Re Freestyle Technology Limited (admins apptd)
[2020] VSC 36
•7 February 2020 (Ex tempore)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 02254
IN THE MATTER OF FREESTYLE TECHNOLOGY LIMITED (ACN 117 520 528)
(ADMINISTRATORS APPOINTED)
BETWEEN:
| FREESTYLE ENERGY LIMITED (ACN 121 453 745) | First Plaintiff |
| BEAM BAY PTY LTD (ACN 131 699 410) | Second Plaintiff |
| - and - | |
| MACQUARIE CORPORATE HOLDINGS PTY LTD (ACN 096 705 109) and others according to the schedule | Defendants |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 7 February 2020 |
DATE OF RULING: | 7 February 2020 (Ex tempore) |
CASE MAY BE CITED AS: | Re Freestyle Technology Limited (admins apptd) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 36 |
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CORPORATIONS – Winding up in insolvency – Standing of administrators – Company clearly insolvent – Proposed Deed of Company Arrangement withdrawn – No funding available beyond date of application – Utility of second creditors’ meeting – No utility of continued administration – Whether appropriate to dispense with advertising and notice requirements – Company wound up in insolvency – Corporations Act 2001 (Cth) ss 435A, 437A, 437B, 442A, 459A
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P L Ehrlich QC with Mr N Cozens | Hope Earle |
| For the First and Seventeenth Defendants | Ms S Gory | KCL Law as Town Agent for Quinn Emanuel Urquhart & Sullivan |
| For the Fourth, Fifth and Eighteenth Defendants | Mr P Liondas | Gilchrist Connell Pty Ltd |
| For the Eighth, Ninth and Fifteenth Defendants | Mr D Williams QC | Mills Oakley as Town Agent for William James |
| For the Fourteenth Defendant and Mr Gideon Rathner and Mr Matthew Sweeny as joint and several administrators of the Fourteenth Defendant | Mr I Martindale QC | HWL Ebsworth Lawyers |
HIS HONOUR:
I have set out the background to this application in my Ruling delivered on Wednesday 29 January 2020. I will summarise that background.
The plaintiffs are the shareholders of the 14th defendant (the ‘Company’). They allege that the affairs of the Company have been conducted since December 2015 by the directors of the Company in a way which is prejudicial to the interest of the plaintiffs. In particular, they allege that a rights issue in an underwriting agreement in May 2018, an underwriting agreement in March 2019, and a note offer in April 2019 had the effect of diluting the shareholding and voting rights of the plaintiffs in the Company.
In addition to oppression, they allege that by reason of these transactions, the directors breached their duties as directors of the Company. They allege that other defendants were knowingly involved in these breaches. They seek orders that the issue of shares and/or convertible notes pursuant to these transactions be set aside.
In the alternative, they seek buy-out orders against the first to fifth, eighth to 13th, 15th and 16th defendants of the plaintiffs’ shares in the Company at a fair value after making all necessary adjustments to the damage done to the value of their respective shareholdings by the oppressive conduct.
The defendants deny these allegations; however, they have not put forward any positive defences.
On 9 December 2019, Mr Gammell and Mr Taylor were appointed as administrators of the Company by its directors (the ‘first administrators’). Since that time, the plaintiffs have sought various orders terminating the administration or, alternately, appointing new administrators. They have also sought orders preventing the first administrators from encumbering or selling the assets of the Company until the hearing and determination of their application.
This is in circumstances where the first administrators placed an advertisement in The Australian Financial Review on 11 December 2019 seeking urgent expressions of interest for the purchase of the business and/or assets of the Company. That expression of interest process took place in late-December 2019 and early-January 2020.
One of the entities which lodged an expression of interest was FS IOT Holdings Pty Ltd (‘FSIOT’), a company controlled by the eighth, ninth and 15th defendants and who are secured creditors of the Company (the ‘secured creditors’). FSIOT subsequently put forward a Deed of Company Arrangement (‘DOCA’) by which it offered to purchase all of the assets of the business and undertakings of the Company as a going concern for a total consideration of $18.9 million (the ‘proposed DOCA’).
