Re BCD (Operations) NL (subject to deed of company arrangement)
[2014] VSC 259
•28 May 2014
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2014 2055
IN THE MATTER of BCD RESOURCES (OPERATIONS) NL
(SUBJECT TO A DEED OF COMPANY ARRANGEMENT)
ACN 000 679 023
BETWEEN:
| TIMOTHY BRYCE NORMAN, ADRIAN ROBERT HUNTER AND SALVATORE ALGERI IN THEIR CAPACITIES AS DEED ADMINISTRATORS OF BCD RESOURCES (OPERATIONS) NL (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 000 679 023 | First Plaintiffs |
| BCD RESOURCES (OPERATIONS) NL (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 000 679 023 | Second Plaintiff |
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JUDGE: | DIGBY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 27 May 2014 |
DATE OF JUDGMENT: | 28 May 2014 |
CASE MAY BE CITED AS: | BCD Resources (Operations) NL |
MEDIUM NEUTRAL CITATION: | [2014] VSC 259 |
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CORPORATIONS ‑ Voluntary administration ‑ Application by Administrators under Corporations Act 2001 (Cth), s 444GA for leave to transfer shares ‑ Whether transfer would unfairly prejudice the interests of the members of the Company.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiffs | Mr O Bigos | Maddocks |
For BCD Resources NL | Ms A Borland | Mills Oakley |
In Person | Mr W Matthews |
HIS HONOUR:
Background
This matter concerns the transfer of shares in the second plaintiff (‘the Company’) to BCD Resources NL (‘BCD’), which already owns approximately 93 % of shares in the Company. The first plaintiffs, in their capacity as deed administrators of the Company, seek leave under s 444GA(1) of the Corporations Act 2001 (Cth) (‘the Act’) to transfer all remaining shares in the Company, held by about 700 minority shareholders to BCD.
The first plaintiffs rely on the affidavits of Adrian Robert Hunter, sworn 1 May 2014 and 26 May 2014 and the affidavit of Charles Newman, sworn 8 May 2014. In addition, the first plaintiffs rely on Exhibit “P-1”, which was separately tendered at trial.
In accordance with Ferguson J’s orders made 2 May 2014, notice of the application made in these proceedings has been given to the Australian Securities and Investments Commission (‘ASIC’), and to all shareholders. The affidavit material establishes that the first plaintiffs had provided a postal address for a number of persons, and that the materials were distributed accordingly. However, the Company had received ‘return to sender’ responses in relation to some of these persons.[1]
[1]Mr Hunter’s affidavit of 1 May 2014 [65] and his second affidavit of 26 May 2014 provides service information including an update of the history of communications with the members of the company.
Only two shareholders, William Harry Carne Matthews (‘Mr Matthews’) and his wife, Lidia Joan Matthews (‘Mrs Matthews’), have sought to be heard on the subject application. On their behalf, Mr Matthews filed his affidavit of 23 May 2014, a letter of 22 May 2014 and also tendered a bundle of materials tendered as Exhibit “M-1” at trial.[2]
[2]Marked as Exhibit “M-1”
Although actively involved in correspondence in relation to the plaintiffs’ application in this proceeding and also at one point raising concerns about the second plaintiff’s signed 2013 Annual Report, ASIC did not appear at trial; nor did ASIC communicate its support for, or opposition to, the plaintiffs’ application.
The Legislation
Under Part 5.3A of the Act, s 444GA, which was enacted on 31 December 2007, provides that:
(1)The administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained:
(a)the written consent of the owner of the shares; or
(b)the leave of the Court.
(2)A person is not entitled to oppose an application for leave under subsection (1) unless the person is:
(a)a member of the company; or
(b)a creditor of the company; or
(c)any other interested person; or
(d)ASIC.
(3)The Court may only give leave under subsection (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.
Background to the Legislation
In argument, Counsel for the plaintiffs provided helpful materials, including three cases, which assisted in consideration of the proper operation of s 444GA in the circumstances of this particular matter. Amongst those materials was the Explanatory Memorandum of the Parliament of the Commonwealth of Australia, relating to the Corporations Amendment (Insolvency) Bill 2007 (Cth), which observed as follows:
7.54A compulsory sale power may be beneficial to deed administrators, as it allows administrators to ensure trading of the shares resumes. It may be essential to the success of a deed that a share sale proceeds. For example the DOCA may be based on an investor acquiring all (or a minimum proportion) of the shares in a company in return for a lump sum payment to creditors.
