Pearce, in the matter of Medigard Limited (Administrators Appointed)
[2020] FCA 1768
•7 December 2020
FEDERAL COURT OF AUSTRALIA
Pearce, in the matter of Medigard Limited (Administrators Appointed) [2020] FCA 1768
File number(s): QUD 371 of 2020 Judgment of: GREENWOOD J Date of judgment: 7 December 2020 Catchwords: CORPORATIONS – consideration of an application for an order that the convening period as defined by s 439A(5)(b) of the Corporations Act 2001 (Cth) (the “Act”) in respect of the company be extended to 9 April 2021 – consideration of an application pursuant to s 447A(1) of the Act that Part 5.3A of the Act operate on the footing that the second meeting of creditors may be held at any time during or within five business days after the end of the convening period as extended – consideration of an application for an order that an affidavit attaching an exhibit to an affidavit setting out a recapitalisation proposal be treated as confidential Legislation: Corporations Act 2001 (Cth), ss 439A(5)(b), 439A(6), 447A(1)
Federal Court of Australia Act 1976 (Cth), ss 37AF(1)(b)(i) and (4), 37AG(1)(a)
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 23 Date of hearing: 7 December 2020 Counsel for the Plaintiff: Mr L Copley Solicitor for the Plaintiff: Sparke Helmore Lawyers ORDERS
QUD 371 of 2020 IN THE MATTER OF MEDIGARD LIMITED (ADMINISTRATORS APPOINTED) ACN 090 003 044
MARK PEARCE AND MICHAEL DULLAWAY IN THEIR CAPACITY AS ADMINISTRATORS OF MEDIGARD LIMITED (ADMINISTRATORS APPOINTED) ACN 090 003 044
First Plaintiff
MEDIGARD LIMITED (ADMINISTRATORS APPOINTED)
Second Plaintiff
ORDER MADE BY:
GREENWOOD J
DATE OF ORDER:
7 DECEMBER 2020
THE COURT ORDERS THAT:
1.Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the “Act”), the convening period as defined in s 439A(5)(b) of the Act in respect of the second plaintiff be extended to 9 April 2021.
2.Pursuant to s 447A(1) of the Act, Part 5.3A of the Act is to operate in respect of the Second Plaintiff as if the second meeting of creditors of the Second Plaintiff required by s 439A of the Act may be held at any time during or within five business days after the end of the convening period as extended by the Court under para 1, notwithstanding the provisions of s 439A(2) of the Act.
3.Until further order of the Court, and until no later than 30 June 2021, pursuant to s 37AF(1)(b)(i) and (iv) of the Federal Court of Australia Act 1976 (Cth) (the “FCA”) on the ground stated in s 37AG(1)(a) of the FCA, being that the order is necessary to prevent prejudice to the proper administration of justice, the Confidential Exhibit MD‑13 to the Affidavit of Michael Dullaway dated 3 December 2020 be kept confidential and be prohibited from disclosure to any person other than the Judge hearing the Originating Process, the Judge’s staff and assistants.
4.The first plaintiffs give notice of the making of this order to the creditors of the second plaintiff as known by the first plaintiff, by means of a circular notice to creditors to be electronically mailed to creditors, or, if no email address is known, to be posted to the said creditors by ordinary post no later than seven days after the date of this order.
5.The first plaintiffs have liberty to apply for any purpose connected with the administration of the second plaintiff including but not limited to seeking a further extension of the convening period.
6.The plaintiffs’ costs of and incidental to this application be costs and expenses in the administration of the second plaintiff and be paid out of the assets of the second plaintiff.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
EX TEMPORE REASONS FOR JUDGMENT
GREENWOOD J:
These proceedings are concerned with an application made under s 439A(6) of the Corporations Act 2001 (Cth) (the “Act”) by the administrators of Medigard Limited (the “company” or “Medigard”) for an order that the convening period as defined by s 439A(5)(b) of the Act in respect of the company be extended to 9 April 2021.
