Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) v Canstruct Pty Ltd
[2024] FCAFC 141
•1 November 2024
FEDERAL COURT OF AUSTRALIA
Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) v Canstruct Pty Ltd [2024] FCAFC 141
Appeal from: Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2024] FCA 112 File number: QUD 151 of 2024 Judgment of: O'CALLAGHAN, MCELWAINE AND JACKMAN JJ Date of judgment: 1 November 2024 Catchwords: CORPORATIONS – standard of appellate review – where deed of company arrangement terminated – whether the Court’s satisfaction that a ground for termination is established is governed by the correctness standard pursuant to Warren v Coombes or the standard applicable to discretionary decisions pursuant to House v R – correctness standard applied
CORPORATIONS – voluntary administration – deed of company arrangement – appeal from decision of the primary judge to terminate the deed of company arrangement and administration pursuant to ss 445D(1) and 447A of the Corporations Act 2001 (Cth) – where company was put into administration for the purpose of avoiding having to pay an adjudicator’s determination while paying all other arm’s-length creditors in full and restarting operations in an almost identical position to the pre-DOCA state save for the existence of the particular unwanted debt – whether utilisation of the voluntary administration process and entry into the deed of company arrangement amounted to an abuse of the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) – whether deed was unfairly prejudicial and unfairly discriminatory – whether effect could not be given to the deed without injustice – whether misleading information was provided to creditors voting on the deed – whether there were material omissions from the information given to those creditors – appeal dismissed
CORPORATIONS – insolvency – whether company was insolvent from mid-2020 such that the deed of company arrangement had the effect of avoiding scrutiny into insolvent trading – where company had no income stream or substantial assets of its own – where company depended upon parent company for funding – where directors of the company were essentially the same as those of the parent company – where relevant liabilities were knowingly and voluntarily incurred by the company – where company actually paid all debts that fell due and payable – where no challenge to evidence that the parent company would never have made a demand for repayment of amounts advanced – whether primary judge erred by concluding that in order to reach the required level of assuredness of funding, there must be more than a mere discretion on the part of the external funder – held that company was solvent at all times up until 13 February 2023
Legislation: Corporations Act 2001 (Cth) ss 95A, 445D(1), 447A, sch 2 (‘Insolvency Practice Schedule (Corporations)’) s 75-41
Insolvency Practice Rules (Corporations) 2016 (Cth) s 75-225
Cases cited: Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148
Australian Securities and Investments Commission v Midland Highway Pty Ltd (Administrators Appointed) [2015] FCA 1360; (2015) 110 ACSR 203
Barboutis v Kart Centre Pty Ltd (No 2) [2020] WASCA 41
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 510; (2005) 226 ALR 510
Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391
Britax Childcare Pty Ltd v Infa Products Pty Ltd [2016] FCA 848; (2016) 115 ACSR 322
Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 5) [2024] FCA 479
Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28
Clifton v Kerry J Investment Pty Ltd [2020] FCAFC 5; (2020) 379 ALR 593
Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; (2000) 203 CLR 194
Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd [2011] NSWSC 1279
Commissioner of Taxation v Comcorp Australia Ltd (1996) 70 FCR 356
Cooke v Tweed Shire Council [2024] NSWCA 50
Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32
Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54
Edwards v ASIC [2009] NSWCA 424; (2009) 264 ALR 723
Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) [2005] WASC 261; (2005) 228 ALR 598
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
GLJ v The Trustees of the Roman Catholic Church for the Diocese of Lismore [2023] HCA 32; (2023) 414 ALR 635
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139
International Cat Manufacturing Pty Ltd (in liq) v Rodrick [2013] QCA 372; (2013) 97 ACSR 200
Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34
Le Meilleur Pty Ltd (subject to deed of company arrangement) v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115; (2011) 256 FLR 240
Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385
Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555
Moore v R [2024] HCA 30
New South Wales Crime Commission v Vu [2009] NSWCA 349
Re Academy Constructionand Development Pty Ltd (subject to Deed of Company Arrangement) [2024] NSWSC 808
Re Bosnjak Holdings Pty Ltd; Fexuto Pty Ltd v Lombe [2009] NSWSC 565; (2009) 72 ACSR 377
Re New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504
Re Recycling Holdings Pty Ltd [2015] NSWSC 1016; (2015) 107 ACSR 406
Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85
Singer v Berghouse (1994) 181 CLR 201
Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110; (2023) 168 ACSR 311
Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213
TiVo, Inc v Vivo International Corporation Pty Ltd (Subject to Deed of Company Arrangement) [2014] FCA 789
Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72; (2017) 120 ACSR 130
Warren v Coombes (1979) 142 CLR 531
Williams v Scholz [2008] QCA 94
Williams v Spautz (1992) 174 CLR 509
Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 379
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 185 Date of hearing: 12–13 August 2024 Counsel for the Appellants: Mr M Martin KC and Mr A McKinnon Solicitor for the Appellants: Mills Oakley Counsel for the Respondent: Mr B O’Donnell KC Solicitor for the Respondent: Thomson Geer ORDERS
QUD 151 of 2024 BETWEEN: PROJECT SEA DRAGON PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 604 936 192
First Appellant
SEAFARMS GROUP LIMITED ACN 009 317 846
Second Appellant
AND: CANSTRUCT PTY LTD ACN 008 869 467
Respondent
ORDER MADE BY:
O'CALLAGHAN, MCELWAINE AND JACKMAN JJ
DATE OF ORDER:
1 NOVEMBER 2024
THE COURT ORDERS THAT:
1.Leave be granted to the appellants to amend the Notice of Appeal in the form provided to the Court on 13 August 2024.
2.The appeal be dismissed.
3.The appellants pay the respondent’s costs of the appeal, and of their interlocutory applications in QUD 124 of 2023 filed on 19 March 2024 and 12 April 2024.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
O’CALLAGHAN J
I agree with Jackman J.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice O’Callaghan. Associate:
Dated: 1 November 2024
REASONS FOR JUDGMENT
MCELWAINE J
I have the considerable advantage of reading in draft the comprehensive reasons of Jackman J. I agree that the appeal should be dismissed and that consequential orders should be made as proposed. There is nothing I wish to add.
I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice McElwaine. Associate:
Dated: 1 November 2024
REASONS FOR JUDGMENT
JACKMAN J
Introduction
This is an appeal from the decision of the primary judge in Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) [2024] FCA 112. The first appellant, Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (PSD), is a special purpose vehicle which was incorporated to establish and operate a large-scale prawn aquaculture project in the Northern Territory and Western Australia (the Project). As part of the Project, it has facilitated the development of substantial prawn farming infrastructure in the Northern Territory at a site called “Legune Station”. PSD has not had an income stream or substantial assets of its own, and has received funding from its parent company, Seafarms Group Ltd (SFG), the second appellant. SFG is the largest creditor of PSD.
The respondent to the appeal, Canstruct Pty Ltd (Canstruct), is a contractor which was engaged by PSD to carry out construction works at the Legune Station site. A dispute between Canstruct and PSD as to the amount owed to Canstruct for work performed at Legune Station was the subject of an adjudication determination in favour of Canstruct on 3 February 2023 pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT) (the CCSP Act) in the amount of approximately $14 million, including GST and interest. PSD and SFG dispute that such an amount was properly owing, but the effect of the CCSP Act is that the amount is nevertheless required to be paid.
As I explain in further detail below, on 13 February 2023 SFG withdrew its financial support to PSD, and on the same day the board of PSD resolved to appoint administrators pursuant to s 436A(1) of the Corporations Act 2001 (Cth) (the Act) on the basis that PSD would likely become insolvent in the near future. Accordingly, on 14 February 2023, PSD appointed voluntary administrators. On 21 March 2023, the second creditors’ meeting of PSD resolved to enter into a Deed of Company Arrangement (DOCA) which had been proposed by SFG, pursuant to which all arm’s-length creditors of PSD were to be paid in full other than Canstruct, which was estimated to receive a return of approximately 10 to 11 cents in the dollar. It was anticipated that PSD would resume its ordinary operations in essentially the same position that it was in prior to its entry into the DOCA, except for its liability to Canstruct. The DOCA was executed on 23 March 2023.
The primary judge held that the DOCA should be terminated pursuant to s 447A and s 445D(1) of the Act on various grounds as contended for by Canstruct. In addition, the primary judge ordered that the administration of PSD be brought to an end and that PSD be wound up in insolvency. Those orders were stayed pending this appeal.
Salient Provisions of the Act
Part 5.3A of the Act deals with the administration of a company’s affairs with a view to executing a deed of company arrangement. The object of Pt 5.3A is set out in s 435A as follows:
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.
Part 5.3A then deals with the appointment of an administrator and the first meeting of creditors (Division 2), the assumption by the administrator of the control of the company’s affairs (Division 3), the investigation by the administrator of the company’s affairs (Division 4), and the meeting of creditors to decide the company’s future, usually referred to as the second creditors’ meeting (Division 5). Section 439C provides that, at the second creditors' meeting, the creditors may resolve that the company execute a deed of company arrangement, that the administration should end, or that the company be wound up.
Division 11 of Pt 5.3A deals with the variation, termination and avoidance of a deed of company arrangement, and includes s 445D(1) which provides as follows:
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.
Division 12 of Pt 5.3A deals with the transition to a creditors’ voluntary winding up in certain circumstances, and includes s 446AA which provides (among other things) that if the Court at a particular time makes an order under s 445D terminating the deed of company arrangement, then the company is taken to have passed at that time a special resolution under s 491 that the company be wound up voluntarily, and to have done so without a declaration of solvency by the directors under s 494. I note that until 1 March 2017 a provision to the same effect as s 446AA was included in reg 5.3A.07 of the Corporations Regulations 2001 (Cth) (the Regulations).
Division 13 of Pt 5.3A deals with the powers of the court, and includes s 447A which provides relevantly as follows:
(1)The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2)For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
Reasons of the Primary Judge
Salient Facts
The primary judge referred to SFG as a public listed company and the ultimate parent company of the corporate group known as the “Seafarms Group”, of which PSD is a member: [10]. At all relevant times, the directors of the two companies were identical, except for a small number of immaterial exceptions: [10]. The overall business of the Seafarms Group involves the construction of prawn aquaculture facilities for the growing and harvesting of prawns, and the intended sale of the resulting produce in Australia and overseas: [11]. As indicated above, PSD is a special purpose vehicle which was incorporated to develop and operate the Project: [12]. The Project involves the development of prawn aquaculture facilities in five separate locations, comprising three in the Northern Territory and two in Western Australia: [13]. The only operational site at present is in Exmouth, Western Australia, where a founder stock facility has been established and PSD has employed a number of personnel: [13]. The other sites remain in various stages of development. The dispute between Canstruct and PSD concerns the construction of facilities at Legune Station, a large cattle station in the Northern Territory where PSD holds a sublease for which it pays rent of approximately $2 million per annum: [13].
