Federal Court of Australia

In the matter of Oventus Medical Limited (Administrators Appointed) [2022] FCA 840

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 439A(6) of the Corporations Act 2001 (Cth) (the Act), the convening period defined in s 439A(5)(b) of the Act in respect of each of the Second to Fourth Applicants (the Companies) be extended to 12 January 2023.

2.    Pursuant to s 447A(1) of the Act, Part 5.3A of the Act is to operate in relation to each of the Companies such that the meetings of creditors required by s 439A(1) of the Act may be held at any time during, or within five business days after the end of, the convening period as extended by Order 1 above, notwithstanding s 439A(2) of the Act.

3.    The Administrators (or their solicitors) inform the creditors of the Companies of these orders by means of a circular forwarded by post or email (as the case may be) within seven days after the making of these orders.

4.    Any person who can demonstrate sufficient interest to vary or discharge Order 1 or Order 2 above has liberty to apply on not less than 72 hours’ notice to the Administrators.

5.    Pursuant to section 37AF of the Federal Court of Australia Act 1976 (Cth), on the grounds that it is necessary to prevent prejudice to the proper administration of justice, the final sentence of paragraph 48 of the affidavit of Michael Gerrard McCann sworn 4 July 2022 not be disclosed to any person until the conclusion of the administration of the Companies.

6.    The Administrators’ costs of and incidental to this application be costs and expenses in the administration of the Companies and be paid out of the property of the Companies.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    This application has been brought by the administrators of three related companies, Oventus Medical Limited (Administrators Appointed) (OML), Oventus CRM Pty Ltd (Administrators Appointed) (OCRM) and Oventus Manufacturing Pty Ltd (Administrators Appointed) (OM). In these reasons those companies are collectively referred to as “the companies”. The administrators, Mr Michael McCann and Mr Graham Killer, seek an extension of the convening periods, thereby extending the time for the calling of a second meeting of creditors in respect of each of the companies under s 439A of the Corporations Act 2001 (Cth) (the Act). They also seek ancillary orders under s 447A(1) of the Act.

2    The purpose of the extension is to allow the main company of the group, OML, the opportunity to recapitalise by the issuing of new equity to the existing shareholders and, perhaps, others even though this may take some considerable time. The administrators are of the opinion that, in the somewhat unique circumstances of the present matter, there are reasonable grounds for believing that the recapitalisation will be successful with the result that the debts of all existing creditors will be fully paid.

Background

3    Messrs McCann and Killer were appointed as joint and several administrators of each of the companies on 14 June 2022 and the first meeting of creditors in respect of each company was convened on 24 June 2022.

4    In his affidavit of 4 July 2022, Mr McCann sets out the circumstances which led to the administration of the companies and the steps which are presently being undertaken in their administration. There is no need to detail those matters for present purposes.

5    The companies’ businesses involved the design, development and manufacturing of an obstructive, sleep apnoea device called O2Vent Optima. The development and manufacturing process of the O2Vent Optima device is conducted solely by OM as the operating entity of the group of companies. It also holds the intellectual property rights in relation to the device. OCRM exists to hold patient and clinical data which is critical for the further development of the product. OML acts as the treasurer of the group and funds the operations of OM and OCRM through raising capital and making inter-entity loans.

6    As a general observation, it is clear the companies are presently in the development stage of the commercialisation of the O2Vent Optima device, and this underscores the somewhat unique nature of the present application. Due to the specialised nature of the technology associated with the O2Vent Optima device, the companies have been heavily reliant on funds raised from intermittent capital raisings by investors. Over the past six years OML has obtained over $57 million from investors through significant capital raisings to fund the development of the O2Vent Optima device and associated intellectual property. At the time of the administrators’ appointment, OML had not undertaken or arranged to undertake a capital raising since approximately June 2021.

7    The administrators’ initial investigations have ascertained that the companies’ liabilities are around slightly less than $1 million, owed to around 100 unsecured external creditors including unpaid employee entitlements of approximately $385,000. The unsecured creditors of the companies have debts amounting to approximately $400,000.

