑required property – no exceptions', bearing the registration number 202005060044472;
10.4The DOCA does not have the effect of:
(a)Releasing any claims that each Secured Creditor has against the Company beyond the Released Amount; or
(b)Extinguishing any of the Secured Creditor's rights under the applicable Security in relation to each Secured Creditor's pro rata share of the Retained Amount.
Of course the term sheet contained other provisions including creation of a creditors trust. While it is probably not true to say there is a 'standard' term sheet, this is a case where the offer made by the proponent was simple and straightforward. It did anticipate a s 444GA application but such applications are by no means uncommon. No criticism was made of the term sheet by counsel for Mr O'Reilly. The next step then was for Mr Jacobs to prepare his second report to creditors and make a recommendation as to whether or not to proceed with the DOCA.
Appearing as attachments RAJ33 and RAJ35 to Mr Jacobs affidavits are copies of the reports to creditors. In the context of this application, a number of aspects of these reports should be highlighted. First, under the heading 'company shareholders' there appears the following:
All shares are fully paid.
I have been notified of a claim arising from the transfer of 42,500 shares held by Mr Jordan O'Reilly to Stellar Heights Pty Ltd on or about 9 October 2018. The matter is ongoing.
Under 6.4 headed 'Equipment and Motor Vehicles' there appears the following:
Shortly after my appointment as Administrator of the Company, I instructed a valuer to conduct an assessment of the Company's Equipment and Motor Vehicles. The Valuer has assessed the items at a 'Future Market Value' of $1,233,395 and 'Forced Liquidation Value' of $130,639.
A copy of that valuation was not provided with the report and as I have indicated above, it was not attached to Mr Jacobs' affidavit. That was the reason par 60.4 of his affidavit was struck out. For present purposes, I would note only that the report made the quoted statement. At no stage did Mr O'Reilly lead any evidence to suggest this aspect of the report was false or misleading.
Third, cl 7 of the report details the 'Proposed Deed of Company Arrangement'. I will not detail that in full. It represents a fair summary of the term sheet and it was not subject to any criticism by Mr O'Reilly. That is to say, there was no suggestion this section of the report was in any way false or misleading or omitted any material fact.
Fourthly, section 8 dealt with 'Offences, Voidable Transactions and Insolvent Trading'. Once again I will not detail this section of the report in full. Suffice it to say, the report provides a comprehensive review of the investigations undertaken by Mr Jacobs. He concludes that in relation to all matters he can see no prospect of any action being taken against the directors. The books and records of the companies were in good order and condition. In written submissions, counsel for Mr O'Reilly suggested some investigation of the various transactions undertaken by the company was warranted. Mr Jacobs was asked one or two questions about this issue in cross‑examination. The issue was not pursued with any vigour. In fact, there is nothing in the evidence which would suggest what is contained in section 8 is either false or misleading. Nor is there anything to suggest relevant matters had been omitted from the report.
Finally, is section 10 'Statement by Administrator'. Under section 10.2 'Entering into a Deed of Company Arrangement' there is the following:
10.2Entering into a Deed of Company Arrangement
I recommend that creditors resolve for the Company to execute a DOCA for the reasons set out below:
·The proposed DOCA will enable the Company to continue in existence;
·The proposed DOCA will provide a higher return to unsecured creditors of the Company;
·The proposed DOCA sets out definitive returns to the Company's creditors and is not reliant on achieving certain milestones before amounts will be distributed to creditors; and
·The proposed DOCA will allow the Company to continue the employment of six staff members.
As I mentioned earlier in these reasons, counsel for Mr O'Reilly, in his written submissions, made a number of specific points about what he said were omissions from this report. So the true basis of Mr O'Reilly's action was s 445D(1)(c). No case was really advanced under subpar (1)(a). I will deal with each of counsel's complaints in term.
It was first said the report by the administrator did not disclose the reason for the administration. I have dealt with this at some length earlier in these reasons. There was no reason for Mr Jacobs to examine in detail why he was appointed. But even if there had arisen some requirement for a detailed explanation to creditors there was nothing in the mode of appointment which was improper or sinister. So in not detailing the circumstances of his appointment, Mr Jacobs did not omit anything material which in any way affected his report.