PSD has had no income of its own with which to meet the costs that it has incurred, and also has had no substantial assets and no formal financial facilities on which to draw in order to meet those costs: [14]. Mr Dyer, a director of PSD and a director and the CEO of SFG, gave evidence that PSD was wholly reliant on SFG, as well as other entities in the Seafarms Group, for both financial and operational assistance but there has been no formal loan agreement in place by which SFG or any other company in the corporate group has assumed an obligation to provide funding: [14]. PSD was effectively funded by third party investment in SFG, which was procured by the issuing of new shares in SFG by way of a share placement in June 2021: [15]. SFG’s announcements to the Australian Securities Exchange (ASX) made clear that the funds were to be directed specifically to the Project: [15].
The primary judge referred to Mr Dyer’s evidence that PSD obtained funds from SFG to meet its debts by a particular process, as part of which it would “call” for SFG to transfer funds into its account to pay invoices and other obligations shortly before they fell due: [16]. Accounts staff would assemble the necessary supporting documents and would send them by email to certain persons within SFG with a request that they authorise the payments. The “approvers” with authority to authorise payments were Mr Dyer, Mr Whitcombe (another director of SFG), and Mr Leijer (the CFO of SFG). Payments generally required authorisation from any two of those persons, while transfers from SFG to PSD required authorisation from only one. Calls to transfer funds from SFG to PSD were made only if further funds were required to make certain payments. The process included a weekly “payment run” for invoices relating to PSD to be raised to SFG, a fortnightly payment of wages for Exmouth employees, the monthly payment of a salary to the manager of the Exmouth facility and the payment of payroll tax as well as PAYG tax and superannuation: [17]. The primary judge said that while the obligation to make these payments fell on PSD, SFG consistently put its subsidiary in funds by way of this established process in order to allow the necessary payments to be made: [17].
As a consequence of the implementation of this process, the amount of PSD’s indebtedness to SFG steadily increased. The primary judge said that it was not in doubt that SFG was entitled to demand repayment of its debt at any time: [18]. However, the primary judge referred to Mr Dyer’s assertion that such a demand would never be made, expressed as follows in his affidavit evidence (quoted at [18]):
Any amounts owed by PSD to SFG would technically be payable on demand but that demand will never be made. In my capacity as director of SFG I would never move to or cause the board to move to call up SFG’s loans to PSD while the project was ongoing. It is commercially illogical and against commercial reality for SFG to do so because that would expose me to significant complaint and inevitably legal action by shareholders for breaching my duty as a director.
The sole use of the funds raised was to develop and operate PSD. The very purpose of raising the funds and the reason for investors to invest is that there would be a significant incremental value in their share value as the project was developed. That is the commercial reality regarding the use of the funds. It is simply not open to the directors of SFG to abandon the project and call up the loan funds in circumstances where the very purpose for which the funds were raised would fail. The commercial reality is that SFG could not call up the funds in circumstances whereby doing so the Project would immediately fail.
The primary judge then held that, ultimately, the only conclusion that can properly be drawn is that the funding of PSD continued entirely at the discretion of SFG, and the decision to advance funds was made only as and when the need for additional funding arose: [19].
At the time these proceedings were commenced, PSD had undertaken a great deal of preparatory work on the Project, including negotiating leases, entering into agreements with native title holders, securing environmental approvals and licences, producing feasibility studies, and establishing the founder stock facility at Exmouth: [20]. However, the primary judge said that it was not entirely clear how substantially the development at Legune Station specifically had progressed: [20].
Canstruct was engaged by PSD to carry out certain construction work at Legune Station pursuant to a “Framework Agreement”, which was entered into on 10 May 2021. Pursuant to the Framework Agreement, “Work Orders” could be issued by PSD to Canstruct, after negotiations between them, which would then constitute separate and legally binding agreements for the carrying out of certain work: [21]. The Framework Agreement also required Canstruct to provide security for the performance of its obligations by way of an unconditional undertaking issued by an Australian bank in the amount of $12 million, which was given in the form of two $6 million bank guarantees: [21]. In September and October 2021, PSD issued three Work Orders, and Canstruct undertook a substantial amount of work pursuant to those Work Orders: [22].
Pursuant to the Framework Agreement, PSD was entitled unilaterally to suspend works at the site and was also entitled to terminate the three Work Orders for convenience: [23]. On 24 December 2021, PSD unilaterally suspended all works at the site: [24]. In about January 2022, a dispute arose between Canstruct and PSD in relation to the money owed following the suspension of the works. On 27 April 2022, PSD terminated each of the three Work Orders for convenience: [24]. On 15 September 2022, Canstruct submitted payment claims in relation to the Work Orders to both PSD and the Superintendent on the Project, seeking payment of approximately $27.83 million: [25]. On 30 September 2022, the Superintendent (on behalf of PSD) issued payment certificates to Canstruct in response to the payment claims, pursuant to which Canstruct was paid approximately $780,000 in connection with the first and third Work Orders. The Superintendent certified that the amount payable by PSD in respect of the second Work Order was a negative amount of approximately $270,000, but the primary judge said that this amount does not seem to have been paid by Canstruct: [25].
The primary judge found that the termination of the Work Orders was not the result of any disputation between PSD and Canstruct in connection with the work at Legune Station. Instead, it was the result of growing financial difficulties and internal corporate issues within the Seafarms Group: [27]. The primary judge referred to the statement in the Annual Report for SFG for the financial year ended 30 June 2022 that the year had been a “turbulent” one, and that two new directors had been appointed and three others had resigned in the first half of the year: [28]. There was also a change in the chairmanship of the board and the appointment of a new CEO and CFO: [28]. Although it was noted that construction on the Project had commenced early in the year, it was explained that in November 2021 the new board announced a review of PSD and that decisions taken during this time included the curtailment of all debt funding activity, and the termination of PSD contracts and most of the PSD construction team, effectively placing the majority of PSD on hold: [28]. In connection with these events, a major shareholder moved to have the then-new CEO removed, and the CEO subsequently resigned from his position and from the board, along with the Company Secretary. In late May 2022, Mr Dyer was appointed as CEO, Mr Leijer as CFO, and Mr Whitcombe as Company Secretary, and Mr Dyer and Mr Whitcombe were also appointed to the board: [29]. The Annual Report also referred to the termination of the construction contracts with Canstruct, and the placing of further work on hold at Bynoe and Kununurra, while progressing a reduced scope of work at the Exmouth facility: [20]. It was stated that work was continuing to be undertaken in order to maintain all permits and approvals: [30]. In the notes to the financial statements of SFG in the Annual Report, it was explained that:
The Group commenced construction of Project Sea Dragon in August 2021, which was suspended in December 2021 due to the wet season. In the same month, the Group terminated negotiations on debt funding, which were at an advanced stage, due to the cessation of negotiations by the previous management. In April 2022 the major construction contracts for the construction of ponds and other infrastructure at Legune Station were terminated to preserve cash as the future of the project is re-assessed…. [F]ollowing the termination of the construction contracts, the Group received a number of claims from the construction company and after assessment of the currently available information, recorded a provision for general contractual liabilities of $8,730,094.
The primary judge also referred to SFG’s report for the half-year ended 31 December 2022, which included the following (quoted at [32]):
At 31 December 2022, the Group had net current assets of $18,796,286, including $20,426,850 cash and cash equivalents.
The Directors note material uncertainties relating to the decision to continue with Project Sea Dragon, if so whether adequate funding will be obtained to fund the continuance, if not whether the remaining Project Sea Dragon related expenses will be successfully reduced and ceased, as to the final amount payable to meet Project Sea Dragon contractual liabilities, and as to the future profitability and cash flow from improvements at Queensland Farms and the ability of these to cover corporate expenditure.
The primary judge referred to Mr Dyer confirming in his evidence that the statements made in the reports by SFG were accurate: [33]. The primary judge drew the conclusion that the Work Orders issued from PSD to Canstruct were terminated because the viability of the project had become less certain on account of financial concerns that were emerging at that time: [33].
On 7 November 2022, Canstruct filed four adjudication applications pursuant to the CCSA Act, three of which related to the work performed under each of the Work Orders: [34]. By those applications, Canstruct sought determinations that PSD was liable to pay to it the full amount of its payment claims. By its fourth application, Canstruct sought the return of one of its bank guarantees in the amount of $6 million, which had been provided by way of security under the Framework Agreement. On 3 February 2023, three determinations were made in favour of Canstruct in respect of the three Work Orders in an amount which was subsequently adjusted to $13,994,955.32, including GST and interest: [35]. In addition, the adjudicator made a fourth determination that the outstanding guarantee was to be returned to Canstruct: [35]. I will follow the primary judge in referring to the four determinations cumulatively as the “adjudicator’s decision”.
On 3 February 2023, SFG made an announcement to the ASX indicating that, whilst it had provisioned an amount of $8.7 million for a settlement of the dispute with Canstruct in its 2022 accounts, it was “extremely disappointed” with the adjudicator’s decision and expressed the belief that the determination was excessive: [37]. On 8 February 2023, Herbert Smith Freehills (HSF), who were the solicitors for PSD at that time, wrote to Canstruct’s solicitors, Thomson Geer, advising that PSD rejected the adjudicator’s decision and asserted a number of jurisdictional errors, adding that PSD intended to commence proceedings in the Supreme Court of the Northern Territory to obtain relief in the nature of certiorari in respect of the adjudicator’s decision: [38]. On 9 February 2023, HSF wrote to the adjudicator to inform him that PSD was considering the imminent commencement of proceedings: [39].
The primary judge referred to Mr Dyer’s evidence that he was extremely disappointed with the adjudicator’s decision, as were the other directors of PSD and SFG: [40]. Accordingly, the directors explored the legal options available to them at the time. The primary judge referred to Mr Dyer saying that they felt that there were jurisdictional errors affecting the decision, although Mr Dyer could not elaborate upon them: [40]. The primary judge referred to Mr Dyer’s evidence that the directors had discussed the possibility of litigation to challenge the adjudicator’s decision, but they did not get to the point of instructing HSF to commence proceedings: [40].
The primary judge then referred to Mr Dyer’s evidence that he spoke to Mr Cox of Mills Oakley, the current solicitors for PSD and SFG, in connection with the same matters: [41]. Following that discussion, contact was made with Mr McKinnon of BDO Business Restructuring Pty Ltd (BDO) in order to determine whether he was prepared to act as voluntary administrator of PSD. The primary judge referred to the evidence of Mr McKinnon that the prospect of a voluntary administration was first raised with him in a telephone discussion with Mr Cox on or about 8 February 2023: [41].
The primary judge then referred to the evidence of Mr Dyer in cross-examination that the directors had considered whether the voluntary administration of PSD would be a preferable course for the Seafarms Group to take, as against the commencement of court proceedings: [42]. Mr Dyer’s evidence was that, in doing so, they discuss several matters, including whether making payment to Canstruct in accordance with the adjudicator’s decision would undermine the group’s ability to pursue the Project, and whether it would result in the termination of employees, and they ultimately concluded that making the payment to Canstruct would compromise the business of the group: [42]. The directors also considered that, if they were to pursue the option of litigation, they would be required to pay the money into court, or to Canstruct, which would cause PSD to be “in trouble”, and it was thought that the litigation might remain on foot for over two years: [42]. The primary judge said that, according to Mr Dyer, the directors understood at the same time that, if the option of voluntary administration was pursued, then Canstruct would be precluded from enforcing payment of the adjudicator’s decision as soon as the process commenced: [42]. They also understood that, if a DOCA was approved by the creditors of PSD, then Canstruct’s ability to recover the amount awarded to it by the adjudicators would be limited to whatever the DOCA provided for it to be paid, and the liability arising out of the adjudicator’s decision could be discharged: [42].