8    There exists five companies which hold security interests over the companies’ assets, although Mr McCann’s evidence suggests that there is unlikely to be any amounts owed to any of those secured creditors.

9    The assets of the companies include cash at bank, fixed assets, inventory, and registered ownership of numerous trademarks and patents. However, the administrators have not yet fully ascertained the companies’ financial position and, in particular, the value of its assets. In that respect, Mr McCann deposed in paragraph 35 of his affidavit that:

… my present expectation is that much of the company’s value will be derived from the Patents, the Trademarks, intellectual property and know-how associated with the development and manufacturing of the O2Vent Optima devices and the customer base, as well as the corporate and technical knowledge and knowhow of certain key employees.

10    It is most likely that the valuation of the intellectual property rights would be difficult in the present circumstances, and the administrators cannot be criticised for the present lack of information as to the value of the companies’ assets. Nevertheless, as a general observation it might be said that the companies, as a whole, appear to be asset rich as a consequence of the research and development which they have undertaken, but are cashflow poor and will likely be until the O2Vent Optima device is more fully commercialised.

11    In accordance with their obligations, since their appointment the administrators have conducted investigations into the potential avenues that may be taken to produce the best outcomes for the companies.

12    In his affidavit of 4 July 2022, Mr McCann outlined what he believed to be the three main options available in the administration and the reasons why an extension of the convening periods will be beneficial for the purposes of the administrations. Those options are:

(a)    the commencement of a campaign to recapitalise OML;

(b)    the sale of the businesses of the companies as a going concern; or

(c)    the sale of each of the companies’ individual assets, which would likely result in the companies’ winding up.

13    Mr McCann has deposed that, in his view, the recapitalisation of the companies is likely to produce the best outcomes and that it is the investigation and potential pursuit of that option which is the major reason for the administrators’ application for the extension of time. However, he has added that, even if either of the second or third options were taken, such processes would require further time due to the unique nature of the companies’ businesses. There is no reason to doubt Mr McCann’s views expressed in his affidavits.

14    The circumstances of these administrations are somewhat unusual although that is not to say that there is any difficulty in dealing with them by the application of the now well-accepted principles.

Power to extend the convening period

15    The power to extend the convening period arises under s 439A of the Act.

439A Administrator to convene meeting and inform creditors

(1)    The administrator of a company under administration must convene a meeting of the company’s creditors within the convening period as fixed by subsection (5) or extended under subsection (6).

(2)     The meeting must be held within 5 business days before, or within 5 business days after, the end of the convening period.

…

(5)     The convening period is:

(a)    if the day after the administration begins is in December, or is less than 25 business days before Good Friday—the period of 25 business days beginning on:

(i)    that day; or

(ii)    if that day is not a business day—the next business day; or

(b)    otherwise—the period of 20 business days beginning on:

(i)    the day after the administration begins; or

(ii)    if that day is not a business day—the next business day.

(6)    The Court may extend the convening period on an application made during or after the period referred to in paragraph (5)(a) or (b), as the case requires.

(7)    If an application is made under subsection (6) after the period referred to in paragraph (5)(a) or (b), as the case may be, the Court may only extend the convening period if the Court is satisfied that it would be in the best interests of the creditors if the convening period were extended in accordance with the application.

(8)    If an application is made under subsection (6) after the period referred to in paragraph (5)(a) or (b), as the case may be, then, in making an order about the costs of the application, the Court must have regard to:

(a)    the fact that the application was made after that period; and

(b)    any other conduct engaged in by the administrator; and

(c)    any other relevant matters.

16    It is well known that the Act requires an administrator to convene a second meeting of creditors within the period fixed by s 439A(5), unless extended under s 439A(6). As such, the second meeting of creditors must be held within five business days before or after the end of the convening period.

17    Pursuant to s 439A(6) of the Act, the Court is empowered to extend the convening period under s 439A on the making of an application during or after the convening period.

