Re Smith as joint and several administrators of Catalano Seafood Limited (Subject to A Deed of Company Arrangement) (Administrators Appointed) - [2024] WASC 99

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   RE SMITH as joint and several administrators of CATALANO SEAFOOD LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ADMINISTRATORS APPOINTED) [2024] WASC 99
CORAM:   COBBY J
HEARD:   15 FEBRUARY 2024
DELIVERED          :   3 APRIL 2024
FILE NO/S:   COR 196 of 2023
MATTER:   IN THE MATTER OF SMITH as joint and several administrators of CATALANO SEAFOOD LTD
EX PARTE

Linda Methven SMITH as joint and several administrators of CATALANO SEAFOOD LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ADMINISTRATORS APPOINTED)
First named First Plaintiff

Robert Conry BRAUER as joint and several administrators of CATALANO SEAFOOD LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT ) (ADMINISTRATORS APPOINTED)
Second named First Plaintiff

Catchwords:

Corporations - Voluntary administration - Application to court by administrators under Corporations Act 2001 (Cth) - Section 444GA for leave to transfer shares - Whether unfair prejudice suffered to interests of members of the company by transfer - Deed of Company Arrangement - Transfer of shares

Legislation:

Corporations Act 2001 (Cth)

Result:

Orders made pursuant to s 444GA for transfer of shares

Category: B

Representation:

Counsel:

First named First Plaintiff	:	P Edgar SC
Second named First Plaintiff	:	P Edgar SC

Solicitors:

First named First Plaintiff	:	HWL Ebsworth Lawyers
Second named First Plaintiff	:	HWL Ebsworth Lawyers

Case(s) referred to in decision(s):

Re Black Oak Minerals Ltd (Subject to a Deed of Company Arrangement) (in liq) [2019] FCA 293; (2019) 134 ACSR 472
Re Centennial Mining Ltd (subject to deed of company arrangement) [2019] WASC 441
Re Paladin Energy Ltd (Subject to Deed of Company Arrangement) [2018] NSWSC 11
Re Virgin Australia Holdings Ltd (Admins apptd) (No 9) [2020] FCA 1652; (2020) 148 ACSR 648
Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301

COBBY J:

