FEDERAL COURT OF AUSTRALIA

Carter, in the matter of SFM Australasia Pty Ltd (Administrators Appointed) ACN 105 317 333 [2009] FCA 360

BRUCE JAMES CARTER, GEORGE GEORGES AND DARREN GORDON WEAVER AS ADMINISTRATORS OF SFM AUSTRALASIA PTY LTD (ADMINISTRATORS APPOINTED) ACN 105 317 333

SAD 51 of 2009

MANSFIELD J

16 APRIL 2009

ADELAIDE

THE COURT ORDERS THAT:

1.     Pursuant to s 447A of the Corporations Act 2001 (Cth) (the Act), Pt 5.3A of the Act is to operate in relation to SFM Australasia Pty Ltd (administrators appointed) ACN 105 317 333 (SFM) as if s 443A(1) provided that:

1.1      the repayment of money borrowed, interest in respect of money borrowed and borrowing costs in respect of the loan made to the applicants (the administrators) pursuant to a Cash Facility Agreement between SFM and SFM Carbon Trading Limited (the financier) in or substantially in the form of Exhibit BJC1 to the affidavit of Bruce James Carter sworn on 31 March 2009 (the agreement) comprise debts incurred by the administrators in the performance and exercise of their functions and powers as administrators of SFM;

1.2      notwithstanding paragraph 1.1:

(a)        if the administrators’ indemnity under s 443D of the Act is insufficient to meet any such debts, the administrators will not be personally liable to repay such debts to the extent of that insufficiency; and

(b)        as to the repayment of such debts to the financier, the debts are given the same priority in the payment of any debts of SFM during its administration as if it had been in liquidation and the debts had the priority governed and provided for under ss 556(1)(c) and 560 of the Act.

2.     Pursuant to s 447A of the Act, s 447D(1) of the Act is to operate in relation to SFM so that in an application by the administrators for directions pursuant to s 447D(1) in relation to the agreement, the Court may give a direction that it approves the agreement and that the administrators may properly and justifiably give effect to the agreement.

3.     Pursuant to s 447D(1) of the Act, as it operates in accordance with paragraph 2 above, the Court directs that:

3.1      the Court approves the agreement to the extent that it provides for the drawdowns referred to in paragraph 3.2 hereof;

3.2      the administrators may properly perform and give effect to the agreement to the extent of:

3.2.1      the drawdown of $300,000 pursuant to the agreement; and

3.2.2      the incurring of the commitment fee as defined in the agreement.

4.     Any application for approval in respect of further drawdowns be stood over for further consideration.

5.     An order that the costs of the administrators in relation to this matter, be costs in the administration of SFM.

6.     Liberty to the administrators and any other interested party to apply on short notice.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

INTRODUCTION

1                          This is an application by the administrators of SFM Australasia Pty Ltd (Administrators Appointed) ACN 105 317 333 (SFM) to the Court for directions and orders that the Court limit the administrators’ personal liability under a Cash Facility Agreement to the extent of their right of indemnity under s 443D of the Corporations Act 2001 (Cth) (the Act), and that the Court approve the terms of that agreement. The directions are sought pursuant to ss 447A(1) and 447D(1) of the Act.

2                          The administrators also seek orders pursuant to s 447A(1) of the Act that Pt 5.3A of the Act is to operate in relation to SFM as if s 443A(1) provided that:

1.1       the repayment of money borrowed, interest in respect of money borrowed and borrowing costs in respect of the loan made to the applicants (the administrators) pursuant to a Cash Facility Agreement between SFM and SFM Carbon Trading Limited (the financier) in or substantially in the form of Exhibit BJC1 to the affidavit of Bruce James Carter sworn on 31 March 2009 (the agreement) comprise debts incurred by the administrators in the performance and exercise of their functions and power as administrators of SFM;

1.2  notwithstanding paragraph 1.1:

(a)     if the administrators’ indemnity under s 443D of the Act is insufficient to meet any such debts, the administrators will not be personally liable to repay such debts to the extent of that insufficiency; and

(b)     as to the repayment of such debts to the financier, the debts are given the same priority in the payment of any debts of SFM during its administration as if it had been in liquidation and the debts had the priority governed and provided for under ss 556(1)(c) and 560 of the Act.

3                          The administrators secondly seek orders pursuant to s 447A(1) of the Act that s 447D(1) of the Act is to operate in relation to SFM so that

in an application by the administrators for directions pursuant to s 447D(1) in relation to the agreement, the Court may give a direction that it approves the agreement and that the administrators may properly and justifiably give effect to the agreement.

And, thirdly, they seek further directions pursuant to s 447D(1) of the Act, as it operates in accordance with Order 2 above, that the Court approves the agreement, and that the administrators may properly perform and give effect to the agreement.