As a result, the first administrators determined to recommend to the creditors of the Company to accept this offer and called a second meeting of creditors for this purpose on 22 January 2020. In their report dated 14 January 2020, the first administrators expressed the view that Company was insolvent as there was no ongoing funding of its day to day funding requirements. They considered that the proposed DOCA was better than any other offers received in the expressions of interest process.
On 22 January 2020, the plaintiffs sought and obtained from the Court interim orders for an adjournment of the second creditors’ meeting. On 29 January 2020, they sought a further adjournment of the second creditors’ meeting fixed for 30 January 2019.
This was because the plaintiffs contended that the offer in the proposed DOCA was made pursuant to a flawed expressions of interest process, which was agreed upon and implemented pursuant to a pre-appointment agreement entered into by the secured creditors with the first administrators, constituting an abuse of process of Part 5.3A of the Corporations Act 2001 (Cth) (the ‘Corporations Act’). The plaintiffs submitted that the process by which the business was offered for sale was rushed and not adapted to achieving the best price for the assets of the Company. The plaintiffs relied upon a limited scope valuation of the Company of Mr Bailey of Hall Chadwick dated 28 January 2020 which valued the enterprise value of the Company at between approximately $67 million and $90 million.
Further, the plaintiffs submitted that by reason of the expressions of interest process, the secured creditors were in possession of price-sensitive information, which gave them a competitive advantage over the other bidders. In all these circumstances, the plaintiffs submitted that there was an appearance of partiality of the first administrators in favour of the secured creditors.
Further, the plaintiffs contended that the secured creditors were securing the approval of the Company’s creditors to the proposed DOCA by offering a financial advantage to some creditors at the expense of others. I refer to the evidence concerning the conversation between Mr Schaper and Mr Jesudason on 15 January 2020.
On 29 January 2020, the first administrators, without admission in relation to the allegations made by the plaintiffs in the proceeding against the first administrators, informed the Court that they had determined to resign as administrators. The secured creditors also informed the Court on that day that they withdrew their proposed DOCA to buy the business of the Company.
On 29 January 2020, I appointed Gideon Rathner and Matthew Sweeny as new administrators of the Company as proposed by the plaintiffs (the ‘new administrators’). I ordered them to provide by 4 pm on 10 February 2020 a report into certain matters including the solvency of the Company. This was because while the first administrators had formed the view that the Company was insolvent, I wanted the opinion of administrators untainted by the perception of partiality. I also adjourned the second creditors’ meeting until after that time. However, I noted in ‘Other Matters’ of the authenticated Order that the new administrators were at liberty to return to and advise the Court before that time if they formed the view that the Company was insolvent.
On 3 February 2020, I received a letter from the new administrators informing the Court that the new administrators had formed the view that the Company was insolvent. In that letter, the new administrators set out the reasons for that conclusion. This included that the business of the Company and its subsidiaries had a funding requirement of approximately $60,000 per day, totalling $1.2 million per month. The new administrators were unable to obtain funding for those requirements. I note the funding requirements were not disputed by the plaintiffs and are consistent with the report of the first administrators.
This is in circumstances where the principal amount of the secured debt was in excess of $6 million, the amount owing under the unsecured convertible notes was at least $36.4 million and the liability to employees was in the order of $1.3 million to $1.4 million. This is also in circumstances where, as set out below, Mr Greg Blashki of Pitcher Partners had prepared a draft report dated 31 January 2020 which opined that the current value of the Company was between $5 million and $7.25 million and that the value of the Company if not trading was ‘NIL’.
As a consequences, one of the new administrators, Mr Gideon Rathner, filed an affidavit in this proceeding, affirmed 6 February 2020. Mr Rathner provided an update on the administration. In summary, he deposed that:
(1)the administrators had attempted to obtain funding from a variety of sources associated with the Company: the plaintiffs, the secured creditors, shareholders and note holders;
(2) the only funding obtained was from the plaintiffs in the sum of $10,000;
(3)that sum was applied for the new administrators to remain in occupation of the Company’s premises, which contains its IT systems and hardware critical to support the business of the Company and its subsidiaries, until 7 February;
(4)due to the Company’s financial position the Company’s employees were terminated on 31 January 2020; and
(5)as there was no funding for the rent of the premises, the administrators would be vacating the premises no later than 10 February 2020.