The second aspect of the application concerns an order pursuant to s 447A(1) of the Act that Part 5.3A of the Act is to operate in respect of the second plaintiff as if the second meeting of creditors of the second plaintiff required by s 439A of the Act may be held at any time during or within five business days after the end of the convening period as extended by the Court to 9 April 2021 under para 1 of the application.
The third order sought by the application concerns an order under provisions of the Federal Court of Australia Act 1976 (Cth) that a particular document described as Exhibit MD‑13 to the affidavit of Mr Michael Dullaway dated 3 December 2020 be kept confidential. I will explain the background to that matter shortly. The application is supported by two affidavits, one by Mr Michael Dullaway sworn 3 December 2020, and a second affidavit also sworn 3 December 2020 by Mr Dullaway. The second affidavit of Mr Dullaway contextualises aspects of the capitalisation proposal which lies at the heart of the application.
By way of background, on 11 November 2020, Mr Mark Pearce and Mr Michael Dullaway were appointed joint and several voluntary administrators of Medigard pursuant to s 436A of the Act by resolution of Medigard’s directors. Medigard is an international company originally founded in 1999 and listed on the Australian Securities Exchange (“ASX”) in February 2004. Medigard is based on the Gold Coast in Australia.
Medigard formerly conducted research and development for medical devices. It held certain intellectual property related to those devices. At the date of appointment of administrators, Medigard had no current employees. However, it had one former employee who has claimed employment entitlements. It had four directors. It had 172,468,036 total ordinary shares on issue held by a total of 668 individual shareholders. Five shareholders held 36.9 per cent of the total ordinary issued shares, as set out in Mr Dullaway’s affidavit.
The most recent significant business activity conducted by Medigard has been the development of vacuum retractable syringe devices including a blood collection device and blood flash needle. These products were patented and licensed for manufacture and distribution by a company called Shanghai Sol Millennium Medical Products Co, Ltd (“Sol‑M”). The products have experienced some success in international markets but sales were well below those projected by Sol‑M and the income the company received from Sol‑M was relatively insignificant.
As a result, in 2017, private placements, including to the directors occurred raising $300,000 and there was also a Share Purchase Plan which raised $363,000. Since approximately 2017, Medigard has been actively seeking further projects within the medical injectable field. In 2018, Medigard engaged Bio‑Link Australia Pty Ltd to assist it in exploring possible new projects. One of a number of projects reviewed was a project described as the Kunovus KT009 Project (“KT009 Project”) which concerned an injectable product to treat degenerative disc diseases. It was thought to have good prospects and thought to provide value to Medigard’s shareholders and, accordingly, Medigard entered into a Licence agreement with Kunovus Pty Ltd on 30 October 2018.
However, on 8 March 2019, the ASX suspended trade in Medigard’s shares as it determined that the company’s scale and scope of operations did not comply with Listing Rules 12.1 and 12.2. Although the company had a licence for the KT009 Project in 2019, it nevertheless needed to raise capital to meet licence obligations and to seek recommencement of share trading. Raising capital was reliant upon removing debts from the balance sheet including the Convertible Notes held by Sol‑M group and loans from directors. Negotiations in relation to the Convertible Notes took many months and, eventually, a number of company patents were sold to Sol‑M on 28 August 2019 to raise funds ($535,000) to achieve that objective.
The sale of the patents retired the Convertible Notes. At the same time, the directors agreed to convert loans of approximately $496,000 to shares.
On 13 November 2019, shareholders met and approved those transactions. By late 2019, the company was essentially debt free and was looking to raise money and progress the KT009 Project. In February 2020, the company signed a mandate with Canary Capital to raise money to fund the KT009 Project and facilitate reinstatement of share trading. Before that was completed, COVID‑19 changed the market circumstances and Canary Capital did not proceed with those plans.
During this period, the Kunovus Licence Agreement lapsed and on 30 April 2020, the company announced to the market that its plans had effectively been defeated by COVID‑19.
In June 2020, Canary Capital became interested in funding the KT009 Project again and discussions took place throughout September 2020. However, “Canary Capital” was unable to reach satisfactory terms with Kunovus which left Medigard without any significant projects or capital.
From late 2019 into 2020, the directors and the secretary had been funding the operations of the company.