Second, it was said the administrator of Precision Mining did not disclose that a creditor had edited the report to creditors issued prior to the second creditors meeting. This issue arose in the following way. On 18 March 2021, Mr Jacobs sent an email to Mr van Aardt, the solicitor for interests associated with Mr Pugh, attaching a draft of the Precision Mining creditors report. The email contained the following:
I am forwarding my draft creditors report to you as a courtesy to ensure there isn't any facts (sic) in the report that may be materially misstated. In particular the reasons for my appointment at paragraph 3.3.
The complaint put by counsel is found in pars 106 to 108 of his written submissions. These paragraphs read as follows:
106.Mr van Aardt then edited the report, notably in relation to the claims by Mr O'Reilly, and Mr van Aardt's amendments were included in the Precision Mining Creditors' Report. So the solicitor for Mr Pugh (the sole director of Precision Mining), Western Advance and Jayleaf Holdings prepared a report to them and all creditors: in effect, Mr Pugh, Western Advance and Jayleaf Holdings prepared a report to themselves.
107 Mr Jacobs did not reveal Mr van Aardt's role in preparing the Precision Mining Creditors' Report to creditors.
108 But the more substantive concern is that these events demonstrate a lack of impartiality by Mr Jacobs, a surprising lack of independence, very poor judgment and confirm the failure by Mr Jacobs to take reasonable steps to confirm the validity of his appointment prior to accepting the role. Some three months after taking the role, he asked a solicitor for the sole director of Precision Mining to check the facts in support of the reasons for his appointment.
With respect, there is no substance in these complaints and they are completely overblown. The alleged 'editing' was arguably a restating of the facts which was more accurate than Mr Jacobs' original version. Leaving that to one side, the editing was to a very minor aspect of the report. It in no way changed the sense or flavour of the report and had no effect at all on the recommendations. It was, in short, not material. Furthermore, there was nothing improper in what Mr Jacobs did. Mr Pugh and his associated entities were propounding the DOCA. Mr Jacobs was entitled to make sure what was put before creditors was an accurate version of the facts, if, for no other reason, he did not want Mr Pugh at a later date to allege there was some circumstance which would allow him and his related entities to walk away from the proposal.
The third complaint was that the administrator of Precision Mining did not disclose the DOCA proponent had offered some creditors the full amount of their claim in exchange for voting for the Precision Mining DOCA. In fact, that is not an accurate statement. Apart from anything else, Mr Jacobs did not know what arrangements Mr Pugh had come to with the secured creditors. There was no reason why he should have made any enquiries on this issue. The secured creditors compromised the bulk of their debt. The fact they did so left the company as a going concern. There was nothing Mr Jacobs knew which he could have conveyed in the report and he was not required to make any investigations. There is no substance in this complaint.
Fourthly, it was said the DOCA ran counter to the interests of the creditors as a whole. Two points can be made about that claim. First, the creditors are those best placed to determine where their best interests lie. The philosophy lies at the heart of the administration procedure. Second, given the alternative was liquidation, it cannot be said acceptance of the DOCA was not in the best interests of the creditors. As a matter of fact that is simply wrong. The creditors were provided with as much detail as was available to Mr Jacobs and they made a decision based on that information. There is no warrant for saying the DOCA was not in the best interests of creditors.
Finally, it was said the DOCA was not in the public interest. The DOCA was clearly overwhelmingly in favour of the public interest. I say this for three reasons. First, it provided some return to creditors. It may not have been much of a return but it was better than the alternative. Second, the DOCA allowed the companies to continue as a going concern. Third, and leading on from the second point, the DOCA allowed at least six individuals to remain in gainful employment with the company. That fact alone must be seen as a factor which is in the public interest. In written submissions, counsel for Mr Jacobs submitted there were two overarching reasons why this application should be dismissed. First, setting aside the DOCA benefited no one, not even Mr O'Reilly. Second, an abuse of the DOCA process could not be made out. With respect, those submissions, succinct and to the point, are correct. Mr O'Reilly has failed completely to establish any of the requirements of s 445D. The application should be dismissed.
On publication of these reasons the parties ought attempt to agree orders. With respect to costs, it is my preliminary view they ought to follow the event and be paid by Mr O'Reilly. The costs would include reserved costs. If any aspect of the orders cannot be agreed, the parties should file short written submissions within seven days of the publication of these reasons.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CB
Associate to Master Sanderson
2 JUNE 2021
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