FEDERAL COURT OF AUSTRALIA

Crawford, in the matter of North Queensland Heavy Haulage Services Pty Ltd (Administrators Appointed) [2017] FCA 723

ORDERS

THE COURT:

1.    Orders that the originating process be made returnable instanter.

2.    Directs, pursuant to section 447D of the Corporations Act 2001 (Cth) (Act), that the plaintiffs are justified in entering into a funding agreement substantially in the form described in the affidavits of Anthony Norman Connelly sworn 21 June 2017 and 22 June 2017 (Funding Agreement).

3.    Orders, pursuant to section 447A of the Act, that Part 5.3A of the Act is to operate such that, if the indemnity of the plaintiffs under section 443D of the Act from NQ Group Pty Ltd (Receivers and Managers Appointed) (Administrators Appointed) (NQ) is insufficient to meet any amount for which the plaintiffs may be liable arising out of or in connection with the Funding Agreement (including any funds advanced by Rivet Mining Services East Holdco Pty Limited ACN 616 023 655 as interim funding to NQ or in contemplation of or in connection with the Funding Agreement), then the plaintiffs will not be personally liable to repay any such amount to the extent of that insufficiency.

4.    Orders, pursuant to section 447A of the Act, that Part 5.3A of the Act is to operate such that, if the indemnity of the plaintiffs under section 443D of the Act from North Queensland Heavy Haulage Services Pty Ltd (Administrators Appointed) (NQHHS) is insufficient to meet any amount for which the plaintiffs may be liable arising out of or in connection with any funds advanced by NQ to NQHHS, then the plaintiffs will not be personally liable to repay any such amount to the extent of that insufficiency.

5.    Orders that the plaintiff’s costs of and incidental to this application be costs and expenses in the administration of each of NQ and NQHHS, and be paid out of the assets of NQ and NQHHS.

6.    Orders that the plaintiffs, within seven business days of making these orders, are to take all reasonable steps to give notice of these orders to the creditors of NQ and NQHHS (including the persons claiming to be creditors) by means of a circular:

(a)    to be sent by email transmission to creditors for whom the plaintiffs have a current email address; or

(b)    to be sent by ordinary post to creditors for whom the plaintiffs have only a postal address.

7.    Orders that any person who can demonstrate sufficient interest (including any creditor of NQ or NQHHS) for the purpose of modifying or discharging Orders 2 to 5 above shall have liberty to apply on giving all other interested parties not less than 3 business days’ notice.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

MARKOVIC J:

1    Before me is an application made under ss 447A and 447D of the Corporations Act 2001 (Cth) (Act). The application is made by Messrs Keith Alexander Crawford, William James Harris and Anthony Norman Connelly in their capacity as joint and several administrators of North Queensland Heavy Haulage Services Pty Limited (administrators appointed) (NQHHS) and NQ Group Pty Limited (receivers and managers appointed) (administrators appointed) (NQ). They were appointed as voluntary administrators pursuant to s 436A of the Act to each of NQ and NQHHS.

2    By their originating process, the administrators seek a direction pursuant to s 447D of the Act that they are justified in entering into a funding agreement substantially in the form described in the affidavits sworn by Mr Connelly on 21 and 22 June 2017 (Funding Agreement) and orders pursuant to s 447A of the Act that Pt 5.3A of the Act operate such that, if their indemnity under s 443D of the Act from the companies is insufficient to meet any amount for which they may be liable arising out of or in connection with the Funding Agreement, then they will not be personally liable to repay any such amount to the extent of that insufficiency.

3    In support of the application the administrators rely on the affidavits sworn by Mr Connelly on 21 and 22 June 2017 respectively. In summary, this application is brought to allow the administrators to enter into the Funding Agreement to ensure the continued operations of NQ and NQHHS. The funder supports the application and, based on the evidence of Mr Connelly, the administrators consider that entry into the Funding Agreement is consistent with the objects of Pt 5.3A of the Act and is the most appropriate commercial step.

BACKGROUND

4    The administrators have previously approached this Court for an extension of the convening period in relation to the second meeting of creditors to be held for each of NQ and NQHHS. Orders acceding to that application were made by me on 2 June 2017. The convening period has been extended to 5 October 2017: see Crawford, in the matter of North Queensland Heavy Haulage Services Pty Ltd (Administrators Appointed) [2017] FCA 635.