7.55Often, the shares of a company under administration will have little residual value and members will not participate in any distribution. It may be argued that their consent should therefore not be required. However, a compulsory sale power may be open to abuse. For instance, a deed that involves creditors swapping their debt for equity in the company may unfairly advantage creditors if the underlying business of the company is strong.
7.56Other considerations are that members have a proprietary right in the existing shares, and that other external administrators such as liquidators and receivers do not have comparable powers. Importantly, such a power could unfairly prejudice shareholders particularly where there is some residual value in the company.
7.57The law will be clarified to provide that the deed administrator is able to sell shares in the company with either the consent of the holders of those shares, or with leave of the Court in the absence of shareholder consent. This is consistent with recommendation 42 of the CAMAC Report (1998).
7.58The Court may only grant leave if it is satisfied that the sale would not unfairly prejudice the interests of shareholders. This is intended to direct the Court to consider the impact of a compulsory sale of shareholders where there may be some residual value in the company.
7.59Under the new approach, members, creditors and ASIC will have standing to oppose a court application for leave. These parties will also be able to apply to the Court to have an oppressive or prejudicial DOCA terminated under section 445D of the Corporations Act.
I was also provided with the report of the Legal Committee of the Companies and Securities Advisory Committee, Corporate Voluntary Administration Report of June 1998 (‘the Report’) which in part says:
6.73The Legal Committee in its Discussion Paper considered whether the Corporations Law should give deed administrators a compulsory sale power if:
·The share sale is for the purpose of implementing a deed of company arrangement which has been accepted by the creditors, and
·Creditors will not receive full payment of their debts unless the shares are sold. For instance, a deed may be based on an investor acquiring all or a minimum proportion of the existing shares in a company in return for the payment of a lump sum for the benefit of creditors.
6.74The forced sale of existing shares may enable the administrator to “clean up” the balance sheet of a listed holding company, thereby enabling trading in its shares to resume.
6.75However, the Legal Committee recognised the possibility that giving deed administrators this power of forced sale could be abused by opportunistic creditors who acquire those shares, especially as the test of insolvency is based on cash flow, rather than total assets and liabilities. For instance, a deed that involves creditors swapping their debt for equity in the company may unfairly advantage the creditors where the company has a strong underlying business.
6.76The Legal Committee therefore proposed that a deed administrator should only have the power to sell a company’s shares, either with the prior consent of their holders or, in the absence of that consent, with the leave of the court. Also, any member or creditor of a company under administration, or the Commission, should have standing to oppose a court application to sell these shares without consent, for instance on the grounds that the sale price was less than market value.
The plaintiffs also submitted that s 435A of the Act is relevant to Part 5.3A and this application. I accept that submission. That provision reads as follows:
The object of 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.
Relevant Cases
Three cases were cited by Counsel for the plaintiffs as both relating to s 444GA of the Act, and in somewhat similar circumstances. In the first of those cases, Weaver & ors v Noble Resources Ltd,[3]Martin CJ dealt with an application which was attended by circumstances which were, in some respects, similar to those arising in this application. In Weaver, his Honour made the following statements:
[3](2010) 41 WAR 301.
38.One of the key elements of the offer made on behalf of the Consortium was the restructuring of the existing equity in MVPL so that the Consortium could acquire 100% of the shares in MVPL either by consent of the shareholders or by the leave of the court pursuant to s 444GA of the Act. That proposal and its condition have now been approved by the creditors as a result of the meeting that took place in April.
58.I turn now to consider s 444GA of the Act. That section, which was inserted into the Act by the Corporations Amendment (Insolvency) Act 2007 (Cth), came into effect on 31 December 2007. As already noted, the section provides that the administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained either the written consent of the owner of the shares or the leave of the court. A member of the company, a creditor of the company, any other interested person, or the Australian Securities and Investments Commission may oppose an application for leave.