The primary judge said that it emerged from Mr Dyer’s cross-examination that, during their deliberations, the directors took into account the fact that a DOCA could only be adopted in the context of a voluntary administration if it was approved by a majority of creditors in both number and value: [43]. The directors discussed the fact that SFG would have to make a financial contribution under the DOCA in order to ensure that the creditors, or most of them, would do better under the deed than in a liquidation scenario: [43]. The primary judge said that the $3.5 million sum that was ultimately put up was apparently calculated by working out the allowance that would need to be made for:
(a)the fees of the administrator and the other costs of the administration to be paid;
(b)all of the unrelated creditors of PSD, other than Canstruct, to be paid 100 cents in the dollar; and
(c)Canstruct to receive a return on its adjudication debt of about 10 cents in the dollar.
Mr Dyer explained that the directors’ decision to pay Canstruct about 10 cents in the dollar was made because the amount that Canstruct would stand to receive under the DOCA as a result was equivalent to the amount that the directors thought that it was properly owed: [44].
As for the unrelated creditors, the primary judge referred to Mr Dyer’s evidence as follows at [45]–[46]. Mr Dyer initially asserted that the decision to pay them 100 cents in the dollar had not been made in order to encourage them to vote in favour of the DOCA. However, he conceded that the directors had discussed “how the voting might balance out”; that is, “the values and the numbers of all of the creditors and how that might fall out”. The directors had recognised that the majority of the creditors by value were related entities, which would vote in favour of the DOCA. They had then discussed whether they could get a majority by number of creditors to approve the DOCA and, in doing so, discussed the likelihood that offering 100 cents in the dollar to the unrelated creditors would entice them to vote in favour of the deed. According to Mr Dyer, the discussion went no further. While it was acknowledged that offering the unrelated creditors a full return was “likely” to encourage them to vote for the DOCA, that was apparently not the reason that a full return was offered. There were approximately 50 unrelated creditors of PSD, other than Canstruct and the company’s employees, which were owed about $420,000. The group of unrelated creditors affected by the DOCA excluded the landlords with whom PSD was engaged in respect of its various leases, whose entitlements remained unaffected. Mr Dyer’s affidavit set out a list of trade creditors which had lodged proofs of debt at the second meeting of creditors of PSD and asserted that each of those creditors was a “critical supplier or provider to the operations” of PSD, and he was cross-examined in some detail on that assertion, particularly as it seemed to suggest that there was some basis for the different treatment of those creditors relative to Canstruct.
The primary judge said that the cross-examination on this topic revealed that many of the unrelated creditors who were to be paid in full under the DOCA had indeed provided services of some importance to PSD during the 16 months since April 2022 in which the Project had been on hold: [48]. These creditors supplied services that were necessary for the ongoing maintenance of the facilities established by PSD, and for the maintenance of the status quo on the Project more generally, given the prospect that it might recommence: [48]. However, not all of the creditors who were to be paid in full were providing ongoing services to PSD, and Mr Dyer accepted that the DOCA was not structured so as to tie payment in full to the ongoing provision of a service: [48]. The primary judge said that the cross-examination revealed that there were certain creditors of PSD who could not, on any reasonable view, be said to be critical suppliers or providers, such as PSD’s former solicitors, HSF, and a supplier of indoor plants, thus belying Mr Dyer’s justification for paying all of the arm’s-length creditors in full, except for Canstruct: [49].
The primary judge then referred to Mr Dyer’s cross-examination confirming that the directors of SFG well understood that, if SFG ceased to fund PSD, then the directors of PSD would place it into voluntary administration, and the administrators would continue the operations of the company with funds provided by SFG: [50]. Mr Dyer also confirmed that the directors’ intention was that, once PSD was in administration, SFG would propose a DOCA for the purposes of which it would make a financial contribution in order to ensure that the deed offered the creditors a better return than they would receive in a liquidation: [50]. Mr Dyer agreed that the directors had discussed that the plan would be to structure the DOCA so that all of the unrelated creditors, apart from the landlord and Canstruct, would receive 100 cents in the dollar: [50]. Mr Dyer denied the directors had discussed whether this was likely to entice a vote in favour of the DOCA, but admitted that the amount paid to Canstruct was calculated to afford it a better return than it would receive in a liquidation, describing it as a “subjective amount”: [50].
The primary judge referred to Mr Dyer acknowledging that the directors had discussed that, once the DOCA was executed, control of PSD would return to its directors and FSG would resume funding of PSD to continue its operations: [51]. Mr Dyer ultimately accepted that the only substantial difference in PSD before and after its administration was that it would be released from its liability to Canstruct in connection with the adjudication and would therefore retain the money that it would otherwise have been obliged to pay: [51]. Mr Dyer candidly acknowledged that the objects of the voluntary administration and DOCA process were to achieve a situation where the funds did not have to leave the Seafarms Group to go to Canstruct pursuant to the adjudicator’s decision, and PSD would get a release from all liability to Canstruct through the deed: [51].
On 13 February 2023, the directors of SFG resolved to withdraw funding to PSD: [52]. A meeting of the board of directors of PSD was held on the same day, the minutes of which note (among other things) that:
4.the financial position of the Company is such that the Company does not, by itself, have the ability or the means to pay the Adjudicated Amount;
5.the Company has received notice from its ultimate holding [company, namely SFG] that SFG is withdrawing funding support to the Company and specifically that they will not pay the Adjudicated Amount;
6.further the Company cannot give any assurance to SFG that Canstruct will be capable of repaying the funds in the amount that it is ultimately determined that the Adjudicated Amount was not in fact due and payable;
7.the board has formed the view that without the financial support of SFG, the Company will likely become insolvent in the near future; and
8.Shaun McKinnon and Andrew Fielding of BDO Business Restructuring Pty Ltd should be appointed as Joint & Several Administrators of the Company pursuant to Section 436A of the Corporations Act 2001 (Cth).
On 14 February 2023, Mr McKinnon and Mr Fielding were appointed as joint and several administrators of PSD.
On 15 February 2023, SFG released an ASX announcement, which included the following statement:
As a result of the decision made by the adjudicator on 3 February 2023 regarding a construction dispute, the voluntary administration became a necessary step for Project Sea Dragon.
The primary judge referred to the fact that, on 17 February 2023, SFG entered into a “Funding Agreement” with the administrators, pursuant to which it agreed to provide a working capital facility of $1.65 million for the administrators’ use: [55]. Those funds were intended to cover the administrators’ fees and expenses, as well as all expenses involved in continuing to operate the business of PSD, including the cost of continuing to employ PSD’s existing employees, paying all lease payments that fell due, and meeting supplier payments and other operational costs: [55].
On 23 February 2023, being the same date as the first meeting of the creditors of PSD, Canstruct lodged with the administrators a formal proof of debt in the amount of $13,994,955.30: [56]. The proof of debt form cited the three determinations of the adjudicator on 3 February 2023, relating to each of the Work Orders.
Mr McKinnon deposed that, on 13 February 2023, he attended a meeting with certain other representatives of BDO and some of the directors of PSD. The primary judge said that at that meeting, it was allegedly communicated by the directors that their intention was to keep the company and the project alive, and that they intended to propose a DOCA, although they had to confirm their position and consider financial models before doing so: [57]. On 13 March 2023, SFG proposed a DOCA to the administrators of PSD, the terms of which were in line with what is now known to have been the intention of the directors of SFG prior to the cessation of its funding of PSD: [58].
The primary judge said at [59] that the purpose of the proposed DOCA was identified in the following terms:
The proposed DOCA for the Company is intended to satisfy the objectives of Part 5.3A of the Act, including to maximise the chances of the Company, or as much as possible of its operations, continuing in existence, or to achieve better outcomes for the Company, compared to the expected outcome were the Company to be immediately wound up and assets liquidated.
The primary judge noted that this passage seems to have been intended to encapsulate or reflect the object identified in s 435A of the Act, but it contained a significant error: instead of the DOCA seeking to achieve “a better return for the company’s creditors and members than would result from an immediate winding up of the company” (in the words of s 435A(b)), it apparently seeks to achieve “better outcomes for the Company, compared to the expected outcomes were the Company to be immediately wound up and assets liquidated”: [60].
The primary judge described the key elements of the DOCA at [61] as being as follows:
(a)SFG would contribute $3.5 million (described as the “Seafarms Contribution”) to a “Deed Fund”, which would first be used to repay the working capital facility provided by SFG for the administrators’ expenses, after which an amount of $1.9 million to $2.03 million would be available for creditors.
(b)The remainder of the Deed Fund would be distributed according to a priority arrangement so as to:
(i)meet the claims of employees and “Small Claim Creditors” (presenting claims of $300,000 or less) such that they received 100 cents in the dollar; and
(ii)thereafter, pay the “Balance Creditors” (ie Canstruct) an estimated amount of 10.11 cents to 11.11 cents in the dollar, equating to approximately $1.4 to $1.55 million.
(c)Other than the repayment of the interim funding, neither SFG nor any of the other related companies in the Seafarms Group would receive anything from the Deed Fund.
(d)Upon the effectuation of the DOCA, all claims against PSD would be released and extinguished in full, save for any claims by any landlord in respect of premises occupied by PSD.
On 14 March 2023, being the following day, the administrators sent to creditors of PSD a report pursuant to s 75–225 of the Insolvency Practice Rules (Corporations) 2016 (IPR) and s 439A of the Act (the 14 March 2023 Report), containing among other things information regarding the second meeting of creditors to be held on 21 March 2023: [62]. In the executive summary at the outset of the document, the administrators recommended that the company execute a DOCA, as the DOCA proposal before it would “result in a higher and more certain return to all unsecured creditors”. In a later subsection of the executive summary, it was stated that the DOCA proposal “results in all classes of creditors receiving more than is estimated to be returned in a liquidation scenario”: [62].
The primary judge then referred to the more detailed commentary appearing later in the 14 March 2023 Report in respect of the DOCA proposal, including the following points (quoted at [63]):
•The DOCA effectively repays all creditors in full, other than Canstruct Group Pty Ltd . Other than related party creditors, Canstruct is the largest creditor by a significant value. Canstruct is estimated to receive more under the DOCA proposal than they would in a Liquidation scenario.
•The DOCA proposal would result in:
The Company’s operations to be continued;
The ongoing employment of all thirteen staff members, and the avoidance of the crystallisation of the associated employee entitlements, including termination entitlements;
These employee entitlements would be honoured by the Company post DOCA;
The avoidance of the crystallisation of various contractual and contractual related damages clauses for future lease payments and remediation works associated with leases and other agreements, that would be required to be completed at various sites;
A single upfront lump-sum payment and is therefore not subject to the uncertainty of recoveries associated with a Liquidation;
Under the DOCA related party creditors of circa. $65 m would not claim; and
A better financial return for all creditors than a liquidation.