5    The nature of the business operated by NQHHS and NQ is relevantly described in my earlier judgment at [3] to [8]. I will not repeat that background here. There are two factors of note that were relevant to the administrators’ earlier application which are equally relevant to this application. First, shortly before the appointment of the administrators, Messrs Derrick Craig Vickers and Gregory Winfield Hall of PriceWaterhouseCoopers were appointed as receivers and managers of NQ by that company’s principal secured creditor, Isa Sun Pty Ltd (Isa Sun). Since the application to extend the convening period was made the receivers have partially retired. As a consequence, since 14 June 2017, the administrators have assumed day-to-day control of both NQHHS’s and NQ’s operations.

6    Secondly, a proposal for a deed of company arrangement (DOCA) is to be propounded. This follows on from the partial retirement of the receivers. The proposal is that a recapitalisation DOCA be put by Rivet Mining Services East Holdco Pty Limited (Rivet) or an entity associated with it. The time required to propound the DOCA proposal is likely to be protracted and, once the proposal is made, the administrators will be able to assess it for the purpose of making a recommendation to creditors pursuant to s 439A(4) of the Act.

7    In order to continue to operate the companies’ businesses to allow time for the DOCA to be propounded, Mr Connelly explains that:

(1)    it is necessary that NQHHS and NQ obtain funding pursuant to the Funding Agreement, a draft of which is in evidence before me;

(2)    there is an urgent need for a significant amount of funding and, although funds will become available through the continued trading of the businesses of NQHHS and NQ, there are insufficient funds in those companies to allow them to presently continue to trade;

(3)    there are a number of imminent payments required to be made. Mr Connelly estimates that, in order for the companies to continue to trade, total payments of approximately $500,000 per week need to be made, requiring a total of approximately $3.5 million in payments to 31 July 2017. This includes the fortnightly payment of wages to employees of NQ;

(4)    the proposal is that these payments, namely, the required payments of $500,000 per week, be funded by the Funding Agreement until cash flow from the administrators’ continued trading of NQHHS and NQ is received. This is anticipated to occur once the receivers have received sufficient funding for their costs and expenses; and

(5)    the Funding Agreement has been the subject of negotiation for some time and is being progressed in parallel with arrangements that are currently under negotiation between Rivet, Remagen Capital Partners Pty Limited as its financier and Isa Sun in relation to the proposed debt sale. Accordingly, it is not yet in its final form.

8    The evidence before me shows that there has been significant activity in the 24 hours leading up to the making of this application and that, as recently as earlier today, the commercial terms of the Funding Agreement were agreed between the administrators and the funder. Mr Connelly explains that the Funding Agreement will allow NQ, anticipated to be the borrower, to draw down funds of up to $2 million for a “5.3A Purpose”, as that term is defined in the draft Funding Agreement, on the terms set out in that agreement. It will also allow NQ to on-lend funds drawn down under the Funding Agreement to NQHHS in order to finance the operation of its business, including payments to asset financiers.

9    Despite the terms of the Funding Agreement still being the subject of negotiation, interim funding has already been provided to the companies to allow them to continue to trade. That interim funding will be deemed as an initial advance under the Funding Agreement. Mr Connelly deposes that there is a likelihood of more interim funding being needed and, indeed, the next tranche of funding is anticipated to be provided very shortly. Mr Connelly says that, in the absence of the interim funding, the administrators would likely have no alternative but to immediately cease trading of the companies’ businesses.

10    The loan made under the Funding Agreement is intended to be one of limited recourse; it is intended that the administrators’ liability under the Funding Agreement be limited; and the administrators obtaining an order to that effect is a condition precedent to any further drawings under the Funding Agreement. The funder consents to the relief sought in that respect by the administrators, as is evidenced by a letter from it to the administrators dated 21 June 2017.