4                          The circumstances giving rise to the application are as follows. On 25 March 2009, in accordance with a resolution passed at a meeting of the directors of SFM, the applicants were appointed as administrators of SFM in accordance with the provisions of Pt 5.3A of the Act.  On the same day, the applicants were also appointed as administrators of a subsidiary company of SFM, Timber Creek Pine Sawmill Pty Ltd (Timber Creek).

5                          SFM has substantial rural property holdings in both South Australia and Western Australia. Its wholly owned subsidiary, SFM New Zealand Pty Ltd, holds leasehold tree plantations for the purpose of carbon sequestration. SFM’s forecast turnover is approximately $14m per annum. It directly employs 8 full-time staff and 7 contractors. Timber Creek employs approximately 40 people in a timber mill operation located on Kangaroo Island in South Australia.

6                          SFM has two secured creditors, namely Rabobank, which is owed approximately AU$12.905m, and National Australia Bank Ltd, which is owed approximately AU$9.5m. As at the date of the hearing of this application, each bank had notice of it and of the agreement and neither bank had exercised its rights to effect the appointment of a receiver and manager.

7                          SFM has number of unsecured creditors.  They include Sustainable Forestry Management Ltd (a parent entity of SFM) which is owed approximately AU$4.7m; Black Tree Management Pty Ltd which is owed approximately AU$1.6m; and PAYG owing to the Australian Taxation Office of approximately AU$100,000; as well as trade creditors owed approximately AU$1m.

8                          SFM has limited current assets available to it.  In particular, there are insufficient monies on hand to pay wages, incur trading expenses and to keep the company trading whilst the administrators consider what alternatives are available to the creditors of SFM in terms of a restructure involving a deed of company arrangement or any other arrangement.

9                          By reason of the above circumstances, it appears that the administrators have initiated a funding arrangement to facilitate SFM’s trading whilst a restructure proposal is considered. Hence, the proposed Cash Facility Agreement (the agreement).

10                        The agreement into which the administrators propose to enter with an entity linked with the shareholder (via the parent entity and significant shareholder), SFM Carbon Trading Ltd (the financier), sets out the basis on which the financier would provide funding of approximately US$3.5m to facilitate SFM’s interim trading. The forecasts presented by management of SFM, and reviewed by the administrators, predict that up to AU$5.8m is required for the six month period ending 30 September 2009 if SFM is to trade on, so as to protect the value of SFM’s existing assets and to preserve the ability to restructure its business, so as to ensure the best return to all creditors.  The administrators say that one of the preserved assets will be the retention of intellectual knowledge held by existing management in connection with the carbon sequestration rights.  Over the short to medium term, there will also be the prospect of progressive realisation of non-core assets and operations in an orderly manner. That funding is the expected funding requirement for maintaining the existing operations and commitments for that period, including:

·    Interest payments to the two secured creditors;

·    An allowance for a contingency amount;

·    Funding costs capitalised to the financier on account of the borrowings pursuant to the agreement; and

·    A provision of AU$1.2m for legal, administrators and valuers fees.

The cashflow forecast reflecting that assessment is said by the administrators to be a reasonable one.

11                        The provision of US$3.5m equates to approximately AU$5.4m at the current exchange rates.  The administrators acknowledge that creates a potential shortfall of AU$400,000 on the cashflow forecast by 30 September 2009, assuming the funding available under the agreement is taken up. However, the administrators say that there are potential cashflow savings and expect that a restructuring of SFM will be completed prior to 30 September 2009, so that the entire amount of proposed funding under the agreement would not be required.  They have identified and specified the areas of potential cashflow savings.

12                        The agreement provides for an advance commitment fee of 2 per cent of US$3.5m or about $108,000.  On the evidence, that is a commercially acceptable fee consistent with such a fee charged by bank lenders, and achieves the commitment of the financier to provide all the funding if required.  It is planned to be drawn down over time. The agreement has been executed by the administrators, and an initial advance of AU$300,000 has been made pursuant to the agreement, which is to be applied in part to the payment of wages.

13                        The overall effect of the agreement is, in effect, that the financier is to make the funds available to the administrators for the purpose of continuing to trade SFM, whilst the administrators consider what options are available to the creditors of SFM pursuant to the provisions of Part 5.3A of the Act.

14                        The administrators’ view is that absent the advance under the agreement, the resources of SFM are insufficient to permit ongoing trading, including the payment of wages, so that the funding is necessary to permit the restructure that will yield the best outcome for creditors. The administrators are not prepared to borrow that amount without the orders sought (or, as appears below, some of them) as the available assets, after the security by floating charge to the secured creditors is brought to account, may expose them to significant personal liabilities.

15                        The administrators’ present “qualified” estimate is that the agreement may enable the realisation of between AU$11m, and AU$27.3m after payment of secured creditors, by the strategy they propose to adopt.