The primary judge then referred to the next section of the 14 March 2023 Report, in which the administrators purported to estimate the return to creditors in two possible scenarios: [64]. It was suggested that, under the DOCA, all creditors would receive 100 cents in the dollar except for the one “Non-Small Claim Creditor”, which was Canstruct. By contrast, it was suggested that, in a liquidation, all creditors would receive zero cents in the dollar. The primary judge referred to the administrators’ statement that they had “not identified any potential claims that would provide any return to creditors of the Company in a liquidation scenario”, and said that at least part of the basis for this conclusion seemed to be the following series of points (quoted at [65]):
•Based on our investigations, the Company was insolvent from 13 February 2023 being the date SFG resolved to no longer provide financial support.
•Prior to this date, the access to Capital and ongoing financial support of the parent allowed the Company to meet their debts as and when they fell due. Once the support was withdrawn, the Company became insolvent.
•A claim for insolvent trading is generally calculated by reference to the increase in liabilities in the period of insolvency. As the period in question is for the day prior to the Administrators [sic] appointment, we consider that this balance is nil.
The primary judge stated that it was an uncontroversial fact that, at the time that SFG proposed the DOCA, SFG had the ability to fund the payment of the debt owed by PSD to Canstruct: [67]. That was expressly stated by SFG in its ASX announcement of 3 February 2023, and was confirmed by Mr Dyer in the course of his evidence: [67]–[68]. Nevertheless, the primary judge said that SFG declined to fund the payment of that debt, giving the reason that it did not believe that the amount was properly due and owing: [69].
The second meeting of the creditors of PSD took place on 21 March 2023. The primary judge referred at [70] to the creditors of PSD as at that date as including:
(a)13 employees, who were to be paid $11,133 if the DOCA was approved;
(b)50 trade creditors (apart from Canstruct), which were owed approximately $420,000;
(c)Canstruct, which was owed approximately $14 million; and
(d)related party creditors, who were owed a total of approximately $64.85 million. Among those related party creditors, SFG was owed $62.36 million: [71].
In addition, PSD had continuing commitments under certain lease arrangements, although those liabilities were to be met by the administrators as part of the continuation of the business, and were not dealt with in the DOCA: [72].
The minutes of the second meeting of creditors recorded that 25 proofs of debt were received by the administrators, totalling approximately $128.15 million, of which approximately $80.37 million was admitted for voting purposes: [73]. Pursuant to s 75–115 of the IPR, for the DOCA to be passed by resolution at the meeting, there needed to be a vote in favour of the resolution by both a majority in number of the creditors voting and a majority in value of the creditors voting. When the resolution to enter into the DOCA was put, 19 creditors (including four related party creditors) voted in favour, and only Canstruct voted against: [75]. In terms of the value of the debts, those voting in favour had debts worth $65,364,096.15, of which $64,853,676.65 was attributable to related parties, and the only vote cast against the resolution was by Canstruct, whose debt was entered as $13,994,955.25: [75]. The resolution therefore attracted votes in favour by a majority in both number and value of the creditors voting. The DOCA was entered into on 23 March 2023, and in accordance with its terms, control of PSD was immediately returned to its directors: [76]. On 24 March 2023, SFG made an ASX announcement in which it stated, among other things, the following (quoted at [77]):
As a result of entry into the DOCA, control of Project Sea Dragon has now returned to the directors. As previously announced no jobs were lost and the operations at Exmouth continued successfully throughout the Administration period. The directors expect that SFG operations will now return to normal and they will continue to assess advancing Project Sea Dragon including interim funding. Further funding to advance the project is being sought from third party funders.
SFG has been advised that the DOCA discharges the claims against Project Sea Dragon by Canstruct (including the claim and claim amount announced by SFG on 3 February 2023).
On 5 April 2023, Canstruct commenced these proceedings. On 3 May 2023 orders were made restraining the administrators from finalising the DOCA, including distributing the Deed Fund to creditors, until the determination of the matter: Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) [2023] FCA 637. In any event, and despite the injunction against PSD, SFG paid the debts owed to nearly all of the arm’s-length creditors of PSD, such that at the time of the final hearing the only unrelated creditors which had not been paid in full were Canstruct and HSF: [80]. The primary judge recorded that the entirety of Canstruct’s debt remained unpaid: [81].
Termination of the DOCA for abuse of Pt 5.3A
Canstruct claimed that the DOCA should be terminated pursuant to s 447A and/or s 445D of the Act on a number of different grounds and also sought ancillary orders, including orders that the administration of PSD be brought to an end and that PSD be wound up in insolvency: [82]–[84].
The first of the grounds considered by the primary judge was that the DOCA be terminated pursuant to s 447A and s 445D(1)(g) of the Act on the basis that the entry into it constituted an abuse of the provisions of Pt 5.3A. That is a ground specifically referred to in s 447A(2)(b) and falls within the scope of “some other reason” under s 445D(1)(g). The primary judge referred at [90] to the reasoning of Barrett J in Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391 at [17] to the effect that the concept of “abuse” in s 447A(2)(b) is akin to the inherent jurisdiction to stay proceedings for abuse of process as explained in Williams v Spautz (1992) 174 CLR 509, and said at [93] that Barrett J’s statement should not be taken to suggest that the jurisdiction in both instances is the same, as was observed by Sackville AJA in Re New Bounty Pty Ltd; Winpar Holdings Ltd v Baron Corporation Pty Ltd [2015] NSWSC 1060; (2015) 107 ACSR 504 at [198]. The primary judge referred also to the statement of Sackville AJA in New Bounty at [197] to the effect that a person who intends to use a process for the purpose for which it is designed does not abuse that process by having an “ultimate purpose” that is outside the scope of the proceedings. Further, the primary judge said that in order for there to be an abuse of process, the improper or collateral purpose must be the “predominant” purpose: [96]. The primary judge referred at [98] to the statement by Barrett J in Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 379 at [22] that the cases in which courts have intervened to terminate a voluntary administration are all cases in which there has existed what might be termed some “ulterior element”. The primary judge referred also to the power in s 447A usually being exercised having regard to the interests of the creditors as a whole and the public interest, the public interest including considerations of commercial morality and the interests of the public at large: Australian Securities and Investments Commission v Midland Highway Pty Ltd (Administrators Appointed) [2015] FCA 1360; (2015) 110 ACSR 203 at [67]–[68] (Beach J). In that case, Beach J also held at [69] that, in exercising its power under s 447A to set aside a resolution to enter into a DOCA and to order a winding up, the Court could apply by analogy any one or more of the principles applicable to s 445D: [100]. In that regard, the primary judge referred to the observations of Gordon J in TiVo, Inc v Vivo International Corporation Pty Ltd (Subject to Deed of Company Arrangement) [2014] FCA 789 at [58] to the effect that s 445D(1)(g) may be available where (inter alia) the proposal for the DOCA has a fraudulent or wrongful purpose, or the DOCA offers an unconscionable premium as a bribe to creditors to support an arrangement the consequence of which is that the directors’ conduct will not be investigated.
In relation to s 445D(1)(g), the primary judge cited authorities which demonstrate that the ground of “some other reason” may be used by the Court:
(a)where there has been an abuse of the provisions of Pt 5.3A;
(b)where the DOCA is contrary to the public interest, which involves considerations of commercial morality and the interests of the public at large;
(c)where, as in the case of s 447A, the termination of a DOCA can be justified in the public interest even if it is not also in the interest of the creditors as a whole; and
(d)where the DOCA has the consequence of preventing an effective investigation into the company’s affairs and the opportunity for a greater return in a liquidation scenario, as in such circumstances the DOCA is contrary to the creditors’ interests overall and the public interest at large.
At [103]–[104], the primary judge identified Canstruct’s case as being that the real object of PSD and SFG in putting PSD into administration and proposing the DOCA was twofold:
(1)avoiding having to fund payment of the adjudicator’s decision that went against PSD, or avoiding most of the debt owed to Canstruct; and
(2)avoiding scrutiny into possible insolvent trading by PSD over the previous two years, being scrutiny which might occur in a liquidation.
The primary judge held that the first part of Canstruct’s case should be accepted: [105]. The primary judge said that the utilisation of the voluntary administration and DOCA process for the predominant purpose of expunging a particular trade creditor’s debt may suffice to enliven the power under either s 447A or s 445D, saying that Pt 5.3A was not enacted to provide an avenue by which a corporate group might rearrange its affairs in order to expunge a particular trade creditor’s debt or to wipe the unwanted debts of an operating company before returning it to business as usual: [105]. The primary judge held that the evidence established unequivocally that the predominant purpose of PSD and SFG in entering into the voluntary administration and DOCA process was to disencumber PSD of its liability to pay the adjudication debt to Canstruct: [106]. The primary judge referred to Mr Dyer explicitly acknowledging in cross-examination that the process effectively permitted the debt to Canstruct to be discharged by the payment of a substantially smaller sum while the position of PSD remained otherwise the same: [107]–[108].
The primary judge referred to the submission by PSD and SFG that it is fallacious to reason from the outcome of the voluntary administration and DOCA process to an inference of an actual intention on the part of PSD’s directors as to the purpose of that process: [109]. The primary judge said that while it can be accepted that the outcome alone may not, in every case, suffice to reveal the intention underlying a voluntary administration and DOCA, it will in many cases be relevant to the task of ascertaining that intention, and there is nothing inherently erroneous in reasoning that the outcome of a process might, to some extent, reflect the purpose behind it: [109]. In this case, the primary judge said that the outcome whereby all arm’s-length creditors were to be paid in full except for Canstruct, and PSD otherwise continued to operate as it had prior to the administration, minus the debt owed to Canstruct, gave at least a prima facie indication that the purpose of the process was simply to avoid paying the full amount of that debt to Canstruct: [109]. The primary judge said that the prima facie indication of the purpose was not dispelled by the evidence of Mr Dyer, which conveyed a distinct impression that the purpose of the process was simply to avoid paying the Canstruct debt in full: [110]–[111].
In any event, the primary judge said that the evidence that might be used to elucidate the purpose of the voluntary administration and DOCA process in this case did not consist solely of its perceptible outcome, in that it was apparent from the evidence of Mr Dyer in cross-examination that, in relation to the discussions that took place between the directors of PSD and SFG, Mr Dyer considered there to be three purposes to the voluntary administration and DOCA process: first, to avoid paying Canstruct in accordance with the adjudicator’s decision; second, to release PSD from its liability to Canstruct; and, third, to ensure the survival of the Seafarms Group: [112]–[113]. As to the question of “predominant” purpose, the primary judge said that the second purpose of achieving a release from all liability to Canstruct was a necessary part of the first purpose of ensuring that the funds did not have to leave the Seafarms Group to go to Canstruct pursuant to the adjudicator’s decision: [114]. The primary judge said that the third purpose of ensuring the survival of the Seafarms Group was difficult to accept as legitimate in circumstances where the Seafarms Group could not obviously be said to be in jeopardy in circumstances where SFG was, by its own admission, capable of paying the debt due to Canstruct: [114]. The primary judge said that that leaves the first object as the predominant purpose of the voluntary administration and DOCA process, namely that the object of the process was to avoid paying Canstruct in accordance with the adjudicator’s decision: [114].
