FEDERAL COURT OF AUSTRALIA

Preston, in the matter of Hughes Drilling Limited (Administrators Appointed) [2016] FCA 1175

ORDERS

THE COURT ORDERS THAT:

1.    Leave be granted to the first plaintiffs to move on the originating process dated 26 September 2016 (the originating process) on the undertaking of the plaintiffs’ solicitors to promptly file the originating process and pay the filing fee therefor (which undertaking the Court notes).

2.    Pursuant to s 447A of the Corporations Act 2001 (Cth) (the Act), Pt 5.3A of the Act is to operate as if s 443A(1) of the Act provides that the liabilities of the first plaintiffs incurred under the Funding Agreement in, or substantially in, the form exhibited at Tab 1 of exhibit JP-1 to the affidavit of Jason Preston made 26 September 2016 (Funding Agreement) (including monies borrowed, interest in respect of monies borrowed and borrowing costs) are in the nature of debts incurred by the first plaintiffs in the performance and exercise of their functions and powers as joint and several administrators of the second plaintiff.

3.    Pursuant to s 447A of the Act, notwithstanding the preceding order, Pt 5.3A of the Act is to operate as if s 443A(1) of the Act provides that, if the property of the second plaintiff is insufficient to satisfy the debts and liabilities incurred by the first plaintiffs under the Funding Agreement for which the right of indemnity exists under s 443D of the Act, the first plaintiffs will not be personally liable to repay such debts and liabilities to the extent of that insufficiency.

4.    Pursuant to s 447A of the Act, Pt 5.3A of the Act is to operate as if the personal liability of each of the first plaintiffs, third plaintiffs, fifth plaintiffs, seventh plaintiffs, ninth plaintiffs, eleventh plaintiffs, thirteenth plaintiffs, fifteenth plaintiffs, seventeenth plaintiffs, nineteenth plaintiffs, twenty-first plaintiffs, twenty-third plaintiffs, twenty-fifth plaintiffs and twenty-seventh plaintiffs (together, the Administrator Plaintiffs) under s 443A of the Act excludes any liability for:

(a)    any loans or advances from the second plaintiff to the fourth plaintiff, sixth plaintiff, eighth plaintiff, tenth plaintiff, twelfth plaintiff, fourteenth plaintiff, sixteenth plaintiff, eighteenth plaintiff, twentieth plaintiff, twenty-second plaintiff, twenty-fourth plaintiff, twenty-sixth plaintiff and/or the twenty-eighth plaintiff (together, including the second plaintiff, the Corporate Plaintiffs); and

(b)    any loans, advances or other debts between two or more of the Corporate Plaintiffs.

5.    Within 2 business days, the Administrator Plaintiffs cause notice of the originating process and these orders to be given to creditors of each of the Corporate Plaintiffs, by placing copies of the said documents on the website maintained by the Administrator Plaintiffs at http://mcgrathnicol.com.

6.    The costs of the application be treated as costs in the administrations of the Corporate Plaintiffs, and the Administrator Plaintiffs may allocate those costs amongst the Corporate Plaintiffs on a pro rata basis by reference to the funding ultimately received by each Corporate Plaintiff.

7.    Liberty to apply be granted.

8.    Liberty be reserved to any party affected by the above orders to apply to modify or discharge them on no less than 48 hours’ notice to the Administrator Plaintiffs.

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

REASONS FOR JUDGMENT

YATES J:

Introduction

1    The first plaintiffs are the joint and several voluntary administrators of Hughes Drilling Limited (administrators appointed) (HDL) and each of its thirteen Australian-based subsidiary companies (which, together with HDL, are also plaintiffs) (the corporate plaintiffs). The first plaintiffs were appointed on 22 September 2016.

2    The first plaintiffs seek orders pursuant to s 447A(1) of the Corporations Act 2001 (Cth) (the Act) as to how Pt 5.3A of the Act is to operate in relation to the corporate plaintiffs in connection with a funding arrangement into which the first plaintiffs seek to enter with Westpac Banking Corporation (Westpac).

Background

3    HDL is a public company, incorporated and operating in Australia. It was previously listed on the Australian Securities Exchange. Since 27 June 2016, it has been voluntarily suspended from official quotation.

4    HDL is the ultimate holding company of the thirteen Australian-based subsidiary companies and another company which was incorporated in the United States of America. It is convenient to refer to HDL and its subsidiary companies as, simply, the Group.

5    The Group’s principal activities consist of providing drilling services to the mining industry, with a focus on niche services for production, delineation and mining companies that do not have specialised equipment or qualified personnel to perform the necessary work themselves. The Group also supplies manufactured drill rigs and spare parts.

6    The Group’s key assets comprise drilling rigs valued at approximately $67.7 million (as at 30 April 2016). Other assets include drill compressors, land and buildings, support vehicles, light vehicles, other plant and equipment and certain intangible assets (intellectual property) with a total value of approximately $18.5 million (as at 30 April 2016).

7    Companies in the Group are also party to approximately 20 service contracts with major mining companies such as BHP Billiton Ltd, Fortescue Metals Group Ltd, Downer EDI Ltd and Yancoal Australia Ltd, servicing mines across the east coast and west coast of Australia. These contracts (the service contracts) together generate approximately $6 million in monthly revenue for the Group.

8    As at 22 September 2016, HDL and the Australian-based subsidiary companies had a drawn overdraft balance of $11,601,145, but with only $49,398 in cash at bank. Westpac was the principal secured creditor. At that time it was owed approximately $47 million under existing debt facilities. Other secured creditors include suppliers with retention of title arrangements and lessors with registrations on the PPSR. The Group has a potential taxation debt of $19 million (including a superannuation guarantee charge of approximately $4.3 million). The Group has approximately 450 trade creditors (approximately $7 million) and accrued employee entitlements (approximately $4.6 million). In this latter connection, the Australian-based subsidiaries together employ over 300 employees, although most of these employees are employed by two companies in the Group which provide drilling and drilling-related services to customers under the service contracts. Some of these employees are paid weekly. Some are paid fortnightly. Others are paid monthly. The next tranche of wages ($715,094 inclusive of superannuation and tax) is due on 28 September 2016. The first plaintiffs’ forecast that a total amount of $9.7 million will be payable to employees over the next 13 weeks.

9    Since their appointment, it has not been possible for the first plaintiffs, in the limited time available, to investigate comprehensively the affairs of the Group. They have, however, formed the view that there are advantages in the Group continuing to trade as a going concern so as to enable them to explore either a sale or rehabilitation of the Group’s business. The first plaintiffs forecast that the following payments will need to be made:

    approximately $3.3 million by 30 September 2016, of which $0.9 million represents wage payments;

    approximately $5.8 million between 1 October and 28 October 2016, of which $3.7 million represents wage payments;

    approximately $7 million between 29 October and 25 November 2016, of which $3 million represents wage payments; and

    approximately $4.9 million between 26 November and 16 December 2016, of which $2.1 million represents wage payments.

10    It will also be necessary to value the Group’s business and assets. The first plaintiffs estimate that this will cost between approximately $50,000 and $60,000.

11    The Group has insufficient liquidity to make the payments summarised above, as and when those payments will fall due. The first plaintiffs are concerned that if wages are not paid on time, it is very likely that the employees of the Australian-based subsidiaries will cease to perform the work required to complete or otherwise comply with the service contracts. The first plaintiffs are concerned that non-compliance with the service contracts will trigger events of default and the likely termination of those contracts by the relevant customers. This would, in turn, preclude or complicate recovery of existing debts coming out of the service contracts and could remove the key source of future income for the Group.

12    So as to avoid the risk of adverse consequences arising from the failure to make the relevant payments as and when they fall due, and to maintain the day-to-day trading of the Australian Group companies, the first plaintiffs have negotiated an interim funding arrangement with Westpac which involves borrowing approximately $4 million (the funding arrangement). It is envisaged that, on drawing down these funds, HDL will provide intercompany loans to each subsidiary to enable each subsidiary to meet its payments to employees and suppliers.

13    The funding arrangement provides that if the funds received by the first plaintiffs as administrators to which they have recourse pursuant to s 443F of the Act are not sufficient to repay the money borrowed under the funding arrangement, then Westpac agrees to release, and covenants not to sue, the first plaintiffs in respect of their personal liability to repay the borrowed money to the extent of that insufficiency. In short, Westpac is prepared to lend the $4 million on a limited recourse basis. The reason for the present application is that, despite the agreement between Westpac and the first plaintiffs, s 443A(1) of the Act will continue to subject the first plaintiffs to personal liability to repay the borrowed money and interest in respect thereof: s 443A(2) of the Act. Understandably, the first plaintiffs are unwilling to allow the funding arrangement to be entered into if there is a risk that they might be subject to substantial personal liabilities arising from their efforts to promote the interests of the Group companies and their creditors. There is, therefore, a need to modify the operation of s 443A pursuant to s 447A of the Act.