16                        The agreement is expressed to be conditional upon the Court making an order as set out in [2] above. Subject to satisfaction of that condition precedent, the financier has agreed to advance the administrators the sum of US$3.5m for the purposes associated with the administration of SFM.

CONSIDERATION

17                        Section 447A of the Act empowers the Court to make the first order sought by the administrators. Section 447A provides:

(1)        The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

…

(3)        An order may be made subject to conditions.

(4)        An order may be made on the application of:

(a)        the company; or

(b)        a creditor of the company; or

(c)        in the case of a company under administration – the administrator of the company; or

(d)        in the case of a company that has executed a deed of company arrangement – the deed’s administrator; or

(e)        ASIC; or

(f)        any other interested person.

18                        Section 443A, the operation of which the administrators seek to modify, is in the following terms:

(1)        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.

(2)        Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator’s rights against the company or anyone else.

19                        Sections 443A(1)(d), (e) and (f) were introduced by Act No 132 of 2007 and were introduced to legislatively recognise that it is an appropriate part of an administrator’s function to borrow funds in the performance of duties. The effect of s 443A(1) is that the administrators are personally liable for the borrowings.  The effect of them being personally liable is that they have a right of indemnity against company assets in relation to those amounts for which they are personally liable, pursuant to s 443D.  Section 443A(2) provides that administrators cannot contract out of their personal liability.

20                        Hence, the effect of the proposed first order would modify the operation of s 443A(1) so that the administrators would not be personally liable for the debt to be incurred under the agreement beyond the extent of their entitlement to indemnity in respect of it from the assets of SFM.  It would also mean that SFM’s debt would have the same priority as if it were a debt incurred in a liquidation and so be governed by the regime in ss 556(1)(c) and 560 of the Act.  The second order sought by the administrators is to enable them to apply under s 447D(1) of the Act for directions approving the agreement and that they may properly and justifiably give effect to it.

21                        It is clear enough, in the light of the observations of Goldberg J in Re Ansett Australia Ltd & Ors (all administrators appointed) and Mentha & Anor (2002) 40 ACSR 389 at 398-9 and earlier in Re Ansett Australia Ltd and Mentha (2001) 39 ACSR 355 that the Court has power to make those two orders as sought.  As Goldberg J said at 399 in the first mentioned case, the Court should not pronounce upon the commercial prudence of an agreement entered into by administrators.  The Court will act in an appropriate case to protect administrators from claims that they have acted unreasonably in entering into particular agreements. In deciding whether the orders sought should be made, the Court will give weight to the administrators’ decision, and the consistency of the administrators’ objectives with the operation of Part 5.3A of the Act: Re Ansett Australia Ltd & Ors (all administrators appointed) and Mentha & Anor (2002) 40 ACSR 389 at 400-1.

22                        It is necessary to consider the effect that the agreement might have on both the secured and unsecured creditors of SFM.

23                        Section 443E(1) of the Act provides:

Subject to s 556, a right of indemnity under s 443D has priority over:

(a)        all of the company’s unsecured debts; and

(b)        subject to subsections (2), (3) and (4) of this section, debts of the company secured by a floating charge on property of the company.

24                        However, the exception from the application to s 556(b) applying to debts secured by a floating charge in s 443E(4) removes the position of the two secured creditors from the equation in practical terms.  It provides:

If:

(a)        debts of a company under administration are secured by a floating charge on property of the company; and

(b)        the administrator has a right of indemnity under section 443D;

the right of indemnity, to the extent to which it relates to debts incurred for:

(c)        the repayment of money borrowed; or

(d)        interest in respect of money borrowed; or

(e)        borrowing costs;

does not have priority over the debts mentioned in paragraph (a), except so far as the chargee consents in writing.

25                        Hence, the debt arising under the agreement would only take priority over the secured creditors’ interests in the event that the secured creditors or either of them agreed in writing to that position. In the present circumstances, there is no such agreement on the part of the secured creditors in writing. It is apparent, therefore, that the agreement does not effect the position of the secured creditors.  It is a matter for their commercial judgment as to whether to give such written consent.

26                        The position of the unsecured creditors is a little more problematical.  The unsecured creditors have not yet met and have not had an opportunity to determine whether they support the approach of the administrators to the administration.  They may have sound commercial reasons for doing so.  They may have less sanguine ideas about the benefits of the agreement.  They may have different views about the anticipated realisation value of the core assets, or about whether the possible restructuring is a useful one.  They have not yet been served with the proceeding, and (understandably) it has come on for hearing very quickly.  The Court would generally be reluctant to make orders which could have the effect of precluding the unsecured creditors challenging the commercial decision of the administrators to enter into the agreement, where it may subordinate the priority of repayment of their debts to the repayment of the sum borrowed plus interest under the agreement, and where the strategy underlying the agreement may in any event act to their financial detriment.

