Federal Court of Australia

Park (Administrator), in the matter of Ellume Limited (Administrators Appointed) v Evangayle Pty Ltd (Trustee) [2022] FCA 1102

ORDERS

THE COURT ORDERS THAT:

1.    The time for the hearing of this application is abridged.

2.    Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) (being Schedule 2 to the Corporations Act 2001 (Cth) (the Act)), the First Applicants are justified in, and would otherwise be acting reasonably, in:

(a)    entering into, and performing, the funding agreement dated 8 September 2022 (being Annexure “JRP-4” to the affidavit of John Richard Park sworn on 9 September 2022) (Funding Agreement); and

(b)    drawing down funds pursuant to the Funding Agreement.

3.    Pursuant to section 447A of the Act:

(a)    the liabilities of the First Applicants, in their capacity as the joint and several voluntary administrators of the Second Applicant, pursuant to the terms of the Funding Agreement be limited in the manner provided for by the Funding Agreement; and

(b)    the operation of section 443A(2) of the Act is modified, insofar as it applies to the liability of the First Applicants, in their capacity as the joint and several voluntary administrators of the Second Applicant, so as to permit the liability of the First Applicants to be limited in the manner provided for in the Funding Agreement;

(c)    the operation of section 443A(1) of the Act is modified, insofar as it applies to the liability of the First Applicants, in their capacity as the voluntary administrators of the Second Applicant, so that if:

(1)    the property and assets of the Second Applicant are insufficient to satisfy any debts or liabilities incurred by the First Applicants arising out of, or in connection with, the Funding Agreement (including the repayment of the money borrowed, interest thereon and borrowing costs); or

(2)    the indemnity in favour of the First Applicants pursuant to section 443D of the Act is otherwise insufficient to meet any amount for which the First Applicants may be liable arising out of, or in connection with, the Funding Agreement (including the repayment of the money borrowed, interest thereon and borrowing costs),

the First Applicants will not be personally liable under sections 443A(1)(d) to (f) of the Act or otherwise to repay such debts or to satisfy such liabilities to the extent of that insufficiency.

4.    Pursuant to section 588FM of the Act, in respect of any security interests created or granted by the Funding Agreement or the General Security Deed dated 13 September 2022 (an unexecuted copy of which is at Annexure JRP-07 to the Affidavit of John Richard Park sworn 13 September 2022 (GSD)), the registration time is, for the purposes of section 588FL(2)(b)(iv) of the Act, 12 October 2022 (being the day that is the end of 20 business days after the date of the GSD).

5.    The First Applicants, within seven days of the making of these orders, are to take all reasonable steps to give notice of these orders to:

(a)    the Australian Securities and Investments Commission; and

(b)    the creditors of the Second Applicant (including any persons claiming to be creditors of the Second Applicant),

by means of a circular,

(c)    to be sent by email to those creditors, or persons claiming to be creditors, for whom the first applicants have an email address; and

(d)    to be sent by ordinary post to those creditors, or persons claiming to be creditors, for whom the First Applicants do not have an email address.

6.    Any person who can demonstrate a sufficient interest to vary or discharge order 2, order 3 or order 4 above (including any creditor of the Second Applicant) has liberty to apply to the Court on three business days’ written notice to the Applicants.

7.    Liberty to the Applicants to apply.

8.    The Applicants’ costs of and incidental to the application be costs in the administration of the Second Applicant and be paid out of the assets of the Second Applicant.

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

REASONS FOR JUDGMENT

DOWNES J:

Introduction

1    This was an urgent application brought by Mr John Park and Ms Joanne Dunn who are the administrators of Ellume Limited (Company) by which they sought the following orders:

(1)    Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) (being Schedule 2 to the Corporations Act 2001 (Cth) (Act)), the administrators are justified in, and would otherwise be acting reasonably, in:

(a)    entering into, and performing, the funding agreement dated 8 September 2022 (being Annexure “JRP-4” to the affidavit of Mr John Richard Park sworn on 9 September 2022) (Funding Agreement); and

(b)    drawing down funds pursuant to the Funding Agreement.