Mr Rathner confirmed the financial position of the Company in the report of the first administrators dated 14 January 2020. He concluded that, as there is no funding to recommence the business, to preserve the premises and IT systems or to cover costs of an expressions of interest process, the Company is insolvent and should be wound up.
The new administrators initially sought orders that the Court approve a process by which they would offer for sale the assets of the business over the weekend of 8 and 9 February 2020 but only to the plaintiffs, the secured creditors and one noteholder, and that the second creditors' meeting be adjourned until 28 February 2020. In the course of argument, issues were raised about the consequences of the lack of ongoing funding and the Court raised concerns about endorsing a process for the sale of the business of the Company in such a short time period with limited participants.
After discussions between the parties, the new administrators sought and obtained leave to appear on behalf of the Company for the purpose of making an oral application under s 459A of the Corporations Act that the Company be wound up in insolvency.
That application was not opposed by the secured creditors, the first defendant or the director defendants. The plaintiffs made no submission in relation to the application. As I understand it, they did not wish to prejudice their rights in this proceeding generally, relying upon the reasons given by Gummow, Hayne, Haydon and Kiefel JJ in Campbell v Backoffice Investments Pty Ltd.[1]
[1](2009) 238 CLR 304 [68]–[72].
Section 459A provides that:
On an application under s 459P, the Court may order that an insolvent company be wound up in insolvency.
Section 459P(1) provides that:
Any one or more of the following may apply to the Court for a company to be wound up in insolvency:
(a) the company;
(b)a creditor (even if the creditor is a secured creditor or is only a contingent or prospective creditor);
(c) a contributory;
(d) a director;
(e) a liquidator or provisional liquidator of the company;
(f) ASIC;
(g) a prescribed agency.
There was some concern relating to the standing of the administrators of the Company to make an application for the winding up of the Company in insolvency. Senior counsel for the administrators relied upon the powers set out in ss 437A, 437B and 442A of the Corporations Act. He also relied upon the decision of Barrett J in Re Willow Tree Retirement Village Pty Ltd[2] (‘Willow Tree’) and of Emmett J in Carson, Re Hastie Group Limited (No 4)[3] (‘Carson’).
[2][2006] NSWSC 653.
[3][2012] FCA 968.
Section 437A(1)(d) of the Corporations Act relevantly provides:
While a company is under administration, the administrator … may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.
Section 437B provides:
When performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company's agent.
Section 442A(c) relevantly provides:
Without limiting section 437A, the administrator of a company under administration has power to … bring or defend proceedings, or do anything else, in the company's name and on its behalf.
These are very broad powers. It was these powers that caused Barrett J in Willow Tree to conclude[4] that a company under administration was a company for the purposes of s 459P(1)(a). A similar view was reached by Emmett J in Carson.[5]
[4]Willow Tree (n 2) [10]–[11].
[5]Carson (n 3) [32].
In Willow Tree, the administrator formed the view that the company was clearly insolvent. There were issues about identifying all of the creditors for the purposes of the second creditors' meeting. The administrator formed the view that the meeting would not represent a safe vehicle for transporting the company in either of the destinations contemplated by s 439C of the Corporations Act, namely, a deed of arrangement or returning control to the directors.
In Carson, Emmett J was considering whether to end the administration of a group of companies which operated in Australia and internationally. In light of the financial predicament of the group, there were issues about the administrators being able to obtain financial information to comply with their statutory obligations. However, the administrators formed the view that the continued administration would serve no useful purpose as the group was insolvent, no person would be willing to act as a director of the group and there was no prospect of a deed of company arrangement being proposed.[6] In these circumstances, Emmett J wound up the company under s 459P and s 461 (the just and equitable ground) thereby ending the administration.
[6]Carson (n 3) [13], [30].