27                        Counsel for the administrators contended, and I accept, that the first order sought (being the order that the loans be limited recourse), would have no effect on the unsecured creditors. Re Spyglass Management Group Pty Ltd (administrators appointed) (2004) 51 ACSR 432 supports that conclusion, in particular at [6] where Finkelstein J held in relation to an order sought in terms similar to the first order sought by the administrators on the present application:

As the lenders have agreed to a loan of this kind, there is no reason why the order should not be made. Practically speaking the creditors have no interest in the second order because they cannot be disadvantaged by it. On the other hand, they stand to benefit if the loan goes ahead. That is a sufficient reason to make the second order.

28                        However, the second and third orders sought by the administrators may affect the unsecured creditors’ interests in two ways. The first is if the agreement and acceptance of the monies advanced under it is imprudent and causes loss or dilution of the assets of SFM available for the unsecured creditors.  That may obviously prejudice the unsecured creditors. They would have no recourse to the administrators, and would have their debts subordinated to the financier by reason of s 443D of the Act. The second is the immediate incurring of the commitment fee of 2 per cent of the amount of the loan facility, or about $108,000, for the same reasons.

29                        In the decisions referred to by the administrators to support their application, namely Re Ansett Australia Ltd & Ors (all administrators appointed) and Mentha & Anor (2002) 40 ACSR 389 and Re Ansett Australia Ltd and Mentha & Anor (2001) 39 ACSR 355, the ordinary practice of hearing the substantial unsecured creditors on the application was available. Counsel for the applicants submitted that the present circumstances are distinguishable on the basis that advances were required immediately in order to enable the payment of wages (as deposed to in the affidavit of one of the administrators) and because $300,000 has already been drawn down to effect that payment, in anticipation of some form of agreement being able to be implemented, conditional (as it is) upon the making of the orders sought.

30                        Unfortunately, that opportunity could not be given to the unsecured creditors in the circumstances of the urgency of the application and the very early stage of the administration.

31                        It was submitted by Mr Roberts as counsel for the administrators, however, that the Court should give effect to the agreement notwithstanding the terms of s 443A(2), given that the financier is a sophisticated party and is prepared to lend to the administrators a substantial sum on terms which contemplate limited recourse. Indeed, the condition precedent to the agreement sets out that the loan will not proceed absent the modification of personal liability of the administrators under s 443A of the Act.

32                        As the firm evidence of the administrators is that the agreement is in the interests of all the creditors of SFM, including its unsecured creditors, and in the circumstances, I am prepared to make the first and second orders proposed by the administrators.  I do so on the basis that the third order may be amended so as to very substantially limit any possible disadvantage or detriment to the unsecured creditors.  The modification of the operation of s 443A(1) as proposed, and the limitation on the personal liability of the administrators under s 443A can be granted whilst still preserving, except to a limited extent, the opportunity of the unsecured creditors to be heard on whether, under the agreement, any further drawdown of funds under the agreement should be made.  That can be done by limiting the approval of the agreement under s 447D(1) to the extent that it provides for the drawdown of the first advance of $300,000 under the agreement, and the incurring of the commitment fee as defined in the agreement.

33                        The administrators may then exercise the liberty to apply to seek further directions under s 447D(1) in respect of further drawdowns under the agreement, after the unsecured creditors have had the opportunity to consider the agreement and the administrators’ assessment of the state of SFM and their suggested course for the administration.  Any unsecured creditor may also exercise the liberty to apply.  As counsel for the administrators pointed out, also, the unsecured creditors may also resolve in the near future to support the action of the administrators in entering into and giving effect to the agreement.  In that event, the administrators would have the protection they seek (in the light of the first two orders I make), so no further application will be necessary.

34                        Consequently, on the material available I am satisfied that it is appropriate to make the first two orders sought by the administrators.  Their objectives are entirely consistent with the operation of Pt 5.3A of the Act.  The limited evidence indicates that, given the urgency of the situation, they should be protected from any claim that they have acted unreasonably in entering into the agreement.  There are good immediate and longer term reasons for doing so.  However, because there has been no opportunity for the unsecured creditors to be heard, I propose to qualify or limit the effective protection given to the administrators to the two payments under the agreement referred to, by amending the third order sought in the manner I have described.  That is purely for that reason.  I presently have no unease about the appropriateness of making an order beyond covering the further drawdowns under the agreement.  But there might be other points of view, in particular from unsecured creditors.  If there are, the orders I make preserve their opportunity to present them either at a creditors’ meeting or, if necessary, to the Court.  And, in the meantime, any arguably detrimental effect upon their position is a limited one.  Indeed, it is presently hard to see how securing funds to enable SFM to keep trading, at least in the short term, and to have committed access to substantial funds for the next several months if that is in the interests of SFM and its creditors, could in substance detrimentally affect their interests.

Associate:

Dated:         16 April 2009