The primary judge said that if it was necessary to go further to identify the predominant purpose of the voluntary administration and DOCA process, then an appropriate step would be to investigate why Canstruct was paid a different amount to the other arm’s-length trade creditors; in other words, why the directors insisted upon payment in full to those other creditors: [115]. The primary judge said that Mr Dyer’s evidence as to those matters was not entirely consistent, and certain aspects of it were difficult to accept, and noted the following matters.
First, the proposition advanced by Mr Dyer that the arm’s-length creditors other than Canstruct ought to have received payment in full because each of them was a critical supplier or provider to the operations of PSD, was not made good, in that some of the creditors who were to receive payment in full were clearly not critical to the project. Accordingly, the primary judge said that there must be some other explanation for the decision to pay them in full, and for the decision to pay that group of creditors as a whole a different amount than would be paid to Canstruct: [116].
Second, the primary judge referred to the context in which the voluntary administration and DOCA process was implemented as including the winding down of the Project due to financial difficulties, and the disputation with Canstruct in respect of the amount owing to it: [117]. Before the adjudicator’s decision, SFG had made a provision to fund a payment to Canstruct in the amount of approximately $8.7 million, and although it had the capacity to fund PSD to pay the entire amount of the adjudicator’s decision, it did not wish to do so. The primary judge referred to Mr Dyer saying that PSD considered challenging the adjudicator’s decision in court, but found that such an intention, if it existed, changed abruptly shortly before 13 February 2023, and part of the reason for that change was (as Mr Dyer appeared to admit) the fact that such a course would require SFG and PSD to pay the full debt to Canstruct or into court. By contrast, as the directors knew, the consequence of the adoption of the voluntary administration and DOCA process would be that Canstruct’s ability to recover anything would be limited in accordance with the terms of the DOCA, and it was in that context that SFG withdrew funding of PSD “as a result of the adjudication dispute”: [117]. The primary judge found that SFG withdrew that funding for the further, related purpose of pursuing the voluntary administration and DOCA process, which it had calculated would permit it to discharge any indebtedness arising from the adjudicator’s decision for a fraction of the amount assessed, and otherwise would allow the Project to proceed unimpeded.
Third, the primary judge referred to the fact that Mr Dyer denied that there was any discussion among the directors as to whether payment in full would encourage the arm’s-length creditors to vote in favour of the DOCA, but conceded that there had been discussion about what result the voting process might produce, and discussion as to the likelihood that offering 100 cents in the dollar to those creditors would entice them to vote in favour of the DOCA: [118]. The primary judge referred to Mr Dyer trying to clarify that the discussion as to the “likely” enticing effect of payment in full never progressed to the point where it motivated the decision to offer payment in full in the final DOCA proposal, but said that Mr Dyer’s clarification is difficult to accept in circumstances where his alternative justification for payment in full was defective (namely the proposition that the creditors were critical suppliers or providers to the operations of PSD). The primary judge said that the conclusion more readily drawn is that the payment in full to the other arm’s-length creditors was intended to encourage them to vote in favour of the DOCA: [118]. The primary judge said that it must have been obvious to the directors that the critical obstacle to the passage of the DOCA and the discharge of the debt owed to Canstruct was the requirement that entry into the DOCA be favoured by a majority of the creditors of PSD by number: [119]. The primary judge said that it was difficult to believe Mr Dyer’s evidence that, in those circumstances, the directors discussed the fact that payment in full was likely to entice arm’s-length creditors to vote in favour of the DOCA, but did not consider that to be a motivating factor at all in their decision to offer payment in full (even as a factor additional to their desire to maintain a commercial relationship with those creditors): [119]. The primary judge noted that the related party creditors voted in favour of the DOCA even though they were to receive nothing under it and their debts would be released, whereas as creditors, they had an interest in recovering the debts that they were owed: [120]. Acting as prudent creditors, they would have assessed whether they would receive more under the DOCA or in a winding up scenario, and in circumstances where the former pathway explicitly offered them no return, the latter pathway was perhaps the obvious choice. The primary judge said that their votes in favour of the DOCA belied the suggestion that they were acting truly as creditors, and it was obvious that they voted as they did for the purpose of obtaining the collateral advantage of the benefit to the Seafarms Group in not having PSD pay the adjudication debt or be placed into liquidation: [120]. Accordingly, the primary judge said that the execution of the DOCA was seemingly assured by the related party creditors voting against their own interests as creditors and by the arm’s-length creditors (other than Canstruct) being promised a full return: [120].
The primary judge concluded that the result that the voluntary administration and DOCA process produced was the intended product of a strategy put in place because paying the amount determined as payable by the adjudicator was not in the interests of the Seafarms Group: [121]. The primary judge concluded that the predominant purpose of the voluntary administration and DOCA process was to avoid paying the debt owed to Canstruct, and no other purpose could properly be discerned when the evidence was considered in its totality: [121].
The primary judge then rejected a submission by PSD and SFG to the effect that this line of reasoning blurs the distinction between the two companies as separate corporate entities, saying that the submission denies the reality of the situation: [122]–[123]. The primary judge referred to the directors of the two companies as being essentially the same and the financial ties between the two companies being especially close: [123]. The primary judge said that the voluntary administration and DOCA process in this case spanned the whole of the Seafarms Group, and it was artificial in the extreme to see the same group of directors as acting in accordance with that process for different reasons merely because, at one time, they happened to be representing SFG while, at another time, they happened to be representing PSD: [123].
The primary judge said that, by the conclusion of the trial, it was not seriously in dispute that the predominant purpose of the voluntary administration and DOCA process was to allow PSD to avoid paying the full amount owed to Canstruct as a result of the adjudicator’s decision: [124]. The primary judge said that that purpose was improper, and alien to that for which Pt 5.3A is to be used, and the process was not a bona fide attempt to use Pt 5.3A to achieve an arrangement by which PSD could continue in existence and provide a better outcome for creditors than a liquidation. Accordingly, the primary judge held that the voluntary administration and DOCA process constituted an abuse of the provisions of Pt 5.3A, and enlivened the powers in ss 447A and 445D(1)(g) to set aside both the administration and the DOCA: [124].
The primary judge then turned to the second aspect of the improper purpose case contended for by Canstruct, namely the alleged purpose of avoiding scrutiny into possible insolvent trading on the part of PSD. The primary judge observed that the voluntary administration and DOCA process was not an inexpensive undertaking for SFG, costing it between $2 million and $3.5 million, whereas liquidation would not have involved any such costs and might have been a similarly effective means of avoiding payment of the amount awarded by the adjudicator: [125]. Further, SFG could have used another company to acquire PSD’s business from the liquidator in order to continue the pursuit of the Project: [125]. The primary judge referred to the submission by PSD and SFG that this suggestion was “fanciful”, pointing out that PSD had entered into agreements with native title holders regarding the use of the Legune Station land that could not be guaranteed to carry over to a new entity, and the lessor might be unwilling to contract on commercially acceptable terms with another company. The primary judge said that while the tenor of these submissions can be accepted, it is not entirely unreasonable to suppose that the native title holders and the lessor would have been willing to contract with the new entity in the Seafarms Group, represented by the same individuals, that was merely picking up where PSD left off on essentially the same terms: [127]. The primary judge said that it was unlikely that any third party would have sought to acquire the business of PSD, and thus a purchaser from within the Seafarms Group could have enjoyed immediate exclusivity in attempting to acquire the business. Further, a purchaser from within the Seafarms Group could have paid some of PSD’s debts, as SFG ultimately did, in order to maintain good relations with local suppliers. The primary judge thus drew an inference that the liquidation of PSD was not an entirely unreasonable pathway for the Seafarms Group to follow in order to avoid satisfying the adjudication debt owed to Canstruct: [127].
Canstruct submitted that, rather than pursuing that pathway, SFG was prepared to outlay between $2 million and $3.5 million because that process avoided any scrutiny being applied to PSD’s finances in the period since the 2020 financial year, when the company began to incur significant debts and that scrutiny (it was submitted) would reveal that PSD had been engaged in insolvent trading throughout that period, for which the directors would be personally liable pursuant to ss 588G and 588M of the Act. The primary judge identified the critical issue to be determined in connection with Canstruct’s submission as being whether PSD was insolvent prior to the date on which SFG decided to cease funding it: [129]. While it was common ground that PSD had no income stream or substantial assets of its own, the dispute concerned the extent to which PSD could rely upon SFG providing the funding that it required to pay its debts so as not to have been insolvent: [129].
The primary judge said at [130] that there was no dispute that PSD’s indebtedness grew substantially over the years, and referred to the following figures given in the 14 March 2023 Report as to the increasing amounts from 30 June 2020 to 14 February 2023 by which total current liabilities exceeded total current assets, and total liabilities exceeded total assets:
Excess of Total Current Liabilities over Total Current Assets
Excess of Total Liabilities over Total Assets
30 June 2020 $6.72 million $2.38 million 30 June 2021 $10.7 million $4.83 million 30 June 2022 $67 million $67.39 million 14 February 2023 $73.28 million $73.53 million
The primary judge stated that the overall indebtedness of PSD grew in essentially two main ways: first, as the company progressed the Project, it entered into contracts such as the Work Orders with Canstruct and the subleases for the Legune Station site, under which it incurred substantial liabilities; and second, the process by which it acquired funds to support its operations meant that it continued to incur liabilities to SFG and other companies in the Seafarms Group: [132].
The primary judge said that it was not in dispute that PSD had not entered into an agreement with any entity for the provision of funding to allow it to meet liabilities that it stood to incur during the development phase of the Project, and did not make any arrangements with any entity pursuant to which it obtained a specific promise, commitment or assurance that the funding would be provided: [133]. Although funds were advanced by SFG from time to time when requested by PSD, the amounts in question simply became debts of the company, and there was no agreement as to when those debts were to be repaid to SFG or any agreement as to the terms on which the funds were provided, and there was no agreement that funding would continue at any time in the future: [133]. PSD thus had no control over whether SFG would continue to provide funds upon its request: [134]. The primary judge said that, although one might assume that SFG would ordinarily be inclined to provide those funds, that ultimately depended in each instance upon whether or not it took a favourable view of such a course, and it was at liberty to cease funding whenever it wished to do so: [134]. Indeed, the primary judge said that SFG did cease funding abruptly on 13 February 2023, when it determined to terminate the flow of funds to PSD without notice, and in doing so, it did not breach any agreement, commitment or understanding in place between the two companies: [134]. The primary judge said that, importantly, at all relevant times there was nothing preventing SFG from calling for the immediate repayment of the amounts owed to it by PSD: [135].