In this case, the new administrators by seeking orders under s 459A submit, in essence, that the continued administration will serve no useful purpose. The first administrators and the new administrators have each formed the view that the Company is unable to fund its ongoing requirements in the order of $60,000 per day. No one has suggested in evidence or otherwise that there is a realistic source of finance for this significant ongoing requirement.
In this regard, as set above, the plaintiffs relied upon the valuation of the Company of Mr Bailey which valued the enterprise value of the Company at between approximately $67 million and $90 million.
However, in November 2019, the Court appointed Mr Greg Blashki of Pitcher Partners to value the Company under a range of scenarios for the purposes of the proceeding. Mr Blashki has now prepared a draft report dated 31 January 2020. It was provided to the parties for review for identification of any factual errors before final issue. That draft report values the Company on an enterprise basis as at the various dates and provides that the ‘current value’ of the Company is between $5 million and $7.25 million. The draft report values the Company if not trading at ‘NIL’.
While I acknowledge this is a draft report, there is a significant difference between the valuations of Mr Blashki and Mr Bailey. In written submissions, senior counsel for the plaintiffs submitted that Mr Blashki’s draft conclusions were ‘highly questionable’ including because Mr Blashki had not valued the patents of the Company and rejected the financial forecasts of the Company. I am not in a position to determine such issues now. It suffices to say two things. First, it may be that the low valuation of Mr Blashki is part of the reason why there is no ongoing funding for the Company. Second, it is significant that, notwithstanding Mr Bailey’s valuation, the plaintiffs put forward no material which would suggest that funding was available or likely to be available to meet the ongoing requirements of the Company.
The administrators are currently without ongoing funds. In the absence of such funds, it is necessary for them to vacate possession of the premises of the Company's business today. As a result, practically, the Company is no longer able to trade. I refer to my comment in [16]-[17] above.
Further, the administrators have no funds to perform any further functions, including the calling of the second creditors' meeting. Even if they did have such funds for such a meeting, they could not recommend to the creditors in these circumstances that the Company be returned to the control of its directors.
Further and significantly, there is no suggestion of a DOCA currently proposed in relation to the Company. The previous proposed DOCA was withdrawn on 29 January 2020 and is ‘off the table’. Therefore, the only option available to creditors at such a meeting is liquidation of the Company.
It is in these circumstances that that the Company, through its administrators, now seeks for the Company to be placed into liquidation to avoid the unnecessary costs and expense of a second creditors’ meeting.
I have considered whether, in exercising this power, the administrators, on behalf of the Company, are complying with the objects of Part 5.3A of the Corporations Act set out in s 435A. I have also considered whether the making of such an order is consistent with these objects and whether the future of the Company should be left to the creditors at the second creditors’ meeting.
Section 435A provides, in summary, that the object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(1) maximises the chances of the company continuing in existence; or
(2)if that is not possible, results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
In this case, based upon the evidence before me, it is simply not possible for the administrators, in the absence of ongoing funding to continue the Company. Further, in light of the financial position of the Company, based upon the evidence before me as set out above, there is no possibility of the administration producing a better return for creditors and members than on winding up.
This is in circumstances where the evidence is now that the Company is insolvent and cannot trade beyond today. It is also in circumstances where costs have been spent on an expressions of interest process for the sale of the business in late December and early January 2020, which did not result in an offer acceptable to the administrators. It is also in circumstances where there is no current DOCA.
In the unusual circumstances of this case, I am satisfied that the costs and expenses of holding a second creditors’ meeting are not justified because such a meeting can serve no useful purpose.
As a result of considering these matters, I am satisfied that:
(1) the application to wind up the Company in insolvency is generally consistent with the objects of Part 5.3A of the Corporations Act;
(2) the new administrators have standing to apply to wind up the Company in insolvency; and
(3) the Company should be wound up in insolvency under s 459A of the Corporations Act.
Before making orders to this effect, I have also considered whether I should put on notice those people who might be entitled to attend the second creditors' meeting. I have decided that I should proceed to order that the Company be wound up without doing so.