74.The meaning of the phrase 'unfairly prejudice the interests of members of the company' is not defined by the Act, nor does the Act give any guidance to the particular interests of members which should be addressed by the court but it is clear from the language of the section as a whole, and of s 444GA(3) specifically, that it is the interests of members in their capacity as members, rather than creditors, to which the section is directed.
75.The expression 'unfairly prejudicial' has been considered in other contexts and, in particular, in the context of s 445D of the Act. In Lam Soon Australia (administrators appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34, 48, the Full Court of the Federal Court expressed the view that in determining whether a deed is unfairly prejudicial or unfairly discriminates against a group of creditors, consideration should be given to what they would receive on a winding up. The court stated:
In circumstances where a deed of company arrangement involves the closure of part of a business and the continuation of another part, and a consequent discrimination between groups of creditors, it may be expected that the creditors whose connection is with the continuing business will receive, if not all that they are owed, then at least more than they would receive in a winding up. The alternative to a deed being liquidation, it is likely that the creditors whose connection is solely with the business to be closed will justifiably claim to be unfairly discriminated against, or unfairly prejudiced, if the scheme gives them less than they would have in a winding up. But if the continuing creditors are to be paid more than they would have in a winding up, it is likely that funding from some external source - perhaps, as here, a parent with adequate resources - will be required in order to enable the others to be dealt with in a way that does not involve unfair prejudice or discrimination. [48]
76.The point I draw from that passage is that one point of comparison, relevant to the assessment of whether there would be unfair prejudice, is between the circumstances of the affected party under the proposal for transfer of shares as compared to their circumstance under a winding up. More recently, again in the context of s 445D of the Act, Master Newnes (as his Honour then was) stated in Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd[2005] WASC 261; (2005) 228 ALR 598:
In considering whether a deed is oppressive or unfairly prejudicial or discriminatory under s 445D(1)(f), it is necessary to consider the effect of the deed against the background of the general principles underlying Pt 5.3A, which establish the basic right of a creditor to be paid or to wind a company up, or to have the company administered by the administrator in a way that keeps the company's business going and will see the creditor paid something out of the property of the company. If a deed departs from that, a creditor is more easily able to say that it is operating oppressively: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at 99.
Where s 445D(1)(f)(i) is relied upon, the Court looks at the whole of the effect of the DOCA and assesses its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Pt 5.3A, the interests of the other creditors, the company and the public generally: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at 98. In order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness: Hagenvale Pty Ltd v Depela Pty Ltd & Serrada Holdings Pty Ltd (1995) 17 ACSR 139 at 151; Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453. The criteria that guide the Court are fairness and practicality of the scheme as a whole: Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707 at 710. [59] – [60]
77.It seems to me that, with respect, a similar approach is properly taken in relation to the notion of unfair prejudice under s 444GA.
78.The expression 'unfairly prejudicial' was also considered in the case of Gjergja v Cooper [1987] VicRp 15; [1987] VR 167 in the context of the Companies (Acquisition of shares) (Victoria) Code. McGarvie J stated in that case:
The word 'prejudice' is used in the sense of disadvantage. I consider the adjective 'unfairly' conveys that an order which prejudices a person is only to be made if upon taking into account the various circumstances and considerations which is proper to consider in the exercise of discretion, the order is regarded by the Court as providing the fair and just solution. Usually the exercise of a discretion prejudices someone. The governing consideration in the exercise of a discretion is what the justice of the case requires. In other words, the order to be made is that which the judge regards as the fairest order, having regard to the various interests to be reconciled and the considerations relevant to the exercise of the discretion. [173]
79.It seems to me that those observations are of some pertinence to this case because they elucidate the point that consideration of the notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair. …
81.In this particular case the evidence to which I have referred establishes that MVPL has no residual value. The claims of the secured creditors alone very substantially succeed the realisable assets of MVPL on any scenario. If the recapitalisation of MVPL fails, the value of the members’ equity position will be negative. The shares in the company can only be restored to value if the recapitalisation proceeds, but that can only proceed if those who are to invest the capital acquire all the share of MVPL.