By an originating process filed 14 December 2023, the plaintiffs sought orders pursuant to s 444GA(1) and s 447A of the Corporations Act 2001 (Cth) in relation to the proposed transfer of all the issued shares in Catalano Seafood Ltd (subject to deed of company arrangement) to Avior Asset Management Pty Ltd.
I heard the application on 15 February 2024. At the conclusion of the hearing, I stated that I would grant the application, gave brief oral reasons for doing so, and indicated that I would publish written reasons in due course. These are those reasons.
Catalano was incorporated on 9 May 2019, and was listed on the Australian Stock Exchange. At the time of the hearing of the plaintiff's application, there were 80,124,000 ordinary shares in Catalano on issue, distributed between 370 shareholders. Shares in Catalano had been suspended from trading on 2 October 2023.
Catalano carried on a seafood processing, distribution and retail business, operating a processing and cold storage facility, and retail outlets in Bassendean and Hillarys, Western Australia.
The plaintiffs were appointed as voluntary administrators of Catalano by resolution of the directors made 18 October 2023, and caused Catalano to continue to trade following their appointment.
The first meeting of Catalano's creditors was held on 30 October 2023. No resolution was proposed at that meeting.
Following their appointment, the plaintiffs conducted a marketing campaign for the sale or recapitalisation of Catalano. They initially received 24 expressions of interest, which ultimately resulted in two offers being made for Catalano's assets, one of which involved a proposal by Avior that the company enter into a deed of company arrangement.
Following further negotiations with the two offerors, the plaintiffs recommended the Avior proposal to Catalano's creditors on the basis that the DOCA would likely provide a greater return than the winding up of the company, their view being that the Avior proposal:
1.would result in the full repayment of secured creditors, full repayment of priority creditors pursuant to the terms of the Act, and provide a return to some unsecured creditors;
2.enabled Catalano to continue as a going concern and maintain the employment of the majority of staff; and
3.would provide creditors with a greater and more certain return than what they might receive were Catalano to be placed into liquidation.
On 21 November 2023 a meeting of the employee creditors of Catalano was held pursuant to s 444DA, and the second meeting of the creditors held pursuant to s 439A, of the Act.
A majority of creditors in both value and number agreed that Catalano should execute a DOCA in the terms proposed by Avior at those meetings.
As a result, on 23 November 2023 the plaintiffs, Catalano and Avior entered into a DOCA in those terms. The plaintiffs were appointed the deed administrators upon execution of the deed.
The DOCA was subject to a number of conditions precedent to performance, all but two of which had been satisfied or waived by the time the application was heard.
The two remaining conditions were that the court grant the plaintiffs leave to transfer all of the shares in Catalano to Avior pursuant to s 444GA(1)[1] and, Catalano being a company listed on the ASX, that the Australian Securities and Investment Commission grant relief from the takeover provisions contained in s 606 pursuant to the power conferred upon ASIC by s 655A(1)(a).
[1] References to legislation are to the provisions of the Corporations Act unless otherwise stated.
The DOCA provided, in effect, that if those conditions were not met Catalano would go into liquidation and Avior would have the right to purchase Catalano's assets pursuant to an asset sale agreement executed contemporaneously with the DOCA.
That asset sale agreement essentially provided that the business operations and assets of Catalano would be sold to Avoir in exchange for the $1.7 million advanced by Avoir to Catalano in accordance with the DOCA and the assumption by Avoir of the leave entitlements of those employees of Catalano to be employed by Avior after the sale, together with any liabilities incurred by Catalano in relation to the transferred assets arising after their purchase by Avoir.
Avior had stated that it intended to exercise the right to purchase Catalano's assets if the remaining conditions precedent were not satisfied, with the consequence that any assessment of the value of the shares in Catalano should the DOCA be terminated and the company go into liquidation was required to take that sale and purchase of Catalano's assets into consideration.
Section 444GA(3) provides that the court may only grant leave pursuant to s 444GA(1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.
The legal principles with respect to the assessment of unfair prejudice for the purposes of s 444GA are well established, and I do not repeat them here: see Re Paladin Energy Ltd (Subject to Deed of Company Arrangement),[2] Re Black Oak Minerals Ltd (Subject to a Deed of Company Arrangement) (in liq),[3] and Re Virgin Australia Holdings Ltd (admins apptd) (No 9).[4]
[2] Re Paladin Energy Ltd (Subject to Deed of Company Arrangement) [2018] NSWSC 11, [28] - [35].
[3] Re Black Oak Minerals Ltd (Subject to a Deed of Company Arrangement) (in liq)[2019] FCA 293; (2019) 134 ACSR 472, [31] - [37].
[4] Re Virgin Australia Holdings Ltd (Admins apptd) (No 9)[2020] FCA 1652; (2020) 148 ACSR 648, [29] ‑ [35].
Relevantly for present purposes, where the shares in a company have no residual value, its shareholders are unlikely to suffer any prejudice, and certainly not unfair prejudice, if they do not receive any consideration for the transfer of their shares.[5]
[5] Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301, [80]; Re Virgin Australia, [33] ‑ [34].
The plaintiffs were of the opinion that that the shares in Catalano had no residual value. That opinion was based in part on their investigations into the affairs of Catalano with a view to understanding its history, financial performance and the position of the company. They reported to the company's creditors that:
1.Catalano was likely to have been insolvent from at least 31 July 2023, when the company's net current assets were in deficit, its cash resources had deteriorated and the non-payment of liabilities to creditors had increased, with the company's capital and debt raising activities proving unsuccessful;
2.Catalano had continually incurred losses, which had been funded by shareholder equity and borrowings from National Australia Bank Ltd, since its incorporation;
3.Catalano had incurred losses totalling approximately $5.2 million in the 2022 financial year, substantially due to approximately $3.4 million of extraordinary expenses;
4.Catalano had incurred losses totalling approximately $3 million in the 2023 financial year; and
5.the company's gross profit margin had been detrimentally impacted in the 2023 and 2024 financial years by the regular selling of stock at a discount to maintain cash flow for its operations.
Based on their investigations, the plaintiffs considered that there was an insolvent trading claim which could be pursued by a liquidator if Catalano were to be wound up, the quantum of which was estimated to be approximately $1.1 million, prior to accounting for the costs of realising the claim.