18    In this case, the application has been made within the convening period.

19    The principles and authorities governing applications of this nature were set out at length by Middleton J in Strawbridge, in the matter of Virgin Australia Holdings Limited (administrators appointed) (No 2) [2020] FCA 717 (Strawbridge) at [64] – [68]:

[64]     The circumstances in which the Court will extend a convening period are well established. In making such an order, the Court must reach an appropriate balance between an expectation that the administration will be relatively speedy and summary, and the countervailing factor that undue speed should not be allowed to prejudice sensible and constructive actions directed to maximising a return for creditors: Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611 (Young J); Re Diamond Press Australia Pty Ltd [2001] NSWSC 313 at [10] (Barrett J).

[65]     The approach to be adopted was recently set out by Thawley J in Farnsworth v About Life Pty Limited (Administrator Appointed), in the matter of About Life Pty Ltd [2019] FCA 11 at [3]-[8], where his Honour endorsed the comments of Austin J in In the matter of Riviera Group Pty Ltd (admins apptd) (recrs & mgrs. apptd) [2009] NSWSC 585 (‘Re Riviera’) at [13] as to the categories of cases in which an extension is granted including, relevantly:

(1) where the size and scope of the business in administration is substantial;

(2) where the extension will allow sale of the business as a going concern;

(3) more generally, where additional time is likely to enhance the return for unsecured creditors

    (citations omitted)

[66]     An extension of the administration period to facilitate either (or both) of: (a) the sale of the business of the company as a going concern, so as to maximise the value of the company’s assets; or (b) the progression and assessment of a DOCA proposal that may provide a better return to creditors than a winding up, are well-recognised examples of situations where the Court has extended the convening period.

    (citations omitted)

[67]     In Mighty River International Ltd v Hughts (as deed administrators of Mesa Minerals Ltd) (2018) 359 ALR 181 at 201-202, [73], Nettle and Gordon JJ (in dissent, but not relevantly in this respect) referred to a number of cases including Re Riviera and concluded:

… Generally speaking, courts have been disposed to grant substantial extensions in cases where the administration has been complicated by, for example, the size and scope of the business, substantial offshore activities, large numbers of employees with complex entitlements, complex corporate structures and intercompany loans, and complex recovery proceedings, and, more generally, where the additional time is likely to enhance the return to unsecured creditors. Provided the evidentiary case for extension has been properly prepared, there has been no evidence of material prejudice to those affected by the moratorium imposed by the administration, and the administrator’s estimate of time has had a reasonable basis, the courts have tended to grant extensions for the periods sought by administrators. …

[68]     Finally, the administrator’s own opinion as to the need for an extension will be given weight in an application of this kind: Owen and Others in their capacity as joint and several administrators of Rivercity Motorway Pty Ltd (ACN 116 665 304) (admins apptd) (recs and mgrs. apptd)) v Madden (No 4) (2012) 92 ACSR 255 at [26] (Logan J); In the matter of Belmont Sportmans Club Co-Operative Limited (Administrators Appointed) [2015] NSWSC 543 at [9] (Black J); Jahani, in the matter of Northern Energy Corporation Ltd (Administrators Appointed) (No 2) [2019] FCA 382 at [67] (Farrell J); Bumbak (Administrator), in the matter of Duro Felguera Australia Pty Limited (Administrators Appointed) [2020] FCA 422 at [32] (Gleeson J).

20    Further, as observed by Austin J in In the matter of Riviera Group Pty Ltd (admins apptd) (rcrs & mgrs apptd) [2009] NSWSC 585, when one of the matters or outcomes identified in Strawbridge at [65] is established, and even more so when the facts fit into multiple categories, an extension will generally be granted to the convening period, provided the Court can be satisfied that there will be no material prejudice to those affected by the administration and the Court is satisfied that the administrators’ estimate of time has a reasonable basis.

Application of the principles to this case

21    The slightly unique circumstances of the present case have resulted in the administrators seeking an extension of the convening periods for six months in order to recapitalise the group of companies. In the ordinary course, extensions of time for the orderly sale of a company or its business are regularly granted. Although the sale process might take some time, its scope is generally capable of delineation and the steps involved are identifiable. On the other hand, the recapitalisation of corporate entities involves a number of additional significant variables, including the appetite of the necessary cumulative number of investors to be willing to participate in equity raising.