In Weaver, Martin CJ granted leave to enable the deed administrators to transfer shares in the company as part of a recapitalisation proposal. His Honour also referred to the Report and noted that it was important to identify the consequences that would flow in the event that the recapitalisation proposal did not proceed, and went on to say:
If there is no residual equity or value in the company, it is difficult to see how shareholders could be prejudiced either unfairly or fairly.[4]
[4]Ibid [70].
In the decision in Lindholm re Munday Group Pty Limited (Receivers and Managers Appointed) (In Liquidation) v Tsourlinis Distributors Pty Ltd,[5] Finkelstein J was also called upon to consider an application under s 444GA of the Act in relation to a company that was under a deed of company arrangement. His Honour stated as follows in justification of his grant of leave under the subject section:
The shares in Taylor McKay are held by Ricky John Munday. He has not given his consent to a transfer, despite several requests to do so. A transfer of his shares is necessary in order to effect the sale transaction under the sale agreement and to produce the benefits to creditors under the DOCA.
The shares themselves have no economic value: Taylor McKay is insolvent, both on a cashflow test and on a balance sheet test. Mr Munday, as shareholder, will receive nothing in either a winding up or under the DOCA.[6]
[5][2010] FCA 1488.
[6]Ibid [8]-[9].
The decision of White J in Lewis re Diverse Barrel Solutions Pty Ltd,[7] was also relied upon by the plaintiffs. In concluding that leave should be granted under s 444GA his Honour stated:
[7][2014] FCA.53
5.DBS has recorded significant losses in the 2010, 2011 and 2012 financial years, totalling $4.576 million. The draft accounts for the financial year ending on 30 June 2013 and for the financial year to date indicate further net losses of the order of $2.317 million. The total losses for these periods are therefore of the order of $6.893 million.
9.The applicants, who are those administrators, have concluded, following their investigation, that:
(d)DBS is, and was at the date of the appointment of the voluntary administrators, insolvent on both a cash flow test and a balance sheet test.
(e) On a winding-up, after discharge of the secured debt to Pinara, the deficit in funds available to meet unsecured creditors is likely, depending on valuations and recoveries, to be in the range of $1.971 million to $4.707 million.
10.On 18 November 2013, at a second meeting of the creditors of DBS, the creditors passed a resolution that DBS execute a deed of company arrangement (DOCA) and it did execute such a deed. The principal elements of the DOCA are:
(f) If the transfer of shares to Pinara is not fulfilled within 90 days of the execution of the DOCA, or within such longer time as Pinara may stipulate, the DOCA will terminate and DBS will be placed into liquidation;
11.The applicants consider that, if the DOCA is not carried into effect, the only alternative for DBS is liquidation. They are satisfied that, in that event, the unsecured creditors will not receive any return. The figures I mentioned earlier in these reasons support that conclusion. On the other hand, if the DOCA does come into effect, the majority of creditors of DBS will receive payment in full.
19.Plainly enough, subsection (3) contemplates that a transfer of shares may result in some prejudice to the interests of members of a company. The adverb “unfairly” indicates that the Court must be satisfied that such prejudice as may result should not be “unfair”. Whether or not “unfair prejudice” will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to the existing shareholders if the leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted.
27.I note, in addition, that no shareholder other than Pinara is willing to contribute to the financing of its continued operations and that, in the absence a 100% shareholding, Pinara is willing to contribute further funds to finance the operations of DBS only in proportion to its current shareholding, namely, 51%.
The Facts
The Company is a no liability unlisted public company. It carried on business as the manager of the Beaconsfield Mine Joint Venture (‘the BMJV’). The BMJV formerly operated an underground mine known as the Beaconsfield Gold Mine in Northern Tasmania. The Beaconsfield Gold Mine was the site of a mining disaster, which tragically resulted in a fatality.
Underground mining ceased at the Beaconsfield Gold Mine on 30 June 2012. The mine was then closed and all access sealed. The mine is no longer operational. The mine is in what is known as a rehabilitation phase, which ‑ along with the closure plan for the mine ‑ is the subject of a formal approval by the relevant environmental protection authority.
BCD is the ultimate parent company of the entities that conducted the BMJV, including the Company. On 30 June 2013, all remaining employees employed by the Company were transferred to the employment of BCD.