This is for a number of reasons. First, the usual persons who would be parties to an application under s 459A are the Company itself and the administrators; they are both parties to this proceeding. Second, a number of members of the Company are present in Court today including the plaintiffs and the ninth and 15th defendants. The ninth and 15th defendants do not oppose the orders. In addition, the directors of the Company and the fourth and fifth defendants are also represented in Court and do not oppose the orders.
Third, the secured creditors, who appeared today through senior counsel, represent the largest creditors by value and do not oppose the proposed orders.
In all these circumstances, given the clear insolvency of the Company and the pressing need for a finalisation of the way in which this Company is to be administered, it is appropriate that I dispense with the requirements of rr 2.2, 5.4(1) and 5.6(1) of the Supreme Court (Corporations) Rules 2013 (‘Corporations Rules’), s 465A of the Corporations Act and any other requirements of the Corporations Act, Corporations Regulations 2001 (Cth) or Corporations Rules that had to have been complied with in order for the application to have been made by the Company.
I will order that Freestyle Technology Limited, the 14th defendant, be wound up in insolvency and that Gideon Rathner and Brian Sweeny of Lowe Lippman be appointed joint and several liquidators of the Company, for the purposes of the winding up of the Company.
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SCHEDULE OF PARTIES
S ECI 2019 02254
IN THE MATTER OF FREESTYLE TECHNOLOGY LIMITED (ACN 117 520 528) (ADMINISTRATORS APPOINTED)
BETWEEN:
| FREESTYLE ENERGY LIMITED (ACN 121 453 745) | First Plaintiff |
| BEAM BAY PTY LTD (ACN 131 699 410) | Second Plaintiff |
| - and - | |
| MACQUARIE CORPORATE HOLDINGS PTY LTD (ACN 096 705 109) | First Defendant |
| EQUITECH PTY LTD (ACN 152 669 540) | Second Defendant |
| ROBERT CHARLES GREGORY WATSON | Third Defendant |
| MARCO DI SEBASTIANO | Fourth Defendant |
| CALLISTUS MOHAN JESUDASON | Fifth Defendant |
| ANTHONY LAWRENCE BRAUNTHAL | Sixth Defendant |
| BROWNVALLEY INVESTMENTS PTY LTD (ACN 108 819 361) | Seventh Defendant |
| MAZZARA PTY LTD (ACN 606 138 489) | Eighth Defendant |
| PERLE VENTURES PTY LTD (ACN 168 810 455) | Ninth Defendant |
| JANUS LTD (CR NUMBER 1917420) (A CORPORATION INCORPORATED UNDER THE LAWS OF HONG KONG) | Tenth Defendant |
| KAZAKCO PTY LTD (ACN 056 742 226) | Eleventh Defendant |
| VANEW PTY LTD (ACN 006 236 880) | Twelfth Defendant |
| KEITH BRIAN JELLEY | Thirteenth Defendant |
| FREESTYLE TECHNOLOGY LIMITED (ACN 117 520 528) (ADMINISTRATORS APPOINTED) | Fourteenth Defendant |
| SUPER PROPERTIES PTY LTD (ACN 077 205 102) | Fifteenth Defendant |
| REASH PTY LTD (ACN 067 991 539) | Sixteenth Defendant |
| MALCOLM ROWLAND MCHUTHISON | Seventeenth Defendant |
| ALAN ROBERT STOCKDALE | Eighteenth Defendant |
| TODD ANDREW GAMMELL | Nineteenth Defendant |
| BARRY ANTHONY TAYLOR | Twentieth Defendant |
| ANDREW DONAGHEY ON HIS OWN BEHALF AND AS TRUSTEE FOR THE GYM NUMBER 1 TRUST | Third Party |
AND BETWEEN:
| MACQUARIE CORPORATE HOLDINGS PTY LTD (ACN 096 705 109) | Plaintiff by First Counterclaim |
| - and - | |
| BEAM BAY PTY LTD (ACN 131 699 410) | Defendant by First Counterclaim |
AND BETWEEN:
| MALCOLM ROWLAND MCHUTHISON | Plaintiff by Second Counterclaim |
| - and - | |
| BEAM BAY PTY LTD (ACN 131 699 410) | Defendant by Second Counterclaim |
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