FEDERAL COURT OF AUSTRALIA

Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) [2023] FCA 637

ORDERS

UPON THE UNDERTAKING OF THE PLAINTIFF, BY ITS SOLICITORS, TO:

(A)    SUBMIT TO SUCH ORDER (IF ANY) AS THE COURT MAY CONSIDER TO BE JUST FOR THE PAYMENT OF COMPENSATION (TO BE ASSESSED BY THE COURT OR AS IT MAY DIRECT) TO ANY PERSON (WHETHER OR NOT THAT PERSON IS A PARTY) AFFECTED BY THE OPERATION OF THE ORDER OR UNDERTAKING, OR ANY CONTINUATION (WITH OR WITHOUT VARIATION) OF THE ORDER OF UNDERTAKING; AND

(B)    PAY THE COMPENSATION REFERRED TO IN (A) TO THE PERSON AFFECTED BY THE OPERATION OF THE ORDER OR UNDERTAKING; AND

(C)    NOT AUTHORISE THE TRANSFER OR WITHDRAWAL OF THE SUM OF $50,000 HELD IN THE PLAINTIFF’S SOLICITORS’ TRUST ACCOUNT (EXCEPT TO AN INTEREST-BEARING CONTROLLED MONEY ACCOUNT HELD IN THE NAME OF THE SOLICITORS FOR THE PLAINTIFF FOR THE PURPOSES OF THIS UNDERTAKING) UNTIL FURTHER ORDER OF THE COURT OR CONSENT OF THE DEFENDANTS,

THE COURT ORDERS THAT:

1.    Pursuant to s 23 of the Federal Court of Australia Act 1976 (Cth) and s 75-44 of the Insolvency Practice Schedule (Corporations), the Second Defendants (whether by themselves, their servants, agents or otherwise) be restrained until the hearing and determination of this proceeding or further order from distributing the Deed Fund pursuant to clause 5 of the Deed of Company Arrangement.

2.    The restraint in Order 1 does not prohibit the Second Defendants from paying from the Deed Fund the reasonable legal expenses incurred by the Second Defendants in relation to this proceeding.

3.    It be ordered that:

(a)    Pursuant to r 1.32 of the Federal Court Rules 2011 (Cth), the First and Third Defendants provide to the Plaintiff discovery of the following documents (Documents) or, alternatively;

(b)    to the extent that any of the Documents do not exist, file and serve on the Plaintiff and the Second Defendants an affidavit by a director of the First and Third Defendants to that effect (Affidavit):

(i)    Documents evidencing arrangements, between the First and Third Defendants, for the Third Defendant to provide funding to or for the benefit of the First Defendant, in order to meet liabilities of the First Defendant, during the period 1 July 2020 to 13 February 2023 (“relevant period”), including:

A.    any document recording a promise or assurance by the Third Defendant of ongoing future funding support of the First Defendant over the relevant period;

B.    any document recording a promise or assurance by the Third Defendant of forbearance from requiring repayment of money owing by the First Defendant over the relevant period;

C.    any document evidencing what amounts were lent from time to time by the Third Defendant to the First Defendant over the relevant period, on what terms the money was lent, and the means by which the money was lent;

(ii)    Documents recording or evidencing consideration by the directors of the First Defendant (over the relevant period) as to:

A.    the solvency of the First Defendant;

B.    any promise or assurance of future financial support from the Third Defendant;

(iii)    The lease by the First Defendant of the Core Breeding Centre, Bynoe Harbour in the Northern Territory;

(iv)    The Project Development Agreement entered into by the First Defendant for a site at Hatchery, Gunn Point, Western Australia;

(v)    The sub-lease and co-operation agreement executed by the First Defendant (or Third Defendant) for the property at Legune Station Northern Territory and (if an additional document) the option to acquire that property;

(vi)    The leases of land and offices at Kununurra, Western Australia.

4.    The Documents be disclosed electronically to the Plaintiff and the Affidavit (if required) be filed and served on the Plaintiff and the Second Defendants by no later than 4:00 pm AEST on 8 May 2023.

5.    The parties have liberty to apply for further orders and directions.

6.    The Plaintiff’s costs of, and incidental to, the Interlocutory Application filed on 24 April 2023 be the Plaintiff’s costs in the cause only as against the First and Third Defendants.

7.    The matter be listed for a further case management hearing at 9:15 am AEST on 5 June 2023.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    By an urgent interlocutory application filed 24 April 2023, the plaintiff, Canstruct Pty Ltd (Canstruct), sought an interlocutory injunction to restrain the second defendants, who are the administrators of the first defendant company, Project Sea Dragon Pty Ltd (subject to a deed of company arrangement) (Project Sea Dragon), from distributing funds pursuant to the terms of the Deed of Company Arrangement (DOCA) into which the company entered on 21 March 2023. In essence, Canstruct alleged that the distribution of the funds would put an end to its primary claim, the subject of its Originating Application, whereby it seeks the termination of the DOCA and the winding up of Project Sea Dragon.