(2)    Pursuant to section 447A of the Act:

(a)    the liabilities of the administrators, in their capacity as the joint and several voluntary administrators of the Company, pursuant to the terms of the Funding Agreement be limited in the manner provided for by the Funding Agreement; and

(b)    the operation of section 443A(2) of the Act is modified, insofar as it applies to the liability of the administrators, in their capacity as the joint and several voluntary administrators of the Company, so as to permit the liability of the administrators to be limited in the manner provided for in the Funding Agreement;

(c)    the operation of section 443A(1) of the Act is modified, insofar as it applies to the liability of the administrators, in their capacity as the voluntary administrators of the Company, so that if:

(i)    the property and assets of the Company are insufficient to satisfy any debts or liabilities incurred by the administrators arising out of, or in connection with, the Funding Agreement (including the repayment of the money borrowed, interest thereon and borrowing costs); or

(ii)    the indemnity in favour of the administrators pursuant to section 443D of the Act is otherwise insufficient to meet any amount for which the administrators may be liable arising out of, or in connection with, the Funding Agreement (including the repayment of the money borrowed, interest thereon and borrowing costs),

the administrators will not be personally liable under sections 443A(1)(d) to (f) of the Act or otherwise to repay such debts or to satisfy such liabilities to the extent of that insufficiency.

(3)    Pursuant to section 588FM of the Act, in respect of any security interests created or granted by the Funding Agreement or the General Security Deed dated 13 September 2022 (an unexecuted copy of which is at Annexure JRP-07 to the Affidavit of John Richard Park sworn 13 September 2022), the registration time is, for the purposes of section 588FL(2)(b)(iv) of the Act, 12 October 2022 (being the day that is the end of 20 business days after the date of the General Security Deed).

(4)    The administrators, within seven days of the making of these orders, are to take all reasonable steps to give notice of these orders to:

(a)    the Australian Securities and Investments Commission; and

(b)    the creditors of the Company (including any persons claiming to be creditors of the Company),

by means of a circular,

(c)    to be sent by email to those creditors, or persons claiming to be creditors, for whom the first applicants have an email address; and

(d)    to be sent by ordinary post to those creditors, or persons claiming to be creditors, for whom the administrators do not have an email address.

(5)    Any person who can demonstrate a sufficient interest to vary or discharge order 2, order 3 or order 4 above (including any creditor of the Company) has liberty to apply to the Court on three business days’ written notice to the administrators.

(6)    Liberty to the Applicants to apply.

(7)    The Applicants’ costs of and incidental to the application be costs in the administration of the Company and be paid out of the assets of the Company.

2    The applicants relied upon the following affidavits:

(1)    affidavit of Mr John Richard Park filed on 12 September 2022 (Park 1);

(2)    affidavit of Ms Estelle Sah filed on 12 September 2022;

(3)    affidavit of Mr John Richard Park filed on 13 September 2022 (Park 2).

3    The application was heard at 9.30am on 13 September 2022. Following submissions by Mr Betros, who appeared for the applicants, and Mr Ananian-Cooper, counsel for the respondents, orders were made at the conclusion of the hearing following the execution of the General Security Deed. I indicated during that hearing that reasons would be provided at a later date. These are my reasons for making the orders sought.

4    The directors of the Company were informed of the hearing of the application at approximately 4.49 pm on Friday 9 September 2022, and were provided with unsealed versions of the application, Park 1 and a draft order. A representative of the Fair Entitlements Guarantee branch of the Department of Employment and Workplace Relations, and the Australian Securities and Investments Commission, and the respondents, were also notified at about the same time and were provided with the same documents. Solicitors for the QIAGEN Group and a representative of Pure Asset Management Pty Ltd (two significant creditors of the Company) were also notified and served.

5    On 12 September 2022, the administrators convened the first meeting of creditors and, at that meeting, Mr Park explained that this application was being brought and the circumstances leading to the execution of the Funding Agreement, including that, without the funding to be provided by that agreement, the Australian business would need to be shut down. No objection to the proposed course of action, funding or the application was raised during the course of that meeting and nor was any objection notified to the administrators by the time of the hearing of the application.