The primary judge acknowledged that PSD was undeniably “balance sheet insolvent” from the 2020 financial year onwards by reference to its assets and liabilities, and stated that that is enough to justify a finding of insolvency at law unless it can be established that PSD had sufficient access to resources not reflected in its balance sheet, in particular through the provision of funding by SFG: [137].
The primary judge referred to the definition of solvency and insolvency in s 95A of the Act at [138], namely:
(1)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(2)A person who is not solvent is insolvent.
The primary judge then referred to the observation of Palmer J in Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385 at [111]–[113] that the omission of the words “from its own monies” from this definition is significant, and leaves the court free to determine insolvency, whether retrospective or prospective, as a question of commercial reality having regard to the particular facts of the case. Justice Palmer explained in that passage that where retrospective insolvency is an issue, the court can take into account that as at and after the alleged state of insolvency the company actually paid all its debts as they fell due because the third party made funds available to it without security. On the other hand, where prospective insolvency is in issue, the court would generally be sceptical of an assertion that a third party is willing to advance funds unsecured on such terms as would not bring about insolvency, and such willingness on the part of a third party would have to be cogently demonstrated at least as a matter of commercial reality.
The primary judge next referred to the reasons of Barrett J in Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148 at [99] to the effect that funds which, on a realistic commercial assessment, are capable of being raised from outside sources are relevant to the question whether a company is solvent, but then continued in the same paragraph as follows:
[T]he availability of such funds in the form of a loan will not enhance solvency (or have the potential to avoid a finding of insolvency) unless the loan terms are such as to exclude the loan liability from consideration in its own right as part of the debts due or near due. In other words, availability of loan funds for a very short term or payable on demand, as a source from which debts overdue may be paid, does not enhance solvency: it merely substitutes one form of immediate (or near immediate) obligation for another. … [T]he capacity to raise funds from external sources must be judged in a practical and businesslike way by reference to the commercial realities of the case, not by way of some theoretical textbook exercise. Possibilities are not enough. Genuine and realistic availability, as a matter of commercial reality, must be seen.
The primary judge then referred to various cases in which Barrett J’s reasoning has been followed: [141]–[143]. The primary judge said that when assessing solvency, there is nothing inherently objectionable about taking into account loans from related parties where the evidence discloses that, as a matter of commercial reality, the related parties are likely to continue to provide finance: [145]. The primary judge referred to the observation of Morrison JA (with whom Gotterson JA and Boddice J agreed) in Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28 at [43] to the effect that, where the provision of funds cannot be compelled by legal arrangement, there must be a degree of assuredness that the financial support will be forthcoming and at such a level that one could say that the company was able to pay its debts as and when they fell due, rather than being possibly able to do so: [145]. The primary judge said that, as the inquiry is concerned with commercial realities, the funds that are said to be sufficient to maintain solvency must be genuinely and realistically available, when judged in a practical and businesslike way: [146].
The primary judge said that, in the present case, there was limited evidence from the directors of SFG that the company was committed to providing the financial support from PSD into the future, and that it would not demand immediate repayment of a debt: [147]. The primary judge said that no director was able to give such evidence in the circumstances that prevailed as at the time of the hearing, when SFG had ceased providing financial support and had submitted a proof of debt to the administrators: [147]. The primary judge said that, although Mr Dyer deposed that a demand for payment would never be made by SFG and that it was commercially illogical and against commercial reality for the company to call up its loans to PSD while the Project was ongoing, the facts as they stand diminish the force of this evidence quite substantially, in that SFG did cause PSD to become insolvent: [147]. I note in passing however, that SFG never made any demand that PSD repay its debt.
The primary judge identified the key difficulty that PSD and SFG faced in making out their case as to the solvency of PSD as being that, on their characterisation of the facts, funding from SFG was assured and PSD was therefore solvent until, upon the emergence of a particular debt that the Seafarms Group found intolerable, that was suddenly no longer the case: [148]. The primary judge said that the natural question to be asked is whether the funding was ever truly assured, and whether PSD was ever truly solvent, in circumstances where the state of affairs between it and its parent company could (and did) change instantly at the parent’s whim: [148]. The primary judge said, although it was true that in the past PSD had been able to meet its debts consistently with funds from SFG, which might have seemed to have little incentive to call upon the growing debt that was owed to it, one is left to wonder whether that situation existed only by coincidence and as a matter of convenience: [148]. The primary judge said that it seemed rather unsatisfying to ask whether a history of funding is sufficiently lengthy as to demonstrate solvency, in circumstances where there only exists a “history” to speak of because, by chance, the problem that ultimately arose did not arise sooner: [148].
The primary judge at [150] distinguished the decision in International Cat Manufacturing Pty Ltd (in liq) v Rodrick [2013] QCA 372; (2013) 97 ACSR 200 on the basis that the Court accepted in that case at [106] that the commercial reality supported the conclusion that the most important consideration, being that of the degree of commitment to the continuation of financial support, was satisfied. The primary judge said that in that case, there were many factors which bound the third party providers of finance to the company, and which raised the assuredness of further finance beyond a mere discretionary payment, none of which existed in the present matter: [150]. The primary judge said that the analysis in that case demonstrates that to reach the required level of assuredness, there must be more than a mere discretion in the external funder to advance funds, such as where the third party funder is compelled to provide the financial report because it has provided a guarantee in respect of the company’s obligations: [151]. The primary judge said that the definition of solvency requires the debtor being able to pay its debts when they fall due, and that ability does not exist in the absence of funds actually being available, although there are degrees of certainty as to the “availability” of funds: [152]. The primary judge said that for that reason, the line is drawn at a point where it can be objectively ascertained that a sufficient degree of assuredness exists that funds will be forthcoming to discharge the indebtedness, in contrast to a hope or mere expectation that a third party will favourably exercise their unfettered discretion to make, or continue to make, funds available: [152].
The primary judge referred to the submission by SFG and PSD that the fact that PSD is a “special purpose vehicle” used for development purposes is a relevant consideration to be taken into account in determining solvency: [153]. The primary judge said that the question of the solvency of special purpose companies is not to be assessed differently because they are often used for speculative undertakings and have little in the way of assets of their own, and that while the support of directors and shareholders without security may be more common with such companies, neither the applicable test for insolvency nor its application are different from that which is ordinarily applied: [154]. The primary judge reiterated that the Court must take into account the commercial realities of a company’s financial circumstances: [157]. In the present case, the primary judge said that when PSD incurred a liability with which SFG was displeased, SFG determined to withhold funds and it made no commitment to continue funding in relation to any other debts or for any period of time, and PSD’s existing liability to SFG was repayable on demand: [157]. The primary judge recognised, however, that SFG’s loan was not called up: [157].
Canstruct contends that the DOCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against, Canstruct within the meaning of para (f)(i) of s 445D(1). The primary judge referred to the principles expressed by McKerracher J in Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 at [202]–[203], which was approved on appeal in that case ([2022] FCAFC 54 at [168]), and by the Full Federal Court in Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110; (2023) 168 ACSR 311 at [64]–[65], in the following terms (omitting citations):
(a)Pt 5.3A of the Act assumes that the creditors are best placed to judge their interests, so a setting aside will not be ordered lightly;
(b)the mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed; the mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement;
(c)the test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice; some degree of discrimination is not necessarily unfair, and thus it is clear that a DOCA may provide for differential dividends among creditors. Part 5.3A does not require a pari passu distribution; what is required is a better return to creditors than an immediate winding up, and that object is met if some creditors are better off than in a winding up and none are worst off under the DOCA than they would be under a winding up;
(d)when deciding whether a deed unfairly prejudices or discriminates against a creditor or group of creditors, consideration must be given to what those purportedly prejudiced creditors would receive, or would be likely to receive, on a winding up, and the reasonableness of any conclusions reached by the administrator on that question; and
(e)in respect of determining what is unfairly discriminatory:
(i)there must be reasonable grounds for differentiation between creditors of an equal class (for example, ordinary unsecured creditors) that accord with the object and spirit of Pt 5.3A, and circumstances may exist where certain creditors must be paid in full to ensure their continued support for the company to allow it to continue to trade;
(ii)there will be circumstances when ordinary commercial common sense will demand, in the case of priority creditors, a loss of priority, and in the case of unsecured creditors, some degree of discrimination;
(iii)where a deed proposes to preserve the company to achieve the objects of Pt 5.3A, there should be no expectation of equal treatment of unsecured creditors where such treatment would defeat that purpose; and
(iv)ultimately, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination, and the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation, and indirect or collateral benefits from the survival of the company’s business, and no worthwhile avenues for further recovery in litigation are identified, a major creditor’s curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole.
The authorities indicate that, depending on the circumstances of the particular case, a relevant factor is a comparison with what the allegedly prejudiced creditors would receive (or be likely to receive) on a winding up: Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48C–E, 50D (von Doussa, O’Loughlin and Lehane JJ); TiVo, Inc v Vivo International Corporation Pty Ltd [2014] FCA 789 at [54] (Gordon J); Britax Childcare Pty Ltd v Infa Products Pty Ltd [2016] FCA 848; (2016) 115 ACSR 322 at [93]–[94], [115]–[116] (Burley J). In Lam Soon at 48C–E, after observing that general propositions are dangerous in this context, the Full Federal Court said that, in that particular case, their Honours could not see why fairness “necessarily” demanded that significantly more be contributed by the relevant external source of funds for the DOCA than was necessary to ensure that all creditors receive benefits of a value at least equal to those they would receive if the deed were not executed, emphasising the use of “necessarily” by reason of the judgment required to be made in light of the particular circumstances. The appellants sought to elevate that reasoning to a proposition of law that a DOCA cannot be oppressive, unfairly prejudicial or unfairly discriminatory if it provides creditors with a better result than in a winding up. The appellants submitted that, if the finding of insolvency since mid-2020 is wrong, thus undermining Canstruct’s claim for insolvent trading before 13 February 2023, then a winding up would yield a negligible return for Canstruct whereas the DOCA would provide Canstruct with a return of about $1.3 million. The authority relied on by the appellants for the proposition of law which they advanced was the Full Court decision in Sino Group at [67], in which Farrell, Cheeseman and Feutrill JJ said:
For the purpose of s 445D(1)(f)(ii), it is not necessary to establish, on the balance of probabilities, that if the company is placed in liquidation the creditors will receive a better return. It is sufficient that there is a not unrealistic prospect that there may be a better return to creditors on a winding up than under the deed — that there is a serious case for the recovery of assets in the liquidation that would result in a better return to creditors: Britax Childcare Pty Ltd v Infa Products Pty Ltd (admins apptd) (2016) 115 ACSR 322; [2016] FCA 848 at [93] to [94].
The appellants’ submission turns on a misreading of that paragraph in the Full Court’s reasons. It is obvious that the Full Court was there discussing para (f)(ii) as to a DOCA being contrary to the interests of creditors as a whole, not para (f)(i). Although the Court said at [66] that the two limbs of para (f) are often considered in combination, there is no indication that their Honours were doing that in their reasons at [67]. Indeed, their Honours expressly dealt with para (f)(ii) on its own. Similarly, the reasoning of the Full Court in Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85 at [91] (Farrell, Davies and Moshinsky JJ), on which the appellants rely in relation to the exercise of discretion, is expressly concerned with para (f)(ii), not para (f)(i).