11    Mr Connelly has turned his mind to why, in his opinion, entering into the Funding Agreement is in the best interests of the companies’ creditors. The reasons he gives include the following:

(1)    the alternative to entering into the Funding Agreement would be to take immediate steps to cease the operation of the businesses of NQ and NQHHS;

(2)    the Funding Agreement will provide those companies with sufficient funding to allow the administrators to trade on the businesses and receive income from the provision of services until such time as a decision is made about the companies’ long-term future;

(3)    income received by the companies from their continued trade will, within the term of the Funding Agreement, outweigh the amount of funding which is provided under it;

(4)    trading on the businesses in the short term is likely to ultimately lead to an increased pool of funds being available to the companies’ creditors than would be available if the companies were to be immediately wound up;

(5)    continuing to trade the businesses will allow the administrators to properly consider all available outcomes of the voluntary administration process and will maximise the chances of NQHHS and NQ, or as much of their businesses as possible, continuing in existence after the administration;

(6)    continuing to trade those businesses will increase the prospects of being able to sell them as a going concern and the potential that they may be restructured through any DOCA proposal; and

(7)    continuation of the businesses will allow for continued employment of a significant portion of NQ’s employees while an assessment of the options for each business is undertaken and will permit payments to be made to landlords and asset financiers of the companies.

12    Mr Connelly is of the opinion that it is highly unlikely that the administrators would have been able to secure a more beneficial funding agreement than that currently proposed.

13    It is for those reasons that the administrators submit that: first, the funding contemplated by the Funding Agreement is the most appropriate commercial step that they can take to secure the significant funding immediately required to be able to continue to operate the companies’ businesses; secondly, the orders they seek are consistent with the objective of Pt 5.3A of the Act to encourage suppliers, customers and employees to continue to deal with a company in administration; and, thirdly, it is in the interests of the companies’ creditors for the administrators to enter into the Funding Agreement, particularly given that the alternative is that the administrators would take immediate steps to cease operations.

Principles

14    The relevant principles to be considered on an application for limitation of an administrator’s liability pursuant to s 447A of the Act were summarised in Re Mentha (in their capacities as joint and several administrators of the Griffin Coal Mining Company Pty Ltd (admins apptd)) (2010) 82 ACSR 142; [2010] FCA 1469 at [23]-[38] by Gilmour J as follows:

23    Section 443A of the Corporations Act relevantly provides:

The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for:

(a)     services rendered; or

(b)     goods bought; or

(c)     property hired, leased, used or occupied; or

(d)     the repayment of money borrowed; or

(e)     interest in respect of money borrowed; or

(f)     borrowing costs.

24     Section 443D of the Corporations Act provides the administrators with a statutory indemnity out of the property of the company for, among other things, any other debts or liabilities incurred by the administrators in the performance of their functions or powers as administrators.

25     Section 447D(1) of the Corporations Act enables administrators to seek directions about matters arising in connection with the performance or exercise of any of the administrator's functions and powers.

26     Section 447A(1) of the Corporations Act provides that the court may make such orders as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company.

27     The court has broad powers under s 447A(1), and has widely used this power in a variety of contexts.

28    It is well established that the court has power under s 447A of the Corporations Act to order an indemnity where the indemnity available to the administrator under s 443D is insufficient or in doubt, in order to satisfy the debts for which the administrator is personally liable pursuant to s 443A: Mentha, Re Spyglass Management Group Pty Ltd (2004) 51 ACSR 432; [2004] FCA 1469.

29     It is also well established that the court has power under s 447A of the Corporations Act to make orders to limit the administrators' personal liability under s 443: Hayes Re Estate Property Group Ltd (admins apptd) [2007] FCA 1393; Re Malanos [2007] NSWSC 865 (Re Malanos); Re View Gold Pty Ltd, View Resources Ltd & View Nickel Pty Ltd; Ex Parte Saker [2008] WASC 241 (Re View); Re Great Southern Infrastructure Pty Ltd; Ex parte Jones [2009] WASC 161 (Re Great Southern); Carter, Re SFM Australasia Pty Ltd (admins apptd) [2009] FCA 360; and Vision (Brisbane) Pty Ltd (admins apptd) [2010] FCA 186.

30     The principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A can be summarised as follows:

(a)    the proposed arrangements are in the interests of the company's creditors and consistent with the objectives of Pt 5.3A of the Corporations Act: Re Great Southern at [13].

(b)    typically the arrangements proposed are to enable the company's business to continue to trade for the benefit of the company's creditors: Re Malanos at [9] and Re View at [17].