14    The first plaintiffs seek orders pursuant to s 447A of the Act to the effect that:

    any moneys advanced by Westpac to HDL under the funding arrangement be treated as debts incurred by the first plaintiffs (in their capacity as administrators of HDL) in the performance and exercise of their functions and powers as administrators under s 443A(1) of the Act;

    the operation of s 443A(1) of the Act be modified so that, if the property of HDL is insufficient to satisfy the debts incurred by the first plaintiffs under the funding arrangement for which the right of indemnity exists under s 443D of the Act, the first plaintiffs (in their capacity as administrators of HDL) will not be personally liable to repay such debts to the extent of that insufficiency; and

    the operation of s 443A(1) of the Act be modified so that the personal liability of the first plaintiffs (in their capacity as administrators of HDL and each of the other corporate plaintiffs) under s 443A of the Act exclude any liability for any loans or advances from HDL to those corporate plaintiffs and for any loans, advances or other debts between two or more companies in the Group.

15    In an affidavit read in support of the present application, Mr Preston, one of the first plaintiffs, has deposed that it is the first plaintiffs’ intention to continue to operate the Group’s business in a way which, to the greatest extent possible, will preserve the value of the assets of the Group companies. He has deposed that the funding arrangement is the only viable and immediately available option to achieve this. He said that the funding will maximise the chances of the Group companies continuing to trade as a going concern, the effect of which would be to:

    preserve the value of the Group companies’ assets for the benefit of creditors;

    maximise the potential proceeds of a sale process; and

    conversely, avoid the potential discount to the amount that the Group companies might receive on a sale of the business or their assets in a liquidation.

Consideration

16    The Court has a broad power under s 447A of the Act to modify the operation of Pt 5.3A, including s 443A. Orders of the kind now sought have frequently been made where the Court is satisfied that an administrator has entered into a loan agreement or other arrangement to enable a company to trade for the benefit of its creditors: see Secatore, in the matter of Fletcher Jones and Staff Pty Ltd (Administrators Appointed) [2011] FCA 1493 at [23] and the cases there cited.

17    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, Gilmour J discussed the relevant principles at [30] (citations omitted):

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.

(b)    typically the arrangements proposed are to enable the company’s business to continue to trade for the benefit of the company’s creditors.

(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.

(d)    notice has been given to those who may be affected by the order.

18    I am satisfied that the relief sought by the first plaintiffs should be granted. The funding arrangement is plainly in the interests of creditors and consistent with the objectives of Pt 5.3A of the Act. The simple fact is that the provision of funding under the arrangement will only proceed if the relief sought is granted. It is not to be expected that the first plaintiffs, as administrators, should be expected to expose themselves to substantial personal liabilities in circumstances such as the present: In the matter of Renex Holdings (Dandenong) 1 Pty Ltd (administrators appointed) [2015] NSWSC 2003 at [13]. Further, there is no significant prejudice or disadvantage to creditors that is likely to arise from entry into the funding arrangement. Westpac has agreed to the limited recourse provision. Further, it has been notified of the present application and has stated, through its solicitors, that it has no objection to the application. Westpac will, of course, retain its security for the money to be borrowed under the funding arrangement. So far as the unsecured creditors are concerned, the evidence before me is that they are likely to be better off (and unlikely to be disadvantaged) by the Group business continuing to operate so as to preserve its value.

19    It has not been possible, given the urgent need for funding, to notify all creditors of the making of this application. I note, in this connection, that the first meeting of creditors is not scheduled to take place until on or about 5 October 2016. However, in light of the urgency of the application and the evidence before me, I do not think that this stands as a substantial reason either to refuse or to delay the granting of relief. I will grant liberty to apply to any party affected by the orders to move to modify or discharge them.

20    There is evidence before me that the first plaintiffs have given notice to the Australian Securities and Investments Commission (ASIC) of the making of this application. At the time of hearing the application, they had not received any substantive response from ASIC. Once again, in light of the urgency of the application and the evidence before me, I do not think that this stands as a substantial reason either to refuse or to delay the granting of relief.

Disposition

21    Orders, substantially as sought, will be made.

Associate:

Dated:    30 September 2016

SCHEDULE OF PARTIES