22    Here, Mr McCann has expressed his professional view that to simply sell the assets of the companies can be immediately discounted as an option. The companies effectively act as a group and their assets, knowhow and value are intimately intertwined. It was submitted that the sale of the individual businesses of the companies must necessarily result in a much lower return than if the businesses were sold together. This should be accepted in the light of the evidence that the companies effectively operate as an integrated business, with one singular focus on developing the O2Vent Optima medical devices. Whilst OM has control of the development and manufacture of the O2Vent Optima device, any further development is dependent upon the assets of OCRM which holds the patient and clinical data critical for the product’s improvement.

23    It can be accepted that it would be inappropriate to sell the companies’ businesses and assets individually, although that does not negate the possibility that the companies or their businesses could be sold together.

24    On the other hand, Mr McCann has deposed that an extension of time to permit recapitalisation of the companies or their sale as a consolidated group will offer benefits such as the following:

(a)    It is likely that existing employees will be retained if the companies are recapitalised or sold. A sale of the companies’ assets would be more likely to lead to the need for the companies or the Federal Government under the Fair Entitlement Guarantee scheme to meet the claims of all employees in a liquidation scenario;

(b)    It is possible that the existing significant tax losses in the companies in the order of $40 million will attract potential buyers or investors who wish to acquire a majority interest in the companies via a share placement or entitlement offer. This may result in an increased sale price or enhanced value in the price of any equity offered for sale. Whilst a potential exists for the recapitalised companies to utilise accumulated tax losses, that may not necessarily be a foregone conclusion; and

(c)    There exists a realistic opportunity to ensure the companies’ intellectual property and clinical data will be retained within the current corporate structure if the recapitalisation can be achieved.

25    On the available evidence it might be accepted that the granting of an extension for the purposes of permitting recapitalisation of the companies affords the best chance of maximising returns to unsecured creditors. Mr McCann deposes in his affidavit that a recapitalisation or sale of the businesses each have reasonable prospects of resulting in the payment of all unsecured creditors, but that the proposed recapitalisation has the beneficial consequence that the current shareholders who have contributed to the development of the O2Vent Optima device will continue to enjoy the potential returns generated by fully recapitalised companies.

26    There is reason to believe that a recapitalisation of the companies is likely to succeed. The affidavits of Mr McCann and also of Ms Emma Cook, the latter being a capital markets partner at Thomson Geer, deposed to conversations with current shareholders of OML which suggest that there are reasonable prospects of success for the recapitalisation of the companies. That view does not appear to be overly optimistic, in that OML has a number of substantial shareholders, and the existing investors have expended substantial capital to date in the development of the O2Vent Optima devices such that they are likely to have an incentive to protect the funds which they have already spent by participating in a rights issue or capital raising. It also appears that the largest shareholders in OML have indicated that they are interested in participating in any future recapitalisation.

27    It is not irrelevant that Mr McCann has already sought to facilitate a successful capital raising. He has issued an ASX Release and advertised in the Australian Financial Review for interested parties to provide expressions of interest for a recapitalisation or purchase of the businesses or assets.

28    It is also apparent that, in the event that a recapitalisation does not succeed, the fact that the extension may allow time for the sale of the business as a going concern is a possible subsidiary reason for why the extension should be granted: In the matter of Riviera Group Pty Ltd (admins apptd) (rcrs & mgrs apptd) [2009] NSWSC 585 at [13]-[14].

29    In his affidavit, Mr McCann deposed that if the convening period is extended, it is not expected the rights of certain stakeholders will be materially affected in any adverse manner. He expressed a view that there would be no prejudice to the companies’ creditors. It is significant that his evidence reveals that, at the first meeting of creditors, none of those creditors whom attended raised any objection to his stated intention to make this application. Mr McCann further deposed that employee entitlements will not be prejudiced by the granting of the extension.