(c)    the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement: Re View at [18], and also Re Application of Fincorp Group Holdings Pty Ltd [2007] NSWSC 628 at [17].

(d)     notice has been given to those who may be affected by the order: Re Great Southern at [12].

31     Most of the cases where the courts have exercised its power under s 447A to vary the administrator's personal liability under s 443A have involved administrators borrowing funds during the period of the administration. The orders typically sought have the effect of limiting recourse of the counterparty to the administrator personally to the extent to which he or she is able to be indemnified from the assets of the company.

32     However, Re Cook Cove Pty Ltd (admins apptd) [2009] NSWSC 620 (Re Cook) was a case which involved the administrators entering into various post appointment construction related contracts. In that case, orders were made to limit the administrators' potentially significant personal liability under the post appointment contracts to the extent that they were able to be satisfied out of the property of the company.

33     In Re Cook at [40], Austin J considered the practical utility of the administrators' statutory indemnity as being a crucial factor in favour of granting the orders sought.

34     Austin J in Re Cook at [37] also made the following comments:

[37]     One can envisage cases in which it would not be appropriate to make an order limiting the normal liability of an administrator under Pt 5.3A for post-appointment debts: for example, where the administrator proposes to enter into many business transactions in the course of carrying on the company’s business, contracting with suppliers and service providers for relatively small amounts in circumstances where those with whom the administrator contracts would not be aware of the court’s order and would be entitled to assume that the normal liability provisions of Pt 5.3A were applicable. But the decided cases are of a different kind.

…

36     The orders sought under s 447A in this case will have the effect that the administrators will only be personally liable for such debts in connection to the new grants pursuant to s 443A of the Corporations Act as accrued and are attributable to the administration period.

37    The orders sought in this case are consistent with the general principles outlined above and also with the policy reasons behind s 443A of the Corporations Act, which is to encourage suppliers, customers and employees to continue to deal with a company in administration during the administration period, by, in effect, ensuring that they will be paid. This increases the prospects that the objectives of the voluntary administration process will be met, being essentially that the business of the company will continue to trade or, if this is not possible, that the returns to stakeholders will be greater than in an immediate winding up: s 435A of the Corporations Act.

38    Further, directions under s 447D of the Corporations Act similar to those sought in the application have been sought and made (or substantially made) by the court in:

(a)     ABC Learning Centres Ltd, Re ABC Learning Centres Ltd; Appln by Walker (No 9) [2009] FCA 1462 (which related to the administrators' entry into a funding agreement);

(b)     Carter Re SFM Australasia Pty Ltd (admins apptd) [2009] FCA 360 (which related to the administrators' entry into a cash facility agreement); and

(c)     Re Appln of Fincorp Group Holdings Pty Ltd [2007] NSWSC 628 (which related to the administrators' entry into a loan facility).

15    The considerations relevant to making a direction pursuant to s 447D of the Act were set out in Re Nexus Energy Ltd [2014] NSWSC 1041 by Black J at paragraphs [12]-[13] as follows:

12    Turning now to the applications which are made, the first application is an application for a direction under s 447D of the Corporations Act that the administrators are justified in procuring the Company to enter into, relevantly, the funding agreement, to procure the Company to draw down under the funding agreement, and to procure the Company to loan moneys to the subsidiaries under the two inter-company loan agreements. Section 447D of the Corporations Act provides that an administrator may apply to the Court for directions about a matter arising in connection with the performance or exercise of the administrator's functions and powers. There are well recognised limitations on the circumstances in which such directions are given, which were noted in the decision of the (sic) Goldberg J in Re Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; (2002) 115 FCR 409, where his Honour noted (at [65]) that something more than the making of a business or commercial decision is required before the Court will give directions to, or approve, the decision. His Honour also observed that that something more may be a legal issue of substance or procedure or an issue of power, propriety or reasonableness, warranting the giving of such a direction. The value of a direction under that section is to protect the administrator from liability for breach of duty or unreasonable behaviour if full disclosure has been made to the Court, and it has been recognised that the Court may give directions to provide guidance on a matter of law or to protect the administrator from accusations that it has acted unreasonably: Re Green [2011] NSWSC 417; (2011) 254 FLR 324 at [10].