6    The matter was called and no person appeared to oppose the orders. The respondents supported the orders.

Relevant background

7    The administrators were appointed on 31 August 2022.

8    The Company has a wholly owned subsidiary, Ellume USA LLC, which is a company incorporated in the United States of America and is not in any form of external administration. The directors of Ellume USA LLC are Dr Sean Parsons and Mr Gary Hewett, who are two of the five directors of the Company. The Company and Ellume USA LLC are managed by their respective boards in a coordinated manner as a corporate group (Group).

9    The Group carries on a business of developing, manufacturing and selling diagnostic tests for infectious diseases. It produces a range of products for retail consumers sold over the counter to the general public for home use (including a COVID-19 rapid antigen test and an influenza test) and a range of products for healthcare professionals.

10    The business is a substantial enterprise which operates two manufacturing facilities (one in Australia and one in the United States).

11    The Company employs 215 employees and Ellume USA LLC employs a further 110 employees.

12    The creditors of the Company are significant in both volume and number. On the information available to them, the administrators believe that the Company owes:

(1)    in excess of $AUD 48 million to more than 380 unsecured “trade creditors”, including employees and lease liabilities;

(2)    the amount of $USD 10,986,528.12 to the QIAGEN Group in respect of unsecured convertible notes (described as QIAGEN Notes) issued on or about 25 August 2020; and

(3)    a total of $AUD 91.8 million to 471 separate noteholders who hold other convertible notes (described as PIPOCN Notes) that were issued during the course of late 2021 and early 2022.

13    At the time of the administrators’ appointment, neither the Company nor Ellume USA LLC had granted any general security interests over their assets. The Company had granted limited security interests (mostly purchase money security interests) over a small class of specific assets.

14    The administrators and the directors of Ellume USA LLC have adopted a strategy of working together to continue to maintain and trade-on the business as a going concern until they are able to achieve a joint sale or recapitalisation.

15    At the commencement of the administration, the balance of the Company’s bank account stood at $AUD 1,551,543.66. Were the administrators to continue to trade the business until the end of the voluntary administration period as it presently stands, being until 2 October 2022, the costs involved in doing so would be in the order of $AUD 3.284 million.

16    The administrators have implemented significant cost saving measures to minimise the trading costs and expenses they will continue to incur. However, even with the benefit of these costs savings, the administrators expect that the convening period for the second meeting of creditors will need to be extended so that, amongst other things:

(1)    a comprehensive and proper marketing campaign can be undertaken;

(2)    the terms of a sale or recapitalisation can be reached with the successful bidder; and

(3)    potentially a deed of company arrangement can be entered into to give effect to the successful bid.

17    Undertaking these proposed steps will maximise the value of the business and in turn produce the greatest possible return for creditors of the Company, a potential return to shareholders and the greatest chance of as many of the employees as possible keeping their jobs. However, this could mean that the administrators must continue to trade-on the business until early to mid-December 2022.

18    Absent funds to continue to trade the business, the administrators will likely cease trading the business as early as Wednesday, 14 September 2022. This would have the consequence that the employment of the vast majority of employees will be terminated and the assets of the Company will be sold and realised on a break-up basis.

19    Faced with this need for immediate funds, the administrators sought interest from unsecured creditors to fund the trade-on and were able to engage in a serious dialogue with two of them – the QIAGEN Group and a PIPOCN noteholder, Dr Evan Jones.

20    The QIAGEN Group decided not to offer funding but Dr Jones was able to form a syndicate of high-net wealth individuals whose family companies (Funder), between them, were prepared to advance a loan of $AUD 3.5 million to the administrators to enable them to continue to trade-on the business pending a sale or recapitalisation. The companies comprising the Funder are the respondents to this application.

21    On 8 September 2022, the administrators entered into the Funding Agreement with the Funder. Relevantly, the Funding Agreement:

(1)    states on its face that the administrators’ personal liability to the Funder is limited to the extent of their indemnity and lien against the assets of the Company; and

(2)    is subject to, and conditional upon, the administrators obtaining the relief they seek by the application.

Consideration

The provision of a direction to an administrator by the Court pursuant to section 90-15

22    Section 90-15(1) of the Insolvency Practice Schedule (Corporations) states:

The Court may make such orders as it thinks fit in relation to the external administration of a company.

23    Where an administrator seeks judicial advice, the only statutory constraint on the exercise of the power is the need to consider whether or not the provision of that advice advances the object of Part 5.3A and is not inconsistent with the object of the Insolvency Practice Schedule (Corporations) set out in 1-1(2). Section 90-15(3)(a) accommodates the determination of substantive rights, provided appropriate notice has been afforded to potentially affected parties: see Hill, in the matter of Autocare Services Pty Ltd (administrators appointed) [2021] FCA 167 (Farrell J) at [42] and [44].

24    As observed by Banks-Smith J in Nipps (Administrator) v Remagen Lend ADA Pty Ltd, in the matter of Adaman Resources Pty Ltd (Administrators Appointed) (No 4) [2021] FCA 644 at [38]:

It is well established that there must be something more than the making of a business or commercial decision before a court will give directions in relation to that decision. It may be a legal issue of substance or procedure or it may be an issue of power, propriety or reasonableness - but some issue of this nature is required to be raised: In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 (Black J) at [9]. 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: Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 at [44] (Goldberg J).

25    There are issues of both propriety and reasonableness raised by the administrators’ decision to enter into the Funding Agreement in this case. In particular, the terms of the Funding Agreement are very favourable to the Funder including an interest rate of 20% per annum.

26    However, the circumstances leading to the entry into the Funding Agreement were such that, had it not been entered, the business would cease to trade almost immediately. This would likely have resulted in the termination of the employment of the vast majority of, or all, employees, a dividend to priority creditors, at best a nominal dividend to general unsecured creditors and no return of monies to shareholders.

27    In the circumstances, I am satisfied that entry into the Funding Agreement is in the creditors’ interest as a whole because it will allow the business to trade-on and enable the administrators to pursue the proposed steps, with obvious benefits to creditors, shareholders and employees. That is because the administrators have determined that the sale or recapitalisation of the business in collaboration with Ellume USA LLC where the business is traded-on throughout as a going concern will, if achieved, result in a very significantly better outcome for creditors, shareholders and employees than the alternative. Indeed, undertaking the proposed steps could potentially see the greatest available return to creditors, a possible return to shareholders and as many of the 325 employees as possible retaining their jobs.

28    For these reasons, I am therefore satisfied that the direction sought by the administrators that they are justified in entering into, and performing, the Funding Agreement advanced the object of Part 5.3A and is not inconsistent with the object of the Insolvency Practice Schedule (Corporations) set out in s 1-1(2).

Relief from liability

29    Section 435A of the Corporations Act sets out the object of Part 5.3A of the Corporations Act, namely, to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a)    maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b)    if that is not possible, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

30    Section 443A of the Corporations Act relevantly provides that an administrator is liable for debts incurred in the performance of their functions and powers as administrator, including for the repayment of borrowed money.

31    In order to avoid the personal liability arising under s 443A of the Corporations Act to enable administrators to borrow funds from the Funder to facilitate trading during the administration period, it has become common to seek orders altering the operation of that section: see Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) (2017) 35 ACLC 17-044; [2017] FCA 1144 at [42] (Markovic J); Birch, in the matter of Geelong Fire Services Pty Ltd (Administrators Appointed) [2022] FCA 963 at [23] (Moshinsky J).

32    In Re Unlockd Ltd (administrators apptd) [2018] VSC 345 at [60]–[64], Sloss J summarised the principles applicable to applications of this type as follows:

60    In the leading case of Secatore, In the matter of Fletcher Jones and Staff Pty Ltd (admins apptd) [2011] FCA 1493 (Secatore), Gordon J stated (at [23]):

Section 447A(1) of the Act empowers the Court, in an appropriate case, to modify the operation of s 443A to exclude personal liability on the part of a voluntary administrator, and to provide that a loan taken by the company via the voluntary administrator is repayable on a limited recourse basis. Orders in similar terms have frequently been made in circumstances where the Court is satisfied that an administrator has entered into a loan agreement or other arrangement to enable the company’s business to continue to trade for the benefit of the company’s creditors: see, for example, Re Ansett Australia Ltd (No 1) at [49]; Re Spyglass Management Group Pty Ltd (admin apptd); Mentha (as joint and several admins of Spyglass Management Group Pty Ltd (admin apptd)) (2004) 51 ACSR 432 at [6]; Sims, Re Huon Corporation Pty Ltd (admins apptd) (2006) 58 ACSR 620 at [12]; Re Malanos [2007] NSWSC 865 at [13].

61    In such circumstances, courts have held that it is not to be expected that the voluntary administrators should expose themselves to substantial personal liabilities: see e.g. Re Renex Holdings (Dandenong) 1 Pty Ltd [2015] NSWSC 2003, [13] (Black J); Preston, in the matter of Hughes Drilling Limited [2016] FCA 1175 (Hughes Drilling), [18] (Yates J). See also Korda, in the matter of Ten Network Holdings Ltd [2017] FCA 1144, [43]–[44] (Markovic J).

62    In Secatore, Gordon J also observed (at [29]) that if orders are made relieving administrators from personal liability in respect of borrowings, it will permit them to make commercial decisions about the ongoing operations by focussing on what is in the best interests of the creditors ‘uninfluenced by concerns of personal liability.’

63    In Re Great Southern Infrastructure Pty Ltd [2009] WASC 161 (Great Southern) at [13], Sanderson M observed that:

The material consideration on such an application is whether the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Pt 5.3A of the Act. To put that proposition positively – the question is whether the court is satisfied the proposed arrangements are for the benefit of the company’s creditors. To put it negatively – the question is whether the court is satisfied the company’s creditors are not disadvantaged or prejudiced by the proposed arrangement. These principles have been confirmed in a large number of cases.

64    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 summarized the principles governing the granting of an application for orders under s 447A to vary the liability of administrators under s 443A as follows (at [30]):

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

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

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

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

33    This statement of the relevant principles has been accepted by judges of this Court: see, for example, Geelong Fire Services at [26]; Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 2) (2020) 144 ACSR 347; [2020] FCA 717 at [89] (Middleton J).

34    The affidavit material relied upon by the applicants establishes that, by entering into the Funding Agreement, the administrators have enabled the Company to continue to operate the business while they undertake the proposed steps, with all of the benefits identified above. This is consistent with the object of Part 5.3A of the Corporations Act.

35    The administrators have appropriately limited the relief they are seeking from personal liability under s 443A to their obligations under the Funding Agreement.

36    Although notice has not been given to all affected persons, the orders which are proposed facilitate the giving of such notice and the granting of liberty to apply to any affected person to enable an application to be made to vary the orders. To the extent that affected persons have received notice, there is no opposition to the proposed orders.

37    In the circumstances, I consider it appropriate to make an order relieving the administrators of personal liability in relation to the Funding Agreement in the terms of the orders sought.

Extension of time under s 588FM of the Corporations Act

38    Without an order under s 588FM extending the registration time for the purposes of s 588FL(2)(b)(iv) of the Corporations Act, the security interests created by the General Security Deed would automatically vest in the Company because s 588FL(2)(b)(ii) of the Corporations Act captures security interests registered after the “critical time” (here, the date of appointment of the administrators by operation of ss 588FL(7)(b) and 513C of the Corporations Act) and by operation of s 588FL(4) of the Corporations Act, the security interest automatically vests in the Company at the time it otherwise becomes enforceable against third parties.

39    It follows that the deadline for registering the security interest to avoid automatic vesting was upon the administrators’ appointment (which was prior to entry into the General Security Deed on 13 September 2022).

40    In the circumstances, I consider it to be just and equitable that the registration time for the collateral be fixed to be, for the purposes of s 588FL(2)(b)(iv) of the Corporations Act, 12 October 2022.

41    The s 588FM order is appropriate in the circumstances because:

(1)    there is no prejudice to creditors;

(2)    there is no displacement of other security interests;

(3)    no objection has been raised to the relief sought and any affected person has liberty to apply to vary the orders; and

(4)    the granting of the security interest under the General Security Deed is necessary to secure the funding that will enable the administrators to pursue the proposed steps.

Conclusion

42    For these reasons, I considered it appropriate to make orders in the terms sought in the originating process.

Associate:

Dated:    16 September 2022

SCHEDULE OF PARTIES