It may be thought that a more promising authority for the appellants’ submission would be that cited in proposition (c) in McKerracher J’s reasons in Decon at [202], to the effect that Pt 5.3A requires a better return to creditors than an immediate winding up, which is met if some creditors are better off than in a winding up, and none are worse off under the DOCA than they would be in a winding up. The only authority cited in support of that proposition by McKerracher J was the decision of Master Newnes in Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) [2005] WASC 261; (2005) 228 ALR 598 at [62]. However, Master Newnes in turn cited the Full Federal Court in Lam Soon for that proposition, which (as I have indicated two paragraphs above) was heavily qualified by reference to the particular circumstances of the case and the danger posed by stating general propositions in this context. Accordingly, in my view, the principles set out my McKerracher J (and approved twice by the Full Federal Court) must be understood as general propositions which are subject to the particular circumstances of the case, not rules of law to be applied dogmatically as though they were part of the Act itself. In any event, McKerracher J’s analysis of the particular element of unfair discrimination at [203] of Decon (which I have set out in sub-para (e) of my summary three paragraphs above) did not contain any such principle.
In the present case, unfair prejudice or unfair discrimination is established by the lack of any acceptable justification for paying Canstruct about 10 cents in the dollar under the DOCA, whereas all other unrelated arm’s-length creditors were to be paid in full. The primary judge rejected the justifications sought to be advanced by the administrators and PSD (see [93] and [94] above). In the 14 March 2023 Report, the administrators suggested that the basis for the differential treatment was that it reflected the priorities for small creditors in a liquidation set out in the Act, which the primary judge correctly referred to as a “bizarre statement” (at [209]), and the appellants did not seek to defend it in their argument before us. PSD sought to justify the differential treatment as being in favour of entities with which PSD would likely engage in business in the future, but the evidence did not support that submission, notably because HSF (which was owed about $291,000, comprising over 50% of the unrelated unsecured creditors’ debts) was to be fully paid even though it was PSD’s former solicitor and thus not an entity with which PSD would be likely to do business in the future (as the primary judge found at [214]). Further, as the primary judge said, there was no affidavit evidence to the effect that this was the justification for the discrimination against Canstruct in the DOCA, and the suggestion was raised for the first time in PSD’s written submissions before the primary judge (at [215]).
The primary judge found that advancing these fictitious justifications was disingenuous, and undertaken for the purpose of concealing the true purpose, namely to cause the release of Canstruct’s debt: [216]. In my view, the lack of a valid justification for discrimination against a particular creditor is capable in itself of constituting unfair prejudice or unfair discrimination, even if there is no realistic prospect of that creditor being better off in a winding up than under the DOCA. A similar conclusion was reached by Black J in Re Academy Construction at [77], where no rational basis was shown for the different treatment of a particular creditor compared to other unsecured creditors, even if it could be shown that they would all receive a better return under the DOCA than they would in a liquidation. In that case, the limit on the potential recovery under the DOCA by the creditor which was discriminated against was simply the arbitrary amount chosen by the proponents of the DOCA as the basis on which its claim would be extinguished: see [71] and [75].
I note that an additional ground relied on by the primary judge was that unfair prejudice or unfair discrimination were established in the present case by reason of the DOCA precluding the largest unrelated unsecured creditor from pursuing recovery by way of indemnifying a liquidator to pursue insolvent trading proceedings: see the primary judge’s reasoning at [221]–[223] (to which I refer at [95] above). I do not regard that matter as being established, for want of proof of insolvency before 13 February 2023. However, this additional ground is not necessary to the conclusion that para (f)(i) of s 445D(1) is established.
Ground 4: Should the DOCA be terminated under s 445D(1)(e)?
The primary judge accepted Canstruct’s submission that “injustice” is established on the basis that the effect of the DOCA is to avoid a proper investigation of insolvent trading allegations, and to deny Canstruct the prospect in a liquidation of a much greater return than 10 cents in the dollar: see [225]–[227], to which I refer at [96]–[97] above.
Given my conclusion that Canstruct has not established that PSD was insolvent before 13 February 2023 on the evidence adduced before the primary judge, the alleged “injustice” has not been established. Accordingly, in my view, the ground under para (e) of s 445D(1) as advanced by Canstruct is not satisfied.
Ground 5: Should the DOCA be terminated under s 445D(1)(b)?
The misleading information relied on by Canstruct concerns the statement in the 14 March 2023 Report which was quoted by the primary judge at [231] (which I have referred to at [99] above). The appellants accept that the information was misleading, as the primary judge found at [232]. The only issue on the appeal was whether the information could 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, within the meaning of para (a)(ii) of s 445D(1). It is common ground that, in this context, “material” means something that was relevant, and either did affect or might have affected the decision to vote in favour of the DOCA: Sino Group at [62], proposition (11); Commissioner of Taxation v Comcorp Australia Ltd (1996) 70 FCR 356 at 392B (Carr J, with whom Lockhart J agreed).
The primary judge reasoned that, while the creditors were likely to vote in favour of the DOCA because they were offered a return of 100 cents in the dollar, the erroneous assertion that they would otherwise be entitled to that on a winding up was likely to give them comfort, and the erroneous statement that the differential payments were the same as found in the Act on a winding up was likely to have provided succour to the creditors in the sense that they would perceive the existence of a justification or fairness for their favoured position: [236] (to which I refer at [102] above). In other words, the primary judge reasoned that it was not certain or inevitable that creditors who were offered 100 cents in the dollar would vote in favour of the DOCA; rather, that was likely, but the likelihood was strengthened by the misleading information contained in the 14 March 2023 Report. In my view, that is plainly sufficient to establish a realistic possibility that the misleading information might have affected the decision by creditors to vote in favour of the DOCA, and the information was plainly relevant to that decision. Accordingly, the primary judge was correct to find that para (b) of s 445D(1) was satisfied.
Ground 6: Should the DOCA be terminated under s 445D(1)(c)?
The primary judge found three omissions from the 14 March 2023 Report, which his Honour held could reasonably be expected to have been material to creditors in deciding whether to vote in favour of the resolution that PSD execute the DOCA, namely:
(a)that the real and intended purpose of the DOCA was to circumvent the payment of the adjudicated amount to Canstruct, except for 10 cents in the dollar, while continuing with the Project, being a matter which (if disclosed) would be likely to have led to creditors questioning the propriety of entering the DOCA and becoming concerned that it may be set aside (at [239]);
(b)that there was a real question as to whether PSD had been trading while insolvent for a number of years, which a liquidator might properly investigate, and there were avenues of recovery against PSD’s directors and SFG (at [240]–[241]); and
(c)that the real purpose of the discrimination in favour of arm’s-length creditors was to provide a majority of creditors in number with an irresistible incentive (or “bribe”) to vote “yes”, and the materiality of that matter was increased by the misleading information in the 14 March 2023 Report suggesting that the discrimination was justifiable by reference to the priorities in a liquidation under the Act (at [242]–[243]).
In my view, the second of those matters is not established on the evidence, consistently with my finding that PSD was solvent at all material times until 13 February 2023. However, the primary judge’s reasoning in relation to the first and third of those matters is compelling, and the appellants have not demonstrated any error in the primary judge’s reasoning in relation to those matters.
The appellants submitted that any omission within para (c) of s 445D(1) must relate to a matter which is required to be disclosed by the statutory provisions relating to the contents of the administrator’s report to creditors. The appellants referred to s 438A of the Act which provides as follows:
As soon as practicable after the administration of a company begins, the administrator must:
(a) investigate the company’s business, property, affairs and financial circumstances; and
(b) form an opinion about each of the following matters:
(i)whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement;
(ii)whether it would be in the creditors’ interests for the administration to end;
(iii) whether it would be in the creditors’ interests for the company to be wound up.
The appellants also referred to s 75–225(3) of the IPR to the effect that the notice of the second creditors’ meeting convened under s 439A of the Act must be accompanied by:
(a)a report by the external administrator about the company’s business, property, affairs and financial circumstances; and
(b)a statement setting out the following:
(i)whether, in the administrator’s opinion, it would be in the creditors’ interests for the company to execute a deed of company arrangement;
(ii)whether, in the administrator’s opinion, it would be in the creditors’ interests for the administration to end;
(iii) whether, in the administrator's opinion, it would be in the creditors’ interests for the company to be wound up;
(iv)the reasons for the opinions referred to in subparagraphs (i) to (iii);
(v)such other information known to the administrator as will enable the creditors to make an informed decision about each matter covered by subparagraph (i), (ii) or (iii);
(vi)whether there are any transactions that appear to the administrator to be voidable transactions in respect of which money, property or other benefits may be recoverable by a liquidator under Part 5.7B of the Act;
(vii)if a deed of company arrangement is proposed — details of the proposed deed.
Even taking that submission at its highest, it is difficult to see how it would assist the appellants in avoiding the application of para (c) of s 445D(1). The purpose of the DOCA (that is, the end which is sought to be achieved by the DOCA) is relevant to whether it is in the interests of creditors for the company to execute the DOCA. That point was well made by the primary judge at [239] (to which I refer at [104] above). Contrary to the appellants’ submission, the first and third grounds of omission under para (c) were not merely matters of motivation, but pertained to the purpose of the DOCA, consistently with the primary judge’s reasoning. Further, even if one were to accept the appellants’ submission that the administrators need not have proffered an opinion as to why some creditors were favoured under the DOCA relative to Canstruct, the fact is that the administrators did proffer a justification for that discriminatory treatment in the present case, which was simply wrong, and therefore in the present case there was a material omission in not giving the true explanation. Similar reasoning was adopted by Campbell J in applying para (c) of s 445D(1) in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 510; (2005) 226 ALR 510 at [177].
In any event, the submission that para (c) of s 445D(1) is limited to material required by statute is contrary to an unbroken phalanx of authority, which I regard as correct, requiring that matters which are relevant and material should be conveyed to the creditors irrespective of whether statutory provisions specifically require such matter to be in the report or statement: Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 148 (Cohen J); Le Meilleur Pty Ltd (subject to deed of company arrangement) v Jin Heung Mutual Savings Bank Co Ltd [2011] NSWSC 1115; (2011) 256 FLR 240 at [331] (Ward J); Re Recycling Holdings Pty Ltd [2015] NSWSC 1016; (2015) 107 ACSR 406 at [33]. As Brereton J said in the last of those authorities at [33]:
Thus an administrator may need to make inquiries to obtain relevant information beyond the duty to investigate under s 438A, depending on “an assessment of the nature of the question to be investigated, the information in the administrator’s hands, the cost and difficulty of making further investigation, and (most importantly) the significance of the issue under investigation to the creditors’ decision”, and a DOCA may be set aside if failure to make such inquiries results in a material omission: Bovis Lend Lease Pty Ltd v Wily (2003) 45 ACSR 612; 21 ACLC 1737; [2003] NSWSC 467 at [325] (Bovis per Austin J). However, in assessing the adequacy of the information contained in a report, the court must recognise that the administrator’s investigation has to be conducted in a short timeframe, and with limited resources and limited powers of compulsion. Together with the reference in s 439A(4)(b)(v) to “such other information known to the administrator” as will enable the creditors to make an informed decision, this is indicative, that, at least generally speaking, there will not be an omission if the information in question is not known, or reasonably capable of being ascertained, by the administrator.
In my view, the first and third matters of material omission referred to above were either known, or reasonably capable of being ascertained, by the administrators, and constituted omissions from the 14 March 2023 Report which can reasonably be expected to have been material to the creditors in deciding whether to vote in favour of the resolution that PSD execute the DOCA. Accordingly, para (c) of s 445D(1) is established.
Ground 7: Should the resolution of creditors be set aside under s 75–41 of the IPS?
The appellants sought leave during the argument on appeal to amend their Notice of Appeal to include a ground of appeal challenging the primary judge’s finding at [263] (to which I refer at [113] above), that the resolution of creditors that PSD execute the DOCA should be set aside pursuant to s 75–41 of the IPS, substantially for the same reasons given in relation to termination of the DOCA under s 445D(1)(f). Leave to amend the Notice of Appeal was not opposed, provided that the new ground did not extend beyond the existing challenges to the primary judge’s reasons. On that basis, leave should be granted to the appellants to file the Amended Notice of Appeal which was sent to us on the afternoon of the second day of the appeal.
Section 75–41 of the IPS provides relevantly as follows:
(1)This section applies if, on the application of a creditor of a company under external administration, the external administrator of the company or ASIC, the Court is satisfied of the following matters:
(a) a proposal has been voted on by creditors (either at a meeting of the creditors or under section 75–40 without a meeting);
(b) if the vote or votes that a particular related creditor, or particular related creditors, of the company cast on the proposal had been disregarded for the purposes of determining whether or not the proposal was passed, the proposal:
(i) if it was in fact passed — would not have been passed; or
(ii) if in fact it was not passed — would have been passed;
or the question would have had to be decided on a casting vote;
(c) the passing of the proposal, or the failure to pass it, as the case requires:
(i) is contrary to the interests of the creditors as a group or of that class of creditors as a group, as the case may be; or
(ii) has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposal, or for it, as the case may be, to an extent that is unreasonable having regard to the matters in subsection (2).
(2)For the purposes of subparagraph (1)(c)(ii), the matters are:
(a) the benefits resulting to the related creditor, or to some or all of the related creditors, from the proposal if passed, or from the failure to pass the proposal, as the case may be; and
(b) the nature of the relationship between the related creditor and the company, or of the respective relationships between the related creditors and the company; and
(c) any other relevant matter.
(3)The Court may make one or more of the following:
(a) an order that the proposal be considered and voted on at a meeting of the creditors convened and held as specified in the order;
(b) an order directing that the related creditor is not, or such of the related creditors as the order specifies are not, entitled to vote on:
(i) the proposal; or
(ii) a resolution to amend or vary the proposal;
(c) if the proposal was passed — an order setting aside the resolution passing the proposal;
(d) such other orders as the Court thinks fit.
(4)In this section:
related creditor, for the purposes of a vote, in relation to a company, means a person who, when the vote was cast, was a related entity, and a creditor, of the company.
As to sub-s (1)(b) if one disregards the votes of related creditors, the value of votes in favour of the DOCA was $510,420, whereas the value of votes against the DOCA was approximately $13.9 million, as the primary judge found at [254] (see [109] above).
As to sub-s (1)(c)(ii), the passing of the proposal caused prejudice to Canstruct to an unreasonable extent, having regard to the benefits to related creditors and the relationship between them and PSD, in particular the control of PSD by SFG, which was by far the largest creditor of PSD. The prejudice to Canstruct is established by reason of the matters which I have found constituted the ground of termination under para (f) of s 445D(1), particularly in that Canstruct is to be paid only about 10 cents in the dollar under the DOCA whereas all other unrelated unsecured creditors are to be paid in full, and there is no principled justification for that discrimination or prejudice. The conclusion is fortified by the primary judge’s finding at [120] (to which I refer at [57] above), to the effect that the related creditors were not in reality voting in their capacity as creditors, given that the DOCA gave them no return at all, but were voting to obtain a collateral advantage, namely a release of Canstruct’s debt (as the primary judge found at [216]) before resuming normal business operations (as the primary judge found at [183]).
Ground 2: Should the Court exercise its discretion to terminate the DOCA?
The primary judge dealt with the exercise of the Court’s discretion in two separate passages of his Honour’s judgment. First, after having found an abuse of the provisions of Pt 5.3A, the primary judge said the following at [186]:
The seriousness of the misuse of the misuse to which Pt 5.3A has been put in this case is sufficient on its own to warrant the exercise of the Court’s power to terminate the DOCA and the administration. On any view, the consequence of the misuse of s 436A, if it were permitted to stand, would be that Canstruct would be denied any possibility of a substantial recovery of its debt. It might also be seen as giving the Court’s imprimatur to inappropriate commercial conduct.
The reference to denying Canstruct any possibility of a substantial recovery of its debt is a reference to what the primary judge regarded as a prospective insolvent trading claim by a liquidator of PSD against PSD’s directors and SFG. However, several paragraphs earlier at [183], the primary judge made it clear that the DOCA should be set aside irrespective of that perceived consequence, saying:
The avoidance of an unwanted indebtedness is not an appropriate purpose for a DOCA. No aspect of Pt 5.3A is designed to permit a company to use the DOCA process to rid itself of a liability, merely to restart operations in almost identical position to the pre-DOCA state save for the existence of the erstwhile debt. In that sense, the DOCA in the present case was entered into to achieve a purpose which was alien to the objects of Pt 5.3A. That is more than sufficient to warrant setting both the administration and the DOCA aside.
Accordingly, the primary judge would have exercised the discretion to terminate the DOCA irrespective of any findings as to insolvency of PSD before 13 February 2023.
The primary judge referred to the exercise of discretion again later in the judgment, after dealing with the grounds under paras (b), (c), (e) and (f) of s 445D(1). The primary judge said that satisfaction of those grounds was itself a “powerful” consideration in the exercise of discretion (at [248]), and that the conclusions as to satisfaction of those other grounds are “weighty considerations” in favour of terminating the DOCA, either taken on their own or collectively. However, in that passage of the judgment, the primary judge did take into account his Honour’s findings as to a history of trading by PSD while insolvent: [250]–[253], [257] and [260]. In contrast to the earlier passage relating to the exercise of discretion, the primary judge did not say in the second passage that the DOCA should be terminated irrespective of any finding of insolvency before 13 February 2023.
The appellants submitted that the primary judge’s error in relation to insolvency before 13 February 2023 has the consequence that his Honour’s exercise of discretion must be re-exercised. I reject that submission. The primary judge expressly stated at [183] that the misuse of Pt 5.3A was more than sufficient to lead to termination of the DOCA, irrespective of PSD’s insolvency before 13 February 2023. Accordingly, the issue of insolvency could not rationally have led to any different exercise of discretion, and no occasion for this Court to re-exercise the discretion arises.
In any event, even if the discretion were to be exercised afresh, I would come to the same conclusion as the primary judge, namely that the DOCA should be terminated by reason of the satisfaction of multiple grounds for termination, and the lack of any sufficient countervailing factor or factors.
The appellants submitted that the winding up of PSD is a pointless exercise and serves no useful purpose. The appellants submitted that the company has no realisable assets, and there are no recovery proceedings to be brought by a liquidator, and accordingly PSD is unable to pay any significant distribution to its unsecured creditors. The appellants further submitted that a winding up may jeopardise native title agreements and permits that are in place. Further, the appellants submitted that Canstruct is substantially better off under the DOCA, which provides it with a return of about $1.3 million.
However, Canstruct has been advised by experienced solicitors and counsel, and has no need for any judicial paternalism to ensure that it is acting in its best interests. HSF is the only other unrelated unsecured creditor not to have been fully paid, and it decided not to seek leave to appear as an interested party to oppose termination of the DOCA, as the primary judge said at [259]. I note also that, while I have taken a negative view of the liquidator’s prospects in any insolvent trading proceedings on the evidence as it currently stands, the evidence to be adduced in any such proceedings may conceivably be different from that adduced before the primary judge in the present case, and the matter would involve the directors of PSD who are not parties to the present case. I therefore express no view as to what the liquidator’s prospects may be on any evidence beyond that which was adduced before the primary judge.
In my view, the appellants have not demonstrated any ground for the setting aside of the primary judge’s exercise of discretion.
Formal matters
There are two aspects of the orders made by the primary judge which are not the subject of specific challenge by the appellants, but which call for comment, at least as a matter of form.
First, Order 2 made by the primary judge was that pursuant to s 447A of the Act, the administration of PSD be brought to an end forthwith. As a matter of law, the administration as such came to an end when the DOCA was executed on 23 March 2023: s 435C(1)(b). There was thus no need for the Court to make Order 2, although given that it confirms the position which arose in any event under the Act, it appears innocuous.
Second, Order 4 made by the primary judge was that PSD be wound up “in insolvency”. The primary judge noted at [258] that s 446AA relevantly has the effect that, if the DOCA is terminated pursuant to s 445D, PSD will proceed to liquidation as if it had been placed in voluntary liquidation under s 491 of the Act, without the directors having made a declaration of solvency under s 494. I note that, until 1 March 2017, a substantially identical provision was contained in reg 5.3A.07 of the Regulations. The Court is able to make an order under s 447A affecting the operation of s 446AA, just as it was able to do so in relation to the predecessor provision, namely reg 5.3A.07: Re Bosnjak Holdings Pty Ltd; Fexuto Pty Ltd v Lombe [2009] NSWSC 565; (2009) 72 ACSR 377 at [41]–[48] (Austin J). As the appellants concede that the PSD has been insolvent since 13 February 2023, the fact that the winding up of PSD is in insolvency, rather than a creditors’ voluntary winding up, does not appear to be inappropriate or to cause any prejudice to any party.
Conclusion
In my view, the appeal should be dismissed with costs. The order as to costs should include the costs of the interlocutory applications filed by PSD and SFG on 19 March 2024 and 12 April 2024 in relation to the stay pending the determination of this appeal, which were heard on 19 March 2024 and 18 April 2024, in respect of which costs were reserved to the hearing of the appeal: Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 5) [2024] FCA 479 at [97]. The appropriate orders are as follows:
(1)Leave be granted to the appellants to amend the Notice of Appeal in the form provided to the Court on 13 August 2024.
(2)The appeal be dismissed.
(3)The appellants pay the respondent’s costs of the appeal, and of their interlocutory applications in QUD 124 of 2023 filed on 19 March 2024 and 12 April 2024.
I note that the stay of the primary judge’s orders operates until the determination of this appeal, and has therefore now come to an end.
I certify that the preceding one hundred and eighty-three (183) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman. Associate:
Dated: 1 November 2024
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