Companies known as APPL Pty Ltd (‘APPL’) and ACN 070 164 653 Pty Ltd, (‘ACN 070’) are wholly owned subsidiaries of the Company. Those entities, in combination, own 51.51 per cent of the BMJV. The remainder of the BMJV is owned by other related entities.
The Company has issued approximately 62 million fully paid 75-cent shares. Of those fully paid shares, about 93 per cent are held by BCD. The remainder is made up of 705 minority shareholders. There are also 10 million partly paid shares, held by BCD to the extent of 69 per cent. The remainder are held by 79 minority shareholders.
On 12 December 2013, a call was made on the partly paid shares. Only two shareholders met that call. The shares of those shareholders who did not meet the call were forfeited. There was also an attempt to auction forfeited shares. The auction, which was held in Tasmania, was unsuccessful. The forfeited shares have been cancelled pursuant to s 254Q of the Act. Accordingly, the former partly paid shares are not relevant to this application.
On 1 October 2013, the first plaintiffs were appointed by the Company, APPL and ACN 070 as the administrators of those companies under s 436A of the Act. On 25 October 2013, the first plaintiffs reported to creditors of the Company, APPL and ACN 070 under s 439A of the Act, and proposed that all three companies enter into deeds of company arrangement (‘DOCA’).
Under the proposed DOCA in relation to the Company, BCD would pay the cash contribution to be wholly distributed amongst participating creditors of the Company. BCD would be excluded as a relevant creditor. If this proposal were to go ahead, there would be a guaranteed return of 10 cents in the dollar to participating creditors.
However, it is a condition precedent to payment of that distribution under the DOCA that BCD obtain ownership of 100 per cent of the fully paid shares in the Company, through a transfer of those shares not currently held by it in the Company.
The administrator has recommended that the DOCA proposal be accepted and has also advised that, in the event of a winding up, there would be no return to creditors.
A second creditors’ meeting was held on 4 November 2013, and a resolution was passed under s 439C(a) of the Act that the Company execute the DOCA. The DOCA was executed on 25 November 2013. On execution of the DOCA, the first plaintiffs became the Deed Administrators of the Company under s 444A(2) and, in accordance with the DOCA, control of the Company reverted to its directors.
The Deeds of Company Arrangement that were proposed in relation to APPL and ACN 070 were, in terms, practically identical to the DOCA that had been proposed in relation to the Company. On 4 November 2013, the creditors of APPL and ACN 070 passed resolutions under s 439C(a) of the Act. On 25 November 2013, the first plaintiffs became the Deed Administrators of APPL and ACN 070 under the DOCA executed that day.
By the time of the trial in this matter, all the conditions precedent in relation to the DOCA had been satisfied, except for a transfer of the fully paid shares in the Company to BCD. The plaintiffs have argued that it is essential to the success of the DOCA that the transfer of the fully paid shares proceeds. In terms of the DOCA, there has been no contention to the contrary, and I accept that submission.
On 27 February 2014, letters were sent out by the Company to all relevant shareholders, seeking their consent to transfer their shares to BCD. The Company received consent from 83 shareholders to the transfer of their shares save as mentioned below. It has received no relevant response from the other shareholders.[8]
[8]This position is refined in the affidavit of Adrian Robert Hunter sworn 26 May 2014. The materials filed by the plaintiffs explains that a shareholder, Mr Matthews, is pursuing a derivative proceeding in the Federal Court in the name of the Company.
Mr Matthews, a shareholder of the Company, did however object to the transfer of shares to BCD. Mr Matthews is pursuing a derivative proceeding in the Federal Court, in the name of the Company, against preceding administrators. However, I note that Mr Matthews ability to prosecute those Federal Court proceedings is unaffected by the proposed transfer of shares. Further, if there is any recovery as a result of the Federal Court derivative proceedings to which I have referred, it appears that those proceeds will be available for distribution under Clause 13.1 of the DOCA.
On the affidavit material before this Court, the first plaintiffs’ investigations establish that:
(a)The Company does not own any assets in its own right.
(b)The Company has a net working capital deficiency of approximately $45 million, and a consolidated deficiency of approximately $93 million.