30    With respect to there being any potential prejudice to the landlord of the two tenancies which are leased by OM, Mr McCann deposed that although by extending the convening period the administrators will receive the benefit of the moratoriums imposed on the administration:

(a)    the leases for both tenancies expire on 31 October 2022;

(b)    the landlord for one of those leases has already been advised that the premises are no longer required and that the administrator asserts no rights in respect to that lease; and

(c)    whilst the companies continue to trade, Mr McCann will ensure that the rent in respect of the remaining lease continues to be paid.

31    It follows that there is little likelihood that the landlord would suffer any additional detriment from the extension of the convening period than it would otherwise have suffered as a result of the administration.

The extensions should be granted

32    There is no doubt that this is a somewhat unusual case. Administrations should be of relatively short duration and the sale of companies or their businesses or corporate rearrangements can and should occur with expedition. By acceding to the request for an extension for the purposes of an attempted recapitalisation, the Court is effectively giving its imprimatur to the promotion of a venture by the administrators, with all of the associated risks that entails. A court should pause before taking such a step. On the other hand, it can be accepted that courts should be open to all appropriate mechanisms through which a company or its business may be returned to solvency and normal operation. There is no reason why that should not involve the recapitalisation of the company if the circumstances warrant that course of conduct.

33    Here, the matter is finely balanced. A relatively short extension for the sale of the business or the companies might be seen to weigh the potential benefits to the creditors and the required timeliness of the administrations. On the other hand, the longer extension has the real potential to facilitate an outcome which will see the creditors fully repaid and the shareholders recover some value in their shareholding.

34    Although there are considerations supporting a shorter extension to allow the companies or businesses to be sold, given the potential benefits which may flow from a recapitalisation it is appropriate to grant a longer extension so as to allow that to be attempted. A not insignificant factor in that conclusion is the confidence which the Court has in the administrators and, in particular, Mr McCann. Mr McCann is an insolvency practitioner of some 30 years’ experience. He is well-known to the courts and well-respected. He has a high reputation which has been earned by his honest and diligent work over an extended period. He has been prepared to depose to his professional opinions about the prospects of the recapitalisation succeeding, although he is appropriately cautious in his views. He does not overstate the prospects, and identifies them as being “reasonable”. It should also be noted that there is a “growing number of precedents for extensions in the order of 6 months”: Longley, in the matter of Dixon Advisory & Superannuation Services Pty Ltd (Administrators Appointed) [2022] FCA 471 at [20].

35    Considering the uniqueness and complexity of the companies’ arrangements, the extensions sought sufficiently balances the obligations of maximising the potential return for the creditors and having the administration finalised in a relatively expeditious way. Importantly, in this unusual and unique case, there are sufficient funds in the company to allow the companies to continue as a going concern, albeit with reduced staff and, perhaps, reduced business. That is a not insignificant factor.

36    Further, Mr McCann has deposed that he will convene a second meeting earlier than the extended date if he is able to do so. That said, the affidavit of Ms Cook outlines the regulatory process involved in a recapitalisation and deposes that a recapitalisation process might take 18 weeks.

37    Given the foregoing and the fact that it has been established that the proposed extension of the convening periods will not materially prejudice any creditors, employees or other stakeholders, and that the extension will provide administrators with the best opportunity to maximise returns to creditors and shareholders, the sought extensions should be granted. The convening periods for the second meeting of the creditors of each of the companies are to be extended until 12 January 2023.

38    It is also appropriate to make an ancillary order pursuant to s 447A that Part 5.3 of the Act is to operate in relation to each of the companies and that the meetings of creditors required by s 439 may be held at any time during the extended period, notwithstanding s 439A(2) of the Act. Orders of this nature have been considered “sensible and now almost routine”: Byrnes, in the matter of Murray River Organics Proprietary Limited (Administrators Appointed) [2022] FCA 232 at [33].

39    The administrators have sought and should be entitled to an order that their costs of this application be their costs in the administration.

Associate:    

Dated:    8 July 2022

SCHEDULE OF PARTIES