The administrator’s investigations to date indicate that Medigard has 17 creditors owed a total of $371,391.79 of which $39,420 is owed to priority creditors. There are no secured creditors. Medigard has no readily realisable assets other than equipment and office furniture valued at $400. Medigard has a claim against Lehman Brothers Australia Ltd (in liquidation) for an amount of $237,117.20 and has already received a dividend in the liquidation of that company. However, any further return will not be material in the view of the administrators.
The first meeting of creditors occurred on 23 November 2020 and the first report of the administrators is dated 12 November 2020 and, of course, it was annexed to the notice for that meeting. Since their appointment, the administrators have been undertaking a review of Medigard’s operations and the detail of that matter is set out at para 33 of Mr Dullaway’s longer affidavit. It is not necessary for me to mention those matters in any detail. They are comprehensive and thorough.
Mr Dullaway in his affidavit observes that the investigations of the administrators have not identified any undisclosed assets at this time or any recovery actions to be pursued in the voluntary administration or should Medigard be placed in liquidation. In relation to any possible insolvent trading claims, the administrators observe that the directors have been providing funding to the company. The administrators observe that there are no material unrelated or unassociated debts which the company owes to creditors which were incurred when the company was insolvent at a time prior to the statutory “moratorium” upon trading which came into effect on 23 March 2020.
At para 49 of the affidavit, Mr Dullaway observes that based on the investigations of the administrators, Mr Dullaway does not believe a dividend would be paid to creditors in the event that Medigard is placed in liquidation, although there may be a return to a former employee of Medigard who has lodged a claim in the liquidation from the Commonwealth Government’s “Fair Entitlement Guarantee scheme” otherwise known as the “FEG”.
However, the administrators observe that there is an alternative to liquidation of the company and it is that matter which goes to the heart of this application. It is not necessary to go into particular detail about the matter, but, of course, the administrators have been investigating with up to 10 parties the possibility of whether there is any interest from any of those parties in putting forward a proposal for a Deed of Company Arrangement.
In about 16 November 2020, a proposal emerged on behalf of Mr Ernie Huang for a recapitalisation of Medigard. Those discussions have progressed to the point where there is a proposal letter which has been put forward. It is simply a “proposal” but nevertheless contains an encouraging set of terms which might well facilitate a recapitalisation of the company which in turn would provide for a distribution to creditors of a certain proportion of debts owed to them which would otherwise not be available to them should the company be placed in liquidation.
It is not necessary to set out those terms in these reasons. The elements of the proposal are described by Mr Dullaway in general terms at para 46 of the first affidavit of 3 December 2020. That description is then subject to the other considerations which are set out at para 4 of the second (shorter) affidavit of Mr Dullaway of 3 December 2020. Those elements are explained in the affidavits in clear terms and I have had the benefit of looking at Confidential Exhibit MD‑13 to Mr Dullaway’s affidavit. I am entirely satisfied that the right course is to provide the administrators with sufficient time to continue exploring the recapitalisation terms and conditions with Mr Huang so as to determine whether that proposal can be brought to fruition.
I am therefore satisfied that the convening period ought to be extended to 9 April 2021 to enable that to occur. The affidavit of Mr Dullaway explains that some discussions have been had with some of the creditors. In particular, there have been discussions with Mr Ashish Diwan who is the director of Kunovus Pty Ltd which is Medigard’s largest present creditor. There have also been discussions with a former employee, Mr Gary Edwards. All of these matters have been taken into account in accordance with the orthodox principles governing an application for extension of time for the convening period and I am satisfied that the orders ought to be made.
I am also satisfied that the related orders pursuant to s 447A(1) of the Act ought to be made, and I am satisfied that the Confidential Exhibit MD‑13 ought to be the subject of the orders sought by the application.
As to the subsidiary matters in the application, I am satisfied that those orders ought to be made. Accordingly, I make orders in accordance with the draft orders which have been provided to me on the footing of the affidavits to which I have referred in these reasons.
I certify that the preceding twenty‑three (23) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Greenwood. Associate:
Dated: 7 December 2020
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