13    It will be the exception, rather than the rule, that the Court would be prepared to give a direction under s 447D of the Corporations Act in respect of arrangements of this kind: compare Systems Advisers Group Pty Ltd (admins apptd) [2013] NSWSC 826. Nonetheless, I am satisfied that in this particular case, the complexity of the issues that the administrator has had to address, including an issue as to dealings with subsidiaries to which I will refer, and the existence of the various classes of creditors to which he has had regard, warrant the giving of such a direction, limited only to the entry into the funding agreement, the drawdowns under the funding agreement, and the arrangements to loan moneys under the intercompany loan agreements. I reach the view that a direction is justified in this case, by contrast with the normal position, because the administrator has in fact had to address legal issues which arise, as to the extent to which borrowings should be made by the Company, so as to preserve values in its subsidiaries, which raise questions as to the legal relationship between companies in the group which are of some complexity. It seems to me that the evidence led by the administrator does warrant the step which he has taken and, in particular, supports the giving of security so as to borrow the relevant amount, so as to obtain the opportunity to preserve value in the subsidiaries' assets. It also seems to me that the entry into the intercompany loan agreements, which raise the particular issue that the Company itself will be fully liable to the lender, although the administrators' liability is limited, and that it has been necessary to limit the subsidiaries' liability so as to preserve their solvency. It seems to me that the approach which the administrators (sic) has adopted is again justified in that setting, so as to preserve value in the subsidiaries. However, the complexity of that approach, and the legal issues which it raises, are such that the Court should in this case provide a degree of comfort as to his entry into the transaction, subject of course to the adequacy of the disclosure which has been made to it. For these reasons, I will make the direction under s 447D of the Corporations Act that is sought in respect of those matters.

consideration

16    The question that arises is whether in the circumstances in which the administrators and companies now find themselves it is appropriate that the direction and orders sought by the administrators be made.

17    Having regard to the evidence given by Mr Connelly and the current circumstances of NQ and NQHHS, in my opinion, it is appropriate that the direction and orders sought are made on this occasion. My reasons for reaching this view are set out below.

18    First, it is clear that the direction and orders sought will serve the objects of s 435A of the Act. They will allow for the possibility of a better return to the companies’ creditors than would result if the administrations were to come to an end. If the orders and direction are not made and the administrators do not enter into the Funding Agreement then the companies will enter into immediate liquidation.

19    Secondly, there is a complexity in the financial circumstances of these companies which warrants the making of the direction. That complexity is brought about by the interaction of a number of factors:

(1)    NQ was in receivership and remains in partial receivership. The receivers remain in control of some of the assets of the company. The interaction of the receivership with the administration and the fact of the administrators now continuing the operation of both companies, without access to all of the assets of the company, gives a complexity to the ongoing operation of these businesses;

(2)    the entry into the Funding Agreement will allow these companies to continue to trade which, as I have already observed, is said by Mr Connelly to be of likely benefit to the creditors in the long term; and

(3)    the progress of the Funding Agreement has been undertaken in parallel with negotiations between Rivet, the funder and Isa Sun in relation to a proposed debt sale. This has added to the complexity of the arrangements and, among other things, the finalisation of the Funding Agreement.

20    Because of the urgent need for funding by the administrators, Mr Connelly has had to consider and form his opinion about whether the funding already provided and the further funds intended to be made available under the Funding Agreement were in the best interests of the companies in a hasty fashion. As a result, he has not yet had the opportunity to consult with creditors about the view he has formed. That urgency, it is submitted, is another matter that adds to the complexity of the proposed funding arrangements.

21    On one view entry into a funding agreement may be viewed as a business or commercial decision. However, I am satisfied that entry into the Funding Agreement in the circumstances of this case rises above being categorised in that way. While an aspect of the decision to enter into the Funding Agreement is a commercial decision, there is “something more” that arises in this instance, as is evident from the matters I have set out above. The procedural issues that have arisen in terms of the timing and the issues as to the reasonableness or need to enter into the Funding Agreement, given the circumstances of these companies, make it appropriate that a direction be made pursuant to s 447A.

22    In those circumstances, I am satisfied that the orders and directions of the nature sought by the administrators can and should be made.

Associate:

Dated:    19 July 2017