However, the directors of Catalano had sought safe harbour advice in July and August 2023, such that the directors of the company potentially had a defence to that claim. Taking into account the defences likely to be raised, the risks inherent in litigation and the financial positions and location of the directors (three of the five directors being resident outside the jurisdiction) the plaintiffs estimated the net amount likely to be recovered if the claim was pursued to be between $285,000 and $455,000.
The plaintiffs were therefore of the opinion that the outcome for shareholders in Catalano would not change if the company went into liquidation. They did not expect there to be any return to shareholders in either case.
The plaintiff's view of the value of the shares in Catalano was supported by an independent expert's report prepared by Nadine Marke and Justin Audcent of RSM Corporate Australia Pty Ltd dated 17 January 2024. On the assumption that the plaintiff's application failed with the consequence that Catalano's assets were sold to Avoir pursuant to the asset sale agreement, they assessed the shortfall in the assets available to meet Catalano's debts at between $722,000 and $1,361,000. On that basis, the residual value of the shares in Catalano was nil.
However, on the hearing of the application senior counsel for the plaintiffs drew my attention to a deed of a loan made between Catalano and Avoir dated 27 November 2023 (that is, after the date the parties had entered into the DOCA) and a general security agreement made between Catalano and Avoir the same day, evidence of which had been filed the morning of the hearing. Senior counsel advised that the assessment of Catalano's financial position in the event that the plaintiff's application was refused had not distinguished between Catalano's secured and unsecured creditors. If that distinction was made, it was said, on the most favourable assessment of Catalano's position there was a net deficiency of only $7,000 between the assets available to Catalano's unsecured creditors and the debts due to those persons, but there would remain a net shortfall of approximately $533,000 due to Avior as secured creditor pursuant to the deed of loan.
If the plaintiff's application was refused, all of the assets and undertaking of Catalano would have been sold to Avoir under the asset sale agreement, with certain limited exceptions. The sale price for those assets pursuant to those agreements was, in effect, the amount provided by Avoir under the DOCA.
Those of Catalano's assets which were not the subject of the asset sale agreement were subject to the general security agreement granted by Catalano to Avoir on 27 November 2023. Accordingly, if the plaintiff's application was refused and Catalano went into liquidation upon the failure of the condition precedent to the operation of the DOCA, Avior would have been entitled to prove in the liquidation of Catalano in respect of the $533,000 shortfall, and Catalano would have had no assets to meet its liabilities.
In those circumstances, I considered that shares in Catalano would have no residual value even if assessed in the manner suggested by senior counsel, both because of the admittedly slim margin between the amounts due to Catalano's unsecured creditors and the assets available to meet those debts, and because of the larger deficiency if Avior were to prove in the liquidation.
As to the satisfaction of the second condition precedent to the operation of the DOCA, by letter dated 6 February 2024 ASIC stated that it had decided, in principle, to grant the relief sought by the plaintiffs, but that it proposed to execute the formal instrument of relief if and only if the court granted leave to the plaintiffs under s 444GA to transfer all of the existing shares to Avior pursuant to the DOCA.
ASIC did not raise any reason why the court might not do so and did not indicate any opposition to the plaintiff's application.
Nor did any shareholder in Catalano. On 21 December 2023, notices advertising these proceedings were posted on the website maintained by the plaintiff and by way of a company announcement to the ASX, and advertisements regarding the proceedings published in the Australian, the Australian Financial Review and the West Australian newspapers on 29 December 2023.
Also on 21 December 2023, the plaintiffs caused notices to be sent to each shareholder in Catalano by email, where a shareholder's email address was contained in Catalano share register, and by post to shareholders whose email address was not listed in the share register for Catalano.
In doing so, the plaintiffs failed to comply with order 1(c) of the orders made by the Honourable Justice Hill on 20 December 2023, which required the plaintiffs to give notice of these proceedings to Catalano's shareholders by both post and email.
However, her Honours orders also required the plaintiffs to advertise the final hearing of these proceedings on the website maintained by the plaintiffs, by way of company announcement to the ASX, and by publishing further advertisements in the Australian, the Australian Financial Review and the West Australian newspapers . Her honour also ordered that the plaintiffs send a letter in terms approved by the court to each shareholder by post not less than 14 days prior to the final hearing in these proceedings.
I am satisfied that the plaintiffs complied with those orders on 31 January 2024.
There was evidence that a small number of shareholders had communicated with the plaintiffs regarding these proceedings, but none entered an appearance, and no shareholder appeared when the proceedings were called.
In the circumstances, I was satisfied that adequate notice of the proceedings had been provided to Catalano's shareholders, notwithstanding the plaintiff's failure to fully comply with the orders made by Hill J on 20 December 2023.
I was accordingly satisfied that I should exercise the discretion to grant the relief sought pursuant to s 444GA(1)(b) because:
1.the share transfer would not unfairly prejudice Catalano's shareholders within the meaning of s 444GA, their shares having no residual value;
2.the share transfer would benefit creditors of Catalano (including its secured creditors, priority unsecured creditors and ordinary unsecured creditors) by increasing the estimated returns to creditors and otherwise by preserving the ongoing business of the company;
3.doing so would result in the continuation of the business of the company and advance the objects of pt 5.3A of the Act as embodied in s 435A of the Act.
The plaintiffs also sought leave pursuant to s 447A(1) to execute, jointly or severally, any share transfer forms and any other documents ancillary or incidental to effecting the transfer of the shares in Catalano to Avoir, and to enter or procure the entry of the name of Avoir or its nominee(s) in the share register of Catalano in respect of the transferred shares.
Orders in terms similar to those sought by the plaintiffs had been made pursuant to s 447A(1) on a number of occasions, including in Paladin, Black Oak, and Re Centennial Mining Ltd (subject to deed of company arrangement).[6]
[6] Re Centennial Mining Ltd (subject to deed of company arrangement) [2019] WASC 441.
Given the number of shareholders in Catalano and the absence of any objection to the plaintiff's application, I considered it appropriate to grant the leave sought by plaintiffs to facilitate the transfers of the shares, and I accordingly made orders in terms of the plaintiff's originating process.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
LT
Associate to the Hon Justice Cobby
3 APRIL 2024