(c)The Company has unsecured creditors to the value of about $45 million, of which $44.997 million is owned by BCD, which is not a participating creditor under the DOCA.
(d)The Company is insolvent both on a cashflow basis and on a balance sheet basis.
(e)If the Company were to be liquidated, a distribution to unsecured creditors would be unlikely, and it is clear the shareholders would receive nothing.
Mr Matthews and Mrs Matthews, however, argue that the s 444GA transfer would be unfairly prejudicial to them.
Critically, however, the Company is cashflow and balance-sheet insolvent on its own current accounts, and no evidence has been proffered by Mr Matthews that there is any likely event or change of circumstance in the future that will, or even could, revitalise and financially invigorate the Company; not even any submission was made to this effect.
Mr Matthews argues that those responsible for the Company and administering it have manipulated the accounts of the Company, its subsidiaries, APPL and ACN 070, and the parent company, BCD, so as to render the Company worthless, as its current financial statements and returns reflect.
Mr Matthews refers me to a collection of extracts from various sources in his Exhibit “M-1”, which he says demonstrate years of incorrect accounting and wrongful manipulation in the Company’s accounts. He also complains that he was, in effect, prevented from bidding at the auction of the Company’s forfeited partly paid shares.
In relation to Mr Matthews’ complaints regarding the forfeited partly paid shares, I accept the plaintiffs’ argument that this application is not to do with the forfeited partly paid shares earlier issued by the Company. Therefore, this initial complaint made by Mr Matthews is irrelevant to the subject application.
Mr Matthews also says that two very valuable assets of the Company have been “seized” in breach of the BMJV agreement. Mr Matthews argues that this has greatly reduced the value of the Company. One such asset is the two per cent management fee in relation to the BMJV which Mr Matthews says relates not only to mining operations but also to what is known as the Beaconsfield Processing Plant.
Mr Matthews asserts that the management of the Beaconsfield Processing Plant also gives rise to a right on the part of the Company to be paid a two per cent management fee in respect of processing operations. Mr Matthews asserts that BCD has seized those assets and thereby trampled the Company’s interest in the Processing Plant. Mr Matthews argues that the transaction ‑ or transactions ‑ by which this state of affairs has been produced should be overturned. In effect Mr Matthews says that transactions and arrangements between the relevant companies over some years should be set aside or struck down, and the Company’s balance sheet and returns rectified in some manner.
I note that the mine itself has been closed since 30 June 2012. I note also that the Company resigned as the manager under the relevant agreement towards the end of 2013. There is no suggestion that the mine is likely to reopen. Accordingly, from the date of closure, there is no question of what was or might be earned by way of the two per cent management fee under the BMJV in respect of the mine.
Further the plaintiffs argue that the provisions of the BMJV (which can be found in Exhibit “ARH-11” to Mr Hunter’s affidavit in Annexure C), and in particular cl 2.05, make it clear that the Company’s entitlement to management fees does not extend to the operation of the Beaconsfield Processing Plant. I agree with this submission.
Mr Matthews points to what the plaintiffs summarise as the extent of the Company’s net working capital deficiency of approximately $45 million, and its consolidated deficiency of $93 million. He also refers to the Company’s unsecured creditors, whose debts approximate $45 million, of which $44.9 million is owned by BCD, and contends that this parlous situation is a result of years of incorrect accounting and wrongly manipulated accounts by those who have controlled BCD. Further, Mr Matthews says that the accounts of BCD and the Company do not correlate. He says that there are also over a number of years, instances of the Company being overcharged by BCD, including in relation to the expenses of the BMJV generated by the mine disaster.
As to these matters, I am not persuaded by Mr Matthews’ submissions. In this regard I accept the plaintiffs’ submissions that the BMJV agreement ‑ and, in particular, cls 9.4 and 11.1 of that agreement ‑ contemplate joint venture costs being allocated in accord with the joint venturers’ respective percentage interests and it is not made out that there has been any inappropriate cost allocation as between BCD and the Company, or any other relevant company. I consider that Mr Matthews’ complaints about the inappropriate loading of costs onto the Company by BCD are unconvincing. This is particularly so in light of the apparent extensive flexibility permitted in relation to the allocation of such costs within the joint venture entities, which flexibility is noted in the Company’s financial statements.[9]
[9]For example in Exhibit “ARH-14” [19 - Item K].