2    On 14 April 2023, the administrators provided an undertaking to the Court that they would give seven days’ notice prior to making any distributions. However, that undertaking lapses upon the conclusion of this application for interlocutory relief or on 23 May 2023, whichever comes first. In that respect, there was a deal of urgency in relation to the matter and for that reason I made the orders sought and gave these ex tempore reasons for doing so.

The facts

3    The circumstances giving rise to Canstruct’s claim and its application for interlocutory relief were not seriously in dispute.

4    The third defendant in these proceedings, Seafarms Group Limited, is a publicly listed company and the head of the corporate group known as the “Seafarms Group”. Project Sea Dragon is a member of that group and a wholly owned subsidiary of Seafarms Group Limited. At all relevant times, but for a small number of immaterial exceptions, the directors of Seafarms Group Limited and Project Sea Dragon were the same.

5    Although there are numerous companies in the Seafarms Group, for the purposes of this application, it is sufficient to note that Project Sea Dragon is a special purpose company, incorporated for the development of a major project, and it is the shareholder of a number of subsidiary companies also involved in that enterprise.

6    The Seafarms Group as a whole operates in the prawn aquaculture business, including the growing, harvesting and marketing of prawns. The individual prawn aquaculture undertakings are conducted from various locations, including certain sites in Queensland and the Northern Territory, which presently generate the group’s revenue.

7    Project Sea Dragon was incorporated to pursue the Seafarms Group’s activities and, in particular, a specific project known as “Project Sea Dragon”. That project is a substantial undertaking, and has been described as a large scale, integrated, land-based prawn aquaculture business in Northern Australia, which is designed to produce a high quality, reliable supply of black tiger prawns on a year round basis for domestic and export markets.

8    The report to creditors produced on or about 14 March 2023 by the administrators of Project Sea Dragon, Mr Shaun McKinnon and Mr Andrew Fielding (the administrators), asserted that significant works had been conducted by the company to secure a number of leases, licences, environmental approvals and other agreements, many in its name, to advance the project.

9    The project apparently involves the development of further prawn aquaculture facilities in five separate locations, three in the Northern Territory and two in Western Australia. Project Sea Dragon has entered into leases or other arrangements for the use of four of those sites, the fifth site being leased by a related entity.

10    The particular dispute between Canstruct and Project Sea Dragon concerns the development of one of the sites, at a location called “Legune Station” in the Northern Territory. It is a large cattle station, over an area of which Project Sea Dragon holds a sublease for which it pays rent of approximately $2 million per annum. Legune Station has been identified as the intended location of the project’s principal operations. The project development on that site is substantial and involves the construction of over 70 aquaculture ponds with associated water integration networks, other related infrastructure, plant and machinery, and accommodation for up to 220 personnel.

The funding of Project Sea Dragon

11    Project Sea Dragon had no income of its own with which to meet the expenses that it incurred in developing the project, nor has it ever had a secure line of finance through any formal agreement with financiers or related companies. Rather, it was at all relevant times wholly reliant on the financial support of Seafarms Group Limited and, to a lesser extent, other companies in the corporate group.

12    There is evidence from a Mr Rodney Dyer, a director of both Project Sea Dragon and Seafarms Group Limited, that there was no formal loan agreement in place between the two companies and, in fact, there was no agreement at all to provide any amount of money to Project Sea Dragon on a regular basis. Mr Dyer does not depose in his evidence to any other form of arrangement pursuant to which Seafarms Group Limited was obliged to, or had committed or promised to, provide funding to its subsidiary. Indeed, there was no suggestion of any letter of intent from Seafarms Group Limited to continue funding, or any offer of finance from the other companies in the group, and there was certainly no legally enforceable agreement on which Project Sea Dragon could rely for finance.

The dispute in relation to the works at Legune Station

13    Project Sea Dragon engaged Canstruct to carry out various construction works at the Legune Station site. The contractual arrangement between the parties was recorded in a “Framework Agreement” dated 10 May 2021, pursuant to which three “Work Orders” were issued in September and October 2021.

14    It does not appear to be in doubt that Canstruct carried out substantial work pursuant to those Work Orders up to about 24 December 2021, when Project Sea Dragon unilaterally suspended all works at the site, as it was entitled to do. Mr Dyer deposed that, on or about January 2022, a dispute arose between Canstruct and Project Sea Dragon with respect to the money owed following the suspension of the works. Subsequently, on 27 April 2022, Project Sea Dragon terminated each of the Work Orders for convenience. Again, it was entitled to do so.

15    Canstruct received substantial remuneration for the work that it performed prior to the termination of the Work Orders. The present dispute arises in relation to its later payment claims, submitted on 15 September 2022, by which it sought approximately $27.83 million in respect of those Work Orders. The Superintendent (on behalf of Project Sea Dragon) issued payment certificates to Canstruct on 30 September 2022 in response to those payment claims, pursuant to which Project Sea Dragon paid to Canstruct approximately $780,000. There is presently no need to delve into the events surrounding the ensuing payment dispute, save to say that, ultimately, an adjudication occurred under the Construction Contracts (Security of Payments) Act 2004 (NT) and, on 3 February 2023, an award was made in favour of Canstruct in respect of the three Work Orders in the total amount of $13,581,592.21, excluding GST and interest. That figure was subsequently adjusted to about $12,473,810.14, excluding GST and interest, or about $13,994,955.32, including GST and interest.

The response to the adjudication decision

16    It was submitted by Mr Martin KC for Project Sea Dragon that the adjudication decision (including its quantum) is always subject to challenge, particularly in accordance with s 47(4) of the Construction Contracts (Security of Payments) Act 2004 (NT). On this basis, he submitted that the debt owing may not be in the amount claimed by Canstruct, being approximately $14 million, and may well be something less. Whilst that may be so, and the actual state of affairs between the two entities is not entirely clear, for the present purposes, it was not suggested that there was not a substantial liability owing or payable to Canstruct. It would appear that the defendants have publicly acknowledged, to a degree, that Project Sea Dragon is indebted to Canstruct in a significant amount.

17    On 3 February 2023, the same date as the adjudicator’s decision, Seafarms Group Limited made an announcement to the Australian Securities Exchange (ASX), indicating that, whilst it had provisioned an amount of $8.7 million for a settlement of the dispute with Canstruct in its 2022 account, it was “extremely disappointed” with the adjudicator’s decision and “believe[d] the determination to be excessive”. It was evident from the consolidated financial statements appearing in the Annual Report for Seafarms Group Limited for the financial year ended 30 June 2022 that Seafarms Group had made provision of $8.73 million for its contractual liabilities to Canstruct. The financial statements further indicated that Seafarms Group had the capacity to pay that amount and, indeed, the whole of the $14 million debt claimed by Canstruct.

18    On 8 February 2023, Herbert Smith Freehills, who were the solicitors for Project Sea Dragon at the time, wrote to the solicitors acting for Canstruct, advising that their client rejected the adjudicator’s decision. It was claimed that the validity of the decision was affected by a number of jurisdictional errors, that the adjudicator had failed to afford procedural fairness to Project Sea Dragon, and that the decision was therefore liable to be set aside. Project Sea Dragon indicated, by its solicitors, an intention to commence proceedings in the Supreme Court of the Northern Territory to obtain, amongst other things, relief in the nature of certiorari.

19    There is no doubt that Project Sea Dragon had the right to pursue that relief in relation to the adjudication. On 9 February 2023, Herbert Smith Freehills accordingly wrote by email to the adjudicator, informing him that Project Sea Dragon was at that time considering “the imminent commencement of proceedings … in respect of the purported determinations dated 3 February 2023”.

20    All of that apparently changed by 13 February 2023, when Seafarms Group Limited withdrew its financial support of Project Sea Dragon. It was indicated in later documents that the decision to withdraw funding was made as a result of the adjudication decision.

21    The following day, on 14 February 2023, the directors of Project Sea Dragon resolved to place the company into voluntary administration. The directors appointed Mr McKinnon and Mr Fielding as the administrators.

22    On 15 February 2023, Seafarms Group Limited released an announcement to the ASX, advising that Project Sea Dragon had been placed into administration and quoting Mr Dyer, in his capacity as CEO of Seafarms Group Limited, as having said:

As a result of the decision made by the adjudicator on 3 February 2023 regarding a construction dispute, the voluntary administration became a necessary step for Project Sea Dragon.

23    On 17 February 2023, Seafarms Group Limited entered into a “Funding Agreement” with the administrators, pursuant to which it agreed to provide a working capital facility of $1.65 million for the administrators’ use. Those funds were intended to cover the administrators’ fees and expenses, as well as, importantly, all expenses involved in continuing to operate the business of Project Sea Dragon. That included the cost of continuing the employment of Project Sea Dragon’s existing employees, paying all lease payments that fell due (including in respect of those leases used in the business) and meeting supplier payments and other operational costs.

24    On 23 February 2023, the same date as the first meeting of the creditors of Project Sea Dragon, Canstruct lodged with the administrators a formal proof of debt in the amount of $13,994,955.30. The proof of debt form cited the three determinations of the adjudicator on 3 February 2023, relating to each of the Work Orders.

Entry into the DOCA

25    Subsequently, Seafarms Group Limited proposed a DOCA to the administrators. In a report to creditors circulated on 14 March 2023, the administrators recommended that the DOCA be executed.

26    The intent of the DOCA was said by one of the administrators to be “to facilitate the completion of the project”. The “project”, in this context, might be taken to be that pursued by Project Sea Dragoon at Legune Station or, at least, could be understood as encompassing that development. In other documents, the purpose of the DOCA was characterised only very generally as being “to satisfy the objectives of Part 5.3A of the [Corporations Act 2001 (Cth)], including to maximise the chances of [Project Sea Dragon], or as much as possible of its operations, continuing in existence”.

27    It did not appear to be in contest that, at the time of the proffering of the DOCA, the circumstances of Project Sea Dragon were essentially that:

(a)    it held few realisable assets that could produce any return to creditors;

(b)    its administrators had expressed the opinion that, if it went into liquidation, there would be little by way of assets to generate a return;

(c)    it had a small number of employees, being 13 in number, who would need to be paid some $11,133 if the DOCA was approved;

(d)    other than Canstruct, it had some 50 trade creditors who were owed approximately $400,000 in total;

(e)    it owed Canstruct, according to the adjudication and Canstruct’s proof of debt, about $14 million;

(f)    it owed related-party creditors a total of $64.8 million, the vast majority of which was owed to Seafarms Group Limited.

28    The proposed DOCA had the following essential features:

(a)    upon is commencement, Seafarms Group Limited would pay a “Seafarms Contribution” of $3.5 million to the administrators to establish the “Deed Fund”, which would also be comprised of certain working capital amounts on hand at the commencement date;

(b)    the Deed Fund would be distributed as follows:

(i)    Seafarms Group Limited would be repaid the sum of $1.65 million, which it had provided as interim funding for the administration;

(ii)    the employees would be paid in full;

(iii)    all of the arm’s-length creditors would be paid in full, other than Canstruct;

(iv)    Canstruct would be paid what remained of the Deed Fund after remuneration of the administrators, which was estimated to afford it a return of approximately 10 to 11 cents in the dollar;

(v)    no payment would be made to the related-party creditors;

(c)    upon its effectuation, all claims against the company would be released and extinguished in full (subject to one exception, relating to the leased premises); and

(d)    during its operation, control of Project Sea Dragon would be returned to the directors.

29    At the second meeting of creditors, on 21 March 2023, a resolution in favour of approving the entry into the DOCA was passed by a majority in number and a majority in value of creditors voting.

30    On 23 March 2023, the DOCA was executed, and control of the company was immediately returned to the directors.

31    As the plaintiff in the present application points out, during the course of the administration of Project Sea Dragon, none of the employees lost their jobs and the business operations continued in the ordinary course. So much was stated in ASX announcements released by Seafarms Group Limited on 21 and 24 March 2023.

A serious question to be tried

32    In order to be granted an interlocutory injunction, the plaintiff must establish the existence of a serious question to be tried in relation to the causes of action that it seeks to pursue in the proceedings. Here, in its originating process, Canstruct seeks orders:

(a)    pursuant to s 447A of the Corporations Act 2001 (Cth) (Corporations Act), to bring an end to the administration and to terminate the DOCA;

(b)    pursuant to s 445D of the Corporations Act, to terminate the DOCA;

(c)    pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations) (being Schedule 2 to the Corporations Act), to set aside the resolution of creditors on 21 March 2023 that Project Sea Dragon execute the DOCA.

33    As was acknowledged by Mr O’Donnell KC for the plaintiff, there is considerable overlap between these three claims. There is also overlap in the factual substratum of the submissions made in support of each.

Sections 447A(2)(b) and 445D(1)(g)

34    The first claim concerns an alleged abuse of Part 5.3A of the Corporations Act, in respect of which the plaintiff seeks orders under ss 447A(2)(b) and 445D(1)(g) of that Act.

35    By s 447A(2)(b), the Court has power to terminate an administration and set aside a DOCA if it is satisfied that the provisions of Part 5.3A are being abused.

36    It did not appear to be in dispute that the concept of an “abuse”, as used in this section, is akin to an abuse of process at common law, and that the jurisdiction conferred by the provision is therefore similar, in content and purpose, to the Court’s inherent jurisdiction to permanently stay proceedings for an abuse of process: Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) (2003) 47 ACSR 391, 395 – 397 [16] – [20] per Barrett J. Hence, an abuse in the context of s 447A(2)(b) would include the use of a procedural process for a purpose foreign to that which the process is designed to serve; that is, for a collateral purpose.

37    That view as to the equivalence between the Court’s inherent jurisdiction in relation to abuse of process and its jurisdiction under s 447A has been referred to in a number of authorities. In particular, reference was made to the recent decision in Chalmsbury Nominees Pty Ltd v Alita Resources Limited (receivers and managers appointed) (subject to deed of company arrangement) [2023] WASC 97 (Chalmsbury Nominees) [49], where Hill J observed in relation to the termination of a DOCA under s 447A:

The [plaintiffs] also seek an order terminating the DOCA under s 447A of the Act. It was not in dispute that the court has jurisdiction to make such an order in an appropriate case. Courts have terminated deeds of company arrangement and voluntary administrations under this section where it would bar particular claims already being litigated against the company,[Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391] where the winding up may serve the public interest as investigations and recovery proceedings are likely to be funded and could realistically lead to persons who engaged in suspect transactions being brought to account,[Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139 [182]] if the provisions of the Act are being abused,[Re Sales Express Pty Ltd (admins apptd) [2014] NSWSC 460 [19]] or where there is an ulterior element or purpose in using the provisions of pt 5.3A.[Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 379 [22]]

38    In the final case cited in this passage, Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 379, Barrett J (as his Honour then was) observed at paragraph [22] that such cases all involve what might be termed some “ulterior element”: see also Guo v Song [2018] NSWSC 12 (Guo v Song) [124] per Black J.

39    In this Court, in Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) (2015) 110 ACSR 203 (ASIC v Midland Hwy), Beach J recognised that the section could be used to remedy an abuse of Part 5.3A where to do so would be in the public interest, even though the making of an order would not necessarily be in the interests of the creditors as a whole. His Honour, correctly in my respectful opinion, observed at 222 – 223 [67] – [69]:

[67] The Court’s power under s 447A is to be exercised having regard to, inter alia, the interests of the creditors as a whole and the public interest. But in an unusual case, the public interest may override the creditors’ interests and favour liquidation.

[68] The public interest includes considerations of commercial morality and the interests of the public at large (Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510; [2005] NSWSC 1235 at [287] (Bidald Consulting) per Campbell J). Where there has been misconduct in the affairs of a company requiring appropriate investigation by a liquidator and appropriate recovery proceedings being considered and undertaken, it is detrimental to commercial morality to prevent or hinder such steps through the device of a DOCA propounded by entities and individuals who ought be the subject of investigation and the target of such proceedings. A winding up will be beneficial from a public interest perspective where investigations and recovery proceedings are likely to be funded and the investigations and appropriate recovery proceedings could realistically lead to the relevant persons who have engaged in the suspect transactions being brought to account: Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (2009) 73 ACSR 139; [2009] QSC 202 at [182] per McMurdo J.

[69] More specifically and of direct relevance to the present context, the Court has power under s 447A to set aside a resolution to enter into a DOCA and to order the winding up of the company. In exercising such a power, the Court can apply by analogy any one or more of the principles applicable to s 445D.

40    For the relief it seeks, Canstruct relied further upon s 445(1)(g) of the Corporations Act, which also applies where there are circumstances involving an abuse of the provisions of Part 5.3A: Mighty River International Ltd v Hughes (2018) 265 CLR 480, 490 – 491 [13] per Kiefel CJ and Edelman J. That power may also be exercised if the DOCA has a fraudulent or wrongful purpose: Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd (2020) 149 ACSR 1 (Habrok v Gascoyne), 55 – 56 [410] per Beach J: or if it is contrary to the public interest, which includes notions of commercial morality and the interests of the public at large: Habrok v Gascoyne at 54 – 56 [409] – [410]; Chalmsbury Nominees at [48].

41    The authorities establish, and it is not contested otherwise, that the scope of the provisions on which Canstruct relies is wide. This is particularly so given that they raise for consideration naturally broad concepts of public interest, and given that the class of cases to which they might apply is not closed. As the circumstances in which the provisions may apply are of potentially unlimited variability, it would be inappropriate to place any restrictions on what might be regarded as a “public interest” ground.

42    Where a court acts to protect the public interest in the context of an administration, it not uncommonly follows that the interests of the creditors in that administration might be subordinated. However, in this case, it was submitted that the protection of the public interest and the promotion of the rights of creditors are complementary objectives. It was submitted that one of the consequences of the entry into the DOCA was the preclusion of any effective investigation by a liquidator into transactions entered into while Project Sea Dragon was insolvent. So the submission went, if there was such an investigation, there might be an opportunity for a substantial return to the creditors through liquidation. On that basis, the DOCA may be susceptible to being set aside in the public interest and as being contrary to the creditors’ interests overall: Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783 [37] per Perry J; ASIC v Midland Hwy at 224 [74].

43    Canstruct submitted that the object of Project Sea Dragon and Seafarms Group Limited in putting the former into administration and proposing the DOCA was to avoid having to make payment in accordance with the adjudicator’s decision, whilst at the same time avoiding scrutiny of Project Sea Dragon’s potential insolvent trading in the two-year period prior to the administration. It was submitted that Part 5.3A had been used to achieve these objects, and that this constituted an abuse of the statutory regime.

44    On the basis of the evidence before the Court, which is presently untested by cross-examination or any substantial countervailing evidence, Canstruct has established that there is a serious question to be tried as to whether Seafarms Group Limited and/or Project Sea Dragon have sought to utilise the administration process and the DOCA, under Part 5.3A, for the collateral purposes alleged.

45    In this context, the timing of the relevant events is of significant importance. Seafarms Group Limited made provision in its accounts to pay to Canstruct up to $8.7 million and, indeed, had the capacity to meet the full amount of the adjudicator’s decision. Whilst it subsequently expressed “extreme disappointment” with the adjudication, and instructed its solicitors to commence proceedings in the Supreme Court of the Northern Territory to have it quashed, it did not do that and instead pursued a different course.

46    At some time between 9 and 13 February 2023, it decided to cease funding Project Sea Dragon. It said that it made this decision on account of the result of the adjudication. That had the consequence that the directors of Project Sea Dragon, who were also the directors of Seafarms Group Limited, in turn decided to put the company into administration. The DOCA then proposed by Seafarms Group Limited resulted in Project Sea Dragon’s liability to Canstruct being released in return for a payment of approximately 10 to 11 cents in the dollar, and the company being returned to the control of the directors. From this series of events, there is more than a mere suggestion that Seafarms Group Limited and Project Sea Dragon have determined to utilise the administration process and the entry into the DOCA in order to avoid meeting the latter company’s indebtedness to Canstruct, save for paying about 10% to 11% of that liability.

47    This conclusion is merely an inference drawn on the facts of this case as they presently appear, and the evidence on which the inference is based has not been tested. It is by no means a final conclusion.

48    However, that finding is supported by the significant fact that, under the DOCA, all other arm’s-length creditors of Project Sea Dragon were paid in full. Whilst that did not include the landlords with which Project Sea Dragon was engaged in respect of its various leases, their entitlements were not affected by the DOCA.

49    Although the nature of the businesses of the other arm’s-length unsecured creditors is not particularly clear, it appears they were and are involved in the ongoing operation of the Project Sea Dragon development and thus are creditors from whom Project Sea Dragon might require ongoing support. As was submitted by Mr O’Donnell KC, the provision for the payment in full of other arm’s-length creditors may have facilitated their voting in favour of the DOCA.

50    It is also worthy of comment that the four related-party creditors voted in favour of the DOCA, despite the fact that they were to receive no payment towards their debts, which would then be released. Their stance, which is prima facie contrary to their interests as creditors, suggests that they perceived they would derive some collateral advantage from the entry into the DOCA. The advantage appears to have been to allow Seafarms Group Limited and Project Sea Dragon to effectively circumvent the adverse adjudicator’s decision, avoid the scrutiny of potential claims that might be made against the directors, and to continue the project. Necessarily, the related creditors would benefit from the latter outcome.

51    A further contextual matter surrounding the administration and the entry into the DOCA was that the administrators continued to meet Project Sea Dragon’s obligations to its landlords, employees and suppliers, such that business operations continued essentially unaffected throughout the process.

52    It is also relevant to observe that the DOCA provided that, upon its execution, rather than its performance, the company would be returned to the stewardship of its directors. Although such a provision is not necessarily unusual, it perhaps indicates that the continuation of the business was the priority of the DOCA, rather than any return to the creditors.

53    It is also pertinent that, upon the directors resuming control of Project Sea Dragon, Seafarms Group Limited immediately resumed funding. That is clear on the evidence, and the intention to do so is something that might properly be drawn from the ASX announcements made by Seafarms Group Limited. That is not an insignificant matter in the circumstances of this case, when it is suggested that the entry into the DOCA was for a purpose not contemplated by Part 5.3A.

54    Finally, Mr O’Donnell KC submitted that it was appropriate to compare the before and after positions of Project Sea Dragon upon its going into administration and entering into the DOCA. When that is done, it is apparent that essentially all of the steps taken by Project Sea Dragon to progress the project continued after its administration and its entry into the DOCA in much the same manner as they had previously. The one clear exception to this was, of course, the existence of the company’s liability to Canstruct, which was substantially avoided. On this basis, perhaps alone, there is a serious question to be tried as to the purpose served by the entry into the DOCA and, particularly, whether that purpose demonstrated an abuse of Part 5.3A of the Corporations Act.

55    Nevertheless, Canstruct also submitted that a second category of abuse might arise on the evidence. It was contended that Seafarms Group Limited could easily have put Project Sea Dragon into liquidation and proceeded with the project via another company. However, rather than pursuing that course, it paid $1.95 million to the administrators as part of the alternative strategy that it adopted. Whilst this choice might be explained on the basis that the process of administration would have caused less disruption to the enterprise then being conducted, Canstruct submitted that the inference remained open that Seafarms Group Limited was prepared to pay close to $2 million to avoid the scrutiny that might be applied by a liquidator to Project Sea Dragon’s conduct and finances. In particular, so it was said, the administration had the benefit of avoiding a liquidator examining the affairs of Project Sea Dragon in order to ascertain whether its directors and its parent company had caused it or allowed it to trade whilst insolvent.

56    Although it might appear that there is a degree of speculation in that submission, on closer analysis, the suggestion as to the potential insolvent trading can be seen to be of some substance. In particular, the evidence as to Project Sea Dragon’s financial status in the two years prior to its going into administration indicated a significantly worsening position. In the financial year ending 30 June 2020, it had an excess of liabilities over assets of $2.38 million. That rose to $67.39 million by the end of June 2022, and by the time of the administration it was $73.5 million. The intercompany indebtedness on the part of Project Sea Dragon had, by that point, increased to $64.85 million.

57    The report to creditors issued by the administrators gives some context to this, in that it demonstrates that:

(a)    Project Sea Dragon had always been wholly reliant on Seafarms Group Limited to meet its debts as they fell due;

(b)    there were no formal agreements for the provision of financial support from Seafarms Group Limited (indeed, Mr Dyer, the company’s director and CEO, said that there was no agreement at all) — in essence, there was no legally enforceable source of funding from the parent company, or any commitment or assurance to provide funding;

(c)    there were no formal agreements with any other companies in the group to provide funding; and

(d)    importantly, it was the withdrawal of the support by Seafarms Group Limited, on 13 February 2023, which triggered the appointment of the administrators the following day.

58    Mr Martin KC submitted that it was unclear when the specific debts that might give rise to a claim for insolvent trading were incurred. Though there is some force in that, it is difficult to accept that the level of Project Sea Dragon’s indebtedness was not increasing as a result of the development activities in which it was engaging. Indeed, it is prima facie apparent that the debt owed to Seafarms Group Limited continued to grow as that company continued to provide funds to Project Sea Dragon, which the latter used to pay its creditors in connection with the project.

59    The precise financial arrangements of Project Sea Dragon are unclear, but it is apparent that it recognised in its accounts its growing indebtedness to Seafarms Group Limited. That is significant for the present purposes, even though no demand had been made for the repayment of the money said to be owed as at the time of this application.

60    Further, the picture that most clearly emerges is that, whilst its indebtedness increased, Project Sea Dragon itself had no source of funding available to it, or any enforceable agreement by which it could secure funding. It had neither a promise of funding, nor any assurance that funds would be forthcoming.

61    Mr Martin KC further submitted that such a conclusion should not be reached because one needed to consider that which had occurred in the past. He correctly identified that, previously, the debts of Project Sea Dragon had consistently been paid by Seafarms Group Limited or, at least, had been paid with money provided by it around the time that the debts fell due. This occurred by the process set out in Mr Dyer’s affidavit dated 28 April 2023. Nevertheless, that previous conduct of Seafarms Group Limited cannot be relied upon as a conclusive indication that the company would continue to act in an identical manner in the future or, more importantly, that it had any commitment so to act in the future, or that it felt compelled to act in any particular way.

62    In these circumstances, as Mr O’Donnell KC submitted, there was a serious question to be tried as to whether Project Sea Dragon had been insolvent since, at least, the end of the 2020 financial year. He quite properly identified that the important question was whether there was an appropriate degree of commitment by the parent company for the continued financial support of Project Sea Dragon, such that the subsidiary could be assured to a sufficient degree that such financial support would be available in the future to meet its liabilities as they arose. In this respect, he relied upon the observations of Morrison JA (with whom Gotterson JA and Boddice J agreed) in Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28 (Chan) [41] – [44], as follows (with footnotes omitted and the emphasis being in the original):

[41] In International Cat [Manufacturing Pty Ltd (in liq) v Rodrick (2013) 97 ACSR 200 (International Cat)] it was held that “regard can be had to such financial support where the evidence establishes that the directors are likely to continue it”. In [Williams (as liquidator of Scholz Motor Group Pty Ltd (in liq)) v Scholz [2008] QCA 94 (Scholz)] Muir JA held that “the most important consideration is the degree of commitment to the continuation of financial support”, a statement endorsed in International Cat.

[42] The learned primary judge also referred to the statement of Giles JA in Lewis v Doran [(2004) 184 FLR 454] that “the key concept is ability to pay the company’s debts as and when they become due”. The learned primary judge went on:

“That emphasis on “ability” is important here. The prospects of obtaining necessary funds from a party, which is not obliged to provide them, must be such as to give the company something more than a chance of paying its debts: the prospects must be sufficient to make the company able to do so. That does not mean that the provision of the funds must be free of any uncertainty or contingency. But there must be a sufficient likelihood for the company, and those directing it, to be able to rely upon the availability of those funds when incurring the relevant debts.”

[43] I agree respectfully with those observations. They reflect the need, in cases where the financial support is from a source which cannot be compelled by legal arrangement, for there to be a degree of assuredness that the financial support will be forthcoming and at such a level that one could say the company was able to pay its debts as and when they fall due, rather than being possibly able to do so. Just as a conclusion that the relevant financial support does not have to be absolutely certain in order to be sufficient to meet the test in Lewis v Doran, Scholz and International Cat, equally the financial support does not have to be absolutely uncertain in order to be insufficient to qualify. Between the two extremes the factual circumstances of each case will provide a variety of points at which one might conclude that the financial support was of such a degree of commitment that it was likely to continue, and with the result that the company was able to pay its debts, and therefore that it has sufficient financial support to draw the conclusion of solvency.

[44] … Given that the resolution of this issue will almost always depend upon an assessment of facts, in my view it is better to proceed on the basis that, where the financial support is being provided by a director or related entity, and in circumstances where there is no formalised agreement or understanding, what is required is cogent evidence which enables the court to conclude that there is such a degree of commitment on the part of the provider of the financial support to continue it, such that it can be said that at any point of time it was likely to be continued, with the result that, at any of those times, the company was able to pay its debts as and when they fell due.

63    That has been followed in a number of subsequent cases at the intermediate appellate level, and at first instance: see, for example, Treloar Constructions Pty Ltd v McMillan (2017) 318 FLR 58, 76 [83] per Beazley P, Gleeson JA and Emmett AJA; Quin v Vlahos (2021) 64 VR 319, 334 – 335 [51] per Kyrou, Kennedy and Walker JJA. See also Re Sails Corp Pty Ltd [2021] NSWSC 1046 [11] per Black J; Carna Group Pty Ltd v The Griffin Coal Mining Company Pty Ltd (No 6) (2021) 157 ACSR 224, 265 – 266 [168] – [169] per McKerracher J.

64    Mr Martin KC submitted that this case was substantially different to that in Chan, but I suspect that is not the case. Although, in Chan, there was an obvious issue of a director’s willingness to fund the company, which may not arise on the circumstance of this case, it is open to Canstruct to contend in the circumstances of this application that an intention on the part of Seafarms Group Limited not to be bound in any way to provide funds into the future, and to eschew any commitment to do so, may ultimately appear from the evidence in this case. It was certainly open for some formal, or even informal but documented, arrangement to be put in place during the course of the project, but that did not occur.

65    Moreover, the import of the decision in Chan and the cases that have followed it is that, in order for a company properly to be regarded as solvent, there needs to be something more than just the happenstance that a parent company has been paying debts in an ad hoc fashion without any particular commitment or assuredness that funds will be forthcoming in the future. There is potentially a public policy issue to be addressed here in relation to the circumstance in which solvency is asserted purely on account of prior funding from a parent company, but no conclusion needs to be reached on that point at present. It will also be necessary, as further evidence comes to light, to consider in greater detail the commercial reality of potential future funding from Seafarms Group Limited; however, for the present purposes, in the circumstances of this case, it is at least arguable that the history of funding between Seafarms Group Limited and Project Sea Dragon was insufficient to demonstrate the latter’s solvency in accordance with the authorities to which reference has been made.

66    It follows that there is a substantial argument that Project Sea Dragon may have been insolvent from an early period, there being no apparent arrangements in place by which it might consistently and predictably meet the debts that it incurred.

67    Mr O’Donnell KC also emphasised that, at all times, there was a growing indebtedness on the part of Project Sea Dragon to its parent company and to other related companies in the group. It, of course, could not rely upon support from those companies to pay those debts if and when they were called upon.

68    As was further submitted, once the agreement with Canstruct was entered into and the development was commenced, it followed naturally that Project Sea Dragon would incur substantial liabilities as the entity promoting the project. That is sufficient to indicate that, at least from 2021, when the contract with Canstruct was entered into, Project Sea Dragon had significant debts and was accruing further debts without assets of its own or finance with which to pay them. These matters may suffice to demonstrate a prima facie case of insolvent trading, or a failure to prevent insolvent trading by Seafarms Group Limited, at least to the level of an arguable case. Again, it is important to emphasise that this is not a final finding to that effect, and the conclusion is simply the result of Canstruct having met what is a relatively low hurdle as a part of its seeking interlocutory injunctive relief.

69    It follows that it is conceivable that the directors of Seafarms Group Limited and Project Sea Dragon were motivated to make use of the administration process in order to avoid scrutiny by a liquidator of the latter’s solvency and trading history. Accordingly, there is a serious question to be tried as to whether the DOCA was entered into for an ulterior purpose, or was contrary to the public interest as well as good and ordinary notions of commercial morality, so as to enliven the Court’s jurisdiction under ss 447A(1)(b) and 445D(1)(g) of the Corporations Act.

Section 445D(1)(f)

70    A further aspect of Canstruct’s case is that the DOