Federal Court of Australia

Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 90-15 of Part 3 of Division 90 of Schedule 2 to the Corporations Act 2001 (Cth), the first plaintiffs (Administrators) would be justified in causing the second plaintiff (Company) to complete the sale of the assets (Assets) of the Company on the terms or substantially the terms of the conditional agreement (Heads of Agreement), a copy of which appears at pages 161 to 163 of the confidential exhibit to the affidavit of Rahul Goyal affirmed on 9 November 2021, marked confidential exhibit RG-01, in circumstances where:

(a)    the Administrators have not publicly advertised the Assets for sale;

(b)    the period in which the Assets have been offered for sale has been limited;

(c)    the purchaser of the Assets is a company owned and controlled by two of the directors of the Company;

(d)    the Administrators have not put the sale of the Assets to the Company’s creditors for a vote; and

(e)    the transaction contemplated by the Heads of Agreement is not proposed as part of a deed of company arrangement.

2.    Subject to the order sought in paragraph 3 below, orders, pursuant to sections 37AF(1)(b), 37AG(1)(a), and 37AJ of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, that the following documents (Documents) are to be marked “confidential” on the electronic Court file and are not to be published or accessed, except pursuant to an order of the Court, until such time as the sale of the Assets, pursuant to the Heads of Agreement, is completed:

(a)    the confidential affidavit of Rahul Goyal affirmed on 9 November 2021;

(b)    confidential exhibit RG-01 to the confidential affidavit of Rahul Goyal affirmed on 9 November 2021; and

(c)    the Administrators’ outline of submissions dated and filed on 10 November 2021.

3.    The order in paragraph 2 above, does not prevent the Administrators, their legal representatives and/or their servants, agents or employees, from disclosing, publishing, or accessing the Documents and the information contained therein.

4.    The Administrators’ costs of and incidental to the originating process filed on 10 November 2021 be costs in the administration of the Company.

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, who are the joint and several administrators of the second plaintiff, Cape Technologies Pty Ltd (administrators appointed) (respectively, the administrators and the company) seek an order, pursuant to s 90–15 of Sch 2 (the Insolvency Practice Schedule (Corporations)) to the Corporations Act 2001 (Cth) (the Act) that they would be justified in causing the company to complete the sale of the assets of the company on the terms, or substantially on the terms, of a conditional agreement into which the administrators have entered on behalf of the company.

2    The administrators were appointed by an instrument of appointment dated 18 October 2021. They were subsequently given a revised instrument of appointment dated 25 October 2021. The circumstances in which the revised instrument of appointment was given to the administrators are explained in the evidence. However, the significance and effect of the revised instrument of appointment is something of a mystery. Even so, nothing in the present application turns on that matter. It is not suggested that the administrators were not validly appointed.

3    The present application has come before me urgently because the agreement to which I have referred is conditional on the court granting the relief now sought. Delay in completion of the transaction will likely have a negative impact on the possible return to creditors and on the costs of the administration generally.

4    The present application is supported by an affidavit made by one of the administrators, Rahul Goyal, affirmed on 9 November 2021. This affidavit makes reference to a large number of documents referred to in the affidavit as Confidential Exhibit RG–1.

5    As part of the present application, the administrators seek orders under s 37AF of the Federal Court of Australia Act 1976 (Cth) that Mr Goyal’s affidavit, Confidential Exhibit RG–1, and the plaintiffs’ written submissions filed in support, not be published or accessed, except pursuant to an order of the Court, until the administration and/or winding up of the company has been finalised. This order has been sought on the basis that it is necessary to prevent prejudice to the proper administration of justice. As discussed during the hearing, I consider that proposed order to be too wide, certainly as to the length of the restraint that is sought.

Background facts

6    The company was established to develop a new financial operating system targeted at small and medium-sized businesses in Australia. It is planned that this system will include a cash management platform tied to prepaid cards and credit cards with integrations made to major Cloud accounting software to automate financial administrative tasks. While a number of its components have been developed, the development of the system is a work in progress. The company does not have any sources of revenue or funding.

7    The evidence discloses that, as at 25 October 2021, the company’s assets included tangible assets (comprising cash at bank) and intangible assets (comprising work-in-progress associated with the development of the financial operating system, including the underlying code, and rights, undertakings, and licenses owned or used by the company in carrying out its activities).

8    The company previously commissioned a valuation report of its market value as at 30 June 2021. The valuation was made on certain assumptions, including that the company’s business will continue as a going concern. Mr Goyal has reviewed the valuation and is not satisfied that it holds true in the current circumstances where the company has been placed into administration; it does not have any source of funding to commercialise its underlying product; and the ability of the company to continue as a going concern is in peril. In Mr Goyal’s opinion, the administrators will not be able to realise any material returns from the sale of the company’s assets, in the absence of other funding to provide for the ongoing operations of the business pending a brief sales campaign, or the purchase of the business immediately. In this connection, I note that the ongoing monthly operating costs of the company are in the vicinity of $150,000 per month.

9    The evidence is that, in the absence of any sources of revenue or funding, the administrators will have insufficient funds to meet the ongoing operational costs of the company and the costs of the administration, and will be required to cease the company’s operations imminently. This would result in, amongst other things, the termination of the company’s existing employment contracts (and, consequently, the crystallisation of employee entitlements) and the termination of various other contracts, with an estimated value of $523,530. Unless the business of the company is sold on acceptable terms, or funding is forthcoming, the administrators will be required to take immediate steps to realise any remaining value from the company’s assets, which Mr Goyal says would be minimal. Based on the current financial position of the company, Mr Goyal does not consider that the realisable value of the company’s assets would exceed the costs of the administration. There would be no funds available for distribution to creditors, including employees, in the liquidation of the company.

10    Faced with these realities, the administrators have conducted a sale process. As explained in Mr Goyal’s affidavit, this process has proceeded on a truncated timetable due to the financial constraints confronting the administrators in maintaining the company’s business, and the terms for acceptance imposed by the proposed purchaser.

11    In essence, between 26 October 2021 and 1 November 2021, the administrators entered into negotiations with two groups of directors and shareholders of the company. The first group is comprised of all the directors and shareholders of the company except for Mr Idomile Omoniyi. This group’s offers were made through a company (BidCo) owned and controlled by Mr Ryan Edwards-Prichard and Mr James Walker. The second group is comprised of Mr Omoniyi and parties associated with him. The offers received from BidCo were significantly superior to the offer received from Mr Omoniyi, for reasons explained in Mr Goyal’s affidavit. On 30 October 2021, Mr Goyal informed Mr Omoniyi that the offer from his group was much lower than the competing offers received by the administrators. Mr Goyal invited Mr Omoniyi to put forward his best and final offer by 31 October 2021. Mr Omoniyi informed Mr Goyal that he would come back to him on the morning of 1 November 2021, after he had spoken to potential investors to determine if his offer could be increased.

12    The final offer received from BidCo included a sunset date and time for acceptance, being 9.00 am on 1 November 2021. The administrators sought an extension of time until 2.00 pm on 1 November 2021, in the hope that they might receive a revised offer from Mr Omoniyi’s group. BidCo would only grant an extension until 12.00 pm on 1 November 2021. As at 11.40 am on 1 November 2021 a revised offer from Mr Omoniyi’s group had not been received. Shortly thereafter, the administrators signed Heads of Agreement with BidCo.

13    Later that day, at 4.00 pm, the administrators attended a conference call with Mr Omoniyi and his solicitor. The primary purpose of the conference call was unrelated to an offer to purchase the company’s business or any part of it. During the call, Mr Omoniyi confirmed that he would not be making a revised bid to purchase the business. At that time, the administrators did not inform Mr Omoniyi that they had already signed Heads of Agreement with BidCo. Later the same day, Mr Goyal received a text message from Mr Omoniyi stating that he had raised the sale of the business with two investors he knew. Mr Omoniyi asked whether an offer of a stated sum of money to purchase the business would be sufficient. Mr Goyal did not respond to that message.

14    On 2 November 2021, Mr Goyal received a call from Mr Omoniyi. During that call, Mr Goyal informed Mr Omoniyi that the administrators had accepted a competing bid. Mr Omoniyi enquired whether the administrators could accept an offer from him if he were to make a further bid. Mr Goyal explained that there was no real value in making a bid, given that the administrators had signed the Heads of Agreement and that they had previously informed Mr Omoniyi that they had required any revised offer from him by the morning of 1 November 2021.

15    The first meeting of creditors was held on 4 November 2021. At that meeting, the creditors in attendance were informed that, given the limited cash available to them, the administrators were not able to conduct a traditional sale process, but they had provided the opportunity to all shareholders and directors to submit a bid to acquire the assets or business of the company. The creditors were informed that the two confidential offers had been received and that, after assessing the offers, the administrators determined one to be superior, and had accepted it. They were also informed that the company’s business is now being financially supported by the successful bidder while sale documents are prepared and the present application is heard and determined by the Court. The creditors were informed that, in the administrators’ view, the present application to the Court was necessary because of the unique circumstances facing the company at the date of their appointment, the fact that the successful bidder is a related party of the company, and a traditional sale process has not been conducted.

16    The second meeting of creditors must be held by 29 November 2021.

17    The evidence before me is that the administrators have given notice, by email communications, of the hearing of the present application to the directors, shareholders, and creditors identified in the originating process. Two email communications were the subject of non-delivery notifications. The originating process has also been published on the KordaMentha website, identifying the date and time of the hearing of the present application. No person has come forward to oppose the making of the orders that are sought.

Consideration

18    The principles to be applied on the present application are helpfully summarised in the plaintiffs’ written submissions. I do not propose to survey those principles in any detail in these reasons. They are not controversial.

19    There is no doubt that the power under s 90-15 of the Insolvency Practice Schedule (Corporations) extends to the giving of judicial advice and direction. However, this power is not appropriately exercised where the Court is being asked to do no more than sanction the making and implementation of a business or commercial decision in respect of which no particular legal issue is raised or in respect of which there is no potential to bring into question the propriety or reasonableness of the decision. As explained by Goldberg J in In the matter of Ansett Australia Ltd and Korda (No 3) [2002] FCA 90; 115 FCR 409 at [65] – [66] in relation to the former s 447D(1) of the Act (which conferred the power to give directions):

65     … the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought.  There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision.  It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.  It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance.  There must be some issue which arises in relation to the decision.  A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease.  There must be an issue calling for the exercise of legal judgment.

66      The administrators may be correct in their submission that there is no rule of law and no fixed principle that a consideration of commercial issues is precluded, as the jurisdiction of the Court to give directions under provisions such as s 447D and s 479(3) of the Act is discretionary.  The exercise of that discretion will vary depending upon the nature and novelty of the matters and issues which are brought before the Court.  From time to time, the Court is necessarily drawn into a consideration of commercial issues where there is a matter giving rise not only to the need to make a business or commercial decision, but also to issues of propriety, power, reasonableness of conduct, contested issues of legal principle or procedure or challenges to the decision made by the liquidator or administrator.  Such a situation arose, for example in Re Codisco Pty Ltd (supra), Sanderson v Classic Car Insurances Pty Ltd (supra) and Re Addstone Pty Ltd (in liq) (supra).  Nevertheless, there is the well-established principle to which I have referred, namely that a court will not give directions approving of a commercial or business decision made by a liquidator or administrator where the decision is within the power of the liquidator or administrator, and there is no challenge to it or other issue arising in relation to it such as propriety or reasonableness, or calling for the exercise of legal judgment. 

20    Speaking more recently, Farrell J summarised the Court’s approach in the following terms in Hill, in the matter of Autocare Services Pty Ltd (administrators appointed) [2021] FCA 167 at [42] – [44]:

42        Section 90-15(3)(a) confers a broad power on the Court to make “an order determining any question arising in the external administration of the company”. Where judicial advice is sought in the context of an administration, the only statutory constraint on the exercise of that power is the need to consider whether or not the provision of that advice advances the objects of Part 5.3A set out in s 435A of the Corporations Act and is not inconsistent with the objects of the IPSC set out in s 1-1(2) with respect to administrations.

43        Courts commonly take some guidance from principles applied to the provision of judicial advice under previous regimes. It is uncontroversial that powers of this kind are intended to facilitate the performance of an external administrator’s functions and should be interpreted widely to give effect to that intention where it is advantageous to the administration, but Courts will generally be reluctant to give directions concerning the making or implementation of a business or commercial decision: see In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 (Black J) at [9]. Further, the protection afforded by such an order must be predicated on the external administrator having made full and fair disclosure of all relevant facts and circumstances to the Court: see Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [44] (Goldberg J).

44        Some care should be taken with the application of principles derived from the statutory predecessors of ss 90-15(1) and (3)(a) to ensure that the power conferred by those provisions is not constrained by limitations imposed by no longer enacted requirements. As noted by Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481; (2018) 125 ACSR 355 at [8], unlike the now repealed ss 479(3) and 511 of the Corporations Act, s 90-15(3)(a) accommodates the determination of substantive rights, provided appropriate notice has been afforded to potentially affected parties. Having said that, as I remarked in GDK Projects Pty Ltd, in the matter of Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541 at [33]: “despite the breadth of s 90-15(1), it is difficult to envisage circumstances where the power would be exercised if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration”.

21    The exercise of a power of sale necessarily involves a “business and commercial decision”. However, courts have been prepared to sanction, by direction (such as now sought), an administrator’s exercise of that power where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision: Re Eisa Ltd (administrators appointed) [2000] NSWSC 940; (2000) 35 ACSR 394; Re Advanced Medical Institute Pty Ltd (administrators appointed) [2011] NSWSC 574; Killer, in the matter of North Coast Wood Panels Pty Ltd (administrators appointed) [2011] FCA 776, per Greenwood J at [58]; Re Keystone Group Holdings Pty Ltd (administrators appointed) [2016] NSWSC 1604, per Black J at [6] to [7]; and Reidy, in the matter of eChoice Ltd (administrators appointed) [2017] FCA 1582. Such is the present case.

22    The administrators have applied to the Court because they are concerned that the sale of the business has occurred in circumstances where: (a) they have not publicly advertised the business for sale; (b) the period in which the business has been offered for sale has been limited; (c) BidCo is a company owned and controlled by two directors of the company; (d) the company’s creditors have not had the opportunity to vote on the sale of the business; and (e) the sale of the business is not proposed as part of a deed of company arrangement. They have thus exercised their power of sale in “unusual circumstances”, and those circumstances might raise issues about the “reasonableness and propriety” of that sale. This is particularly so where it appears that there are, and remain, matters in dispute between Mr Omoniyi, on the one hand, and the other directors of the company, on the other, as to the conduct of the company’s affairs.

23    In addressing the circumstances of the sale, the administrators submit that, in order to preserve the value of the business, they would have had to continue its operation until the business was marketed and sold. However, the company does not have the cash available for that to occur. They concluded that, unless the business was sold very quickly, its value would be completely lost and the company’s creditors would receive nothing.

24    Thus, it was not possible for the administrators to conduct a sale of the business in the usual way; there were no cash resources to fund the usual advertising and marketing campaign, and they simply did not have the time to conduct such a campaign because of their inability to fund the continued operation of the business.

25    Although the administrators would have preferred to negotiate with arms-length purchasers, this was also not possible. In the unusual circumstances that confronted them, the administrators decided that the best—in fact, the only reasonable—course available to them was to try to sell the business to the company’s directors and shareholders because those parties were best placed to appreciate and understand the value of the business, and they were necessary stakeholders for the business’ continued operation.

26    Moreover, because BidCo’s offer would expire at 12.00 pm on 1 November 2021, the administrators did not have the luxury of making “no decision”.

27    The sale of the business to BidCo necessarily precludes the potential for a deed of company arrangement. The administrators submit that this is, perhaps, of little significance because, consistent with the other objectives set out in s 435A of the Corporations Act, the sale of the business to BidCo maximises the chances of the business continuing in existence, albeit in the hands of BidCo, and otherwise results in a better return to creditors than an immediate winding up of the company. I agree.

28    Section 437A(1)(c) of the Act confers power on the administrators to sell the company’s business. The administrators exercised their commercial judgment in that regard and have sold the business to BidCo in the circumstances described above. Through Mr Goyal’s affidavit, the administrators have explained the commercial rationale for accepting BidCo’s offer. By their present application, the administrators are not asking the Court to approve or sanction their exercise of judgment for accepting that particular offer. Rather, they are seeking the Court’s direction as to the appropriateness of completing the sale, to which they have already agreed, where, in other circumstances, the sale process would have occurred differently. In other words, they seek the Court’s protection for conducting the sale process in the way they have.

29    Having regard to the explanation provided, and to Mr Goyal’s affidavit, I am satisfied that the decision taken by the administrators to sell the business at the present time, and the steps taken by them in relation to the sale process, in the difficult circumstances confronting them, was reasonable and justified, and that it is appropriate to make the order they seek under s 90-15 of the Insolvency Practice Schedule (Corporations).

30    As to the making of orders under s 37AF of the Federal Court of Australia Act 1976 (Cth), I am prepared to make the orders that the administrators seek, provided they are limited in time to the completion of the sale to BidCo. I see no justification for the orders beyond that time. The administrators have agreed to this limitation.

Associate:

Dated:    11 November 2021