Mr Matthews also complains that there have been significant instances in which money lent to the Company’s subsidiaries has been wrongly ascribed to the Company as its liability. Again, I reject Mr Matthews’ arguments as being unpersuasive, and not made out on the materials, or otherwise. I am not persuaded by Mr Matthews’ assertions about inappropriate allocation of debt as between the Company and BCD, or as between either of those companies and APPL or ACN 070, nor do I consider that there is any persuasive evidence before me to that effect.
I accept as more likely the plaintiffs’ description of the position with respect to key debt, in particular in relation to the $48 million originally owned by APPL and ACN 070. This is referred to at [2] of the Schedule to Exhibit “P-1”, the letter dated 18 October 2013 from the Company Secretary of BCD to Deloitte Touche Tohmatsu, which was tendered by the plaintiffs at trial. I refer, in particular, to that Schedule from the entry dated 30 October 2007, and the following entries dealing with the history of the $48 million debt complained of by Mr Matthews as being misallocated and manipulated.
In my view, the accounts of the Company’s operations as at 30 June 2013, and Exhibit “P-1”, effectively counter Mr Matthews’ assertions in relation to inappropriate debt allocation.[10]
[10]Exhibit “ARH-14”[43], and in particular note 16 and the related note 22(d) on [47].
I also note that the financial statements to which I refer have been prepared by accounting professionals for the Company as well as signed off by the Company’s Directors and have been, as I understand it, the subject of an audit.
I accept the explanation put forward by the plaintiffs, in particular, in this instance, the second plaintiff by reference to the Table to be found in Exhibit “ARH-4” at [27]. The explanation given in submissions by the Plaintiffs was that this Table correctly sets out the intercompany debt position, and I note that this explanation is also consistent with the tendered statement of financial position.[11]
[11]Exhibit “ARH-14” [11], Item 16 in respect of the company.
Mr Matthews also complained about the extent of compounding interest which contributed to what he agreed was the inappropriate debt level burdening the Company. However, at trial it was not demonstrated by Mr Matthews that this accumulation of the interest was in any way in breach of the arrangements between the parties, or somehow wrongful.
I am not persuaded that the accounts and entries to which Mr Matthews referred in respect of the Company, BCD, or the relevant subsidiaries justifies the view that there has been incorrect accounting or wrongful manipulation in relation to the Company’s accounts and affairs. Nor am I persuaded that the matters raised by Mr Matthews in argument could justify a conclusion on my part that, contrary to the professionally prepared and audited accounts of the Company, that the Company has some value and that its shares have a corresponding value.
I am certainly not persuaded that there is a basis for some sort of intervention and rectification of the Company’s accounts, either in respect of the current accounts or in relation to any of the historical accounts to which Mr Matthews referred in argument.
For these reasons, I am of the view that Mr and Mrs Matthews’ objection to the s 444GA application are of no substance and unpersuasive. I am satisfied in all the relevant circumstances that the proposed transfer would not unfairly prejudice the interests of Mr Matthews, or Mrs Matthews, or any other member of the Company. Further, I am satisfied that the current financial accounts of the Company are likely to accurately reflect its parlous financial position.
Reasons for granting the plaintiffs’ application under s 444GA of the Act
I am satisfied on the evidence before me that the Company appears to be profoundly insolvent, both on a cash flow and on a balance sheet evaluation, with no evidence of any possible prospect of revival. I am comforted in these conclusions by the sworn evidence given in this matter by Mr Hunter, who is a chartered accountant with Deloitte Touche Tohmatsu. Further comfort is provided by the fact that more than one set of auditors, namely Ernst & Young, RCM Bird and KPMG, have, over the relevant period, audited the BCD accounts which, in turn, were produced by professional accountants for BCD. I also note in this regard that those audited accounts included transactions between BCD and the Company.
I am satisfied on the evidence before me that the members of the Company will receive nothing in either a winding up of the Company or under the DOCA.
The creditors will, however, benefit if the DOCA is able to be completed after satisfaction of the condition precedent that all fully paid shares in the Company are transferred to BCD. In that event the evidence is that the creditors will receive a 10 cents in the dollar distribution. On the other hand, the evidence establishes that the creditors will receive nothing if the DOCA is not completed.
The critical consideration is whether or not a member or members will be unfairly prejudiced in the event of the transfer of the shares. In s 444GA(3), the Act requires I focus on whether the transfer, in respect of which the Court’s leave is sought, would unfairly prejudice the interests of members of the Company. Unless the Court is satisfied that the proposed transfer would not unfairly prejudice the interests of members of the Company, leave must not be granted. The relevant interests, is the interest of members in their capacity as members of the Company.
Beyond prohibiting the grant of leave, unless the Court is satisfied that the proposed transfer will not unfairly prejudice the interest of members of the Company, s444GA of the Act provides no guidance as to the matters to be taken into account in considering whether or not leave should be granted.
The words “unfairly prejudice” clearly requires more that the identification of prejudice consequential upon the proposed transfer, or likely to result from the proposed transfer. The addition of the qualifying adjective “unfairly” in s 444GA(3), makes it clear that prejudice alone will not trigger the prohibition in s 444GA(3). This is consonant with the purpose of the section because it accommodates the practical need for the section to be able to operate notwithstanding a situation where the grant of leave can be said to give give to some degree of prejudice to members of the company.
The confinement of the required level of satisfaction under s 444GA(3), means that the prejudice which a member would suffer also needs to be in the nature of an unfair prejudice. If there is no prejudice the Court will not be constrained by s 444GA(3). If there is prejudice the Court will only be constrained if it is satisfied as to the unfairness of that prejudice to a member or members, in the circumstances.
The sort of circumstances which may potentially inform the Courts as to whether there would be relevant unfair prejudice to the interests of the members of the Company cannot be exhaustively catalogued. However, such circumstances would logically include a comparison of the members’ position in the event that the enforced transfer of shares occurred with the members’ position in the event the transfer did not occur. Therefore, it will be material to consider the value of the relevant shares and what, if any, loss will result if leave is granted; whether the shares are likely to increase in value, and the factors which are likely to bring about that result including the likely timing of such factors.
In this matter, I am persuaded that neither Mr Matthews nor Mrs Matthews, nor any other member of the Company, will be unfairly prejudiced if leave is granted for the relevant shares to be transferred. This is because I am persuaded that the shares have no value, and will likely have no value in the future.
Furthermore, the transfer of the shares will not prevent Mr Matthews from prosecuting his derivative proceeding in the Federal Court, nor prevent him and other shareholders from benefiting from any favourable outcome in those proceedings. Rather, any amount recovered in those proceedings is to flow to creditors and members under Clause 13.1 of the DOCA.
In my view, the transfer of shares in relation to which leave is sought is a transfer of the type that s 444GA of the Act contemplates and has been enacted to facilitate. This is clear from the explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 at [7.54], the Report at [6.73] and the scheme of the Act in Part 5.3A.
In the instant case the grant of leave under s 444GA will be beneficial to creditors because it is essential to the success of the DOCA that the transfer of shares for which the Court’s leave is sought proceeds. If the DOCA is completed there is to be a partial return to creditors.
In this case, BCD holds the vast majority of shares and supports the application to transfer the remainder, and on the evidence adduced at trial, it is most unlikely that any of the minority shareholders would be willing to contribute funds to the operation of the Company. When combined with the fact that, for the reasons I have indicated, the shares in the Company have no value and are most unlikely to increase in value in the future, the grant of leave will not unfairly prejudice the interests of the members of the Company. The grant of leave will also, for the reasons I have mentioned, promote the purpose of s 444GA and Part 5.3A of the Act. For these reasons I accede to the plaintiffs’ application.
Orders
Pursuant to s 444GA(1) of the Act, the first plaintiffs have leave, jointly or severally, to transfer all the shares in the second plaintiff not already owned by BCD to the Transferee.
The plaintiffs’ costs of and incidental to this proceeding be costs in the deed of administration of the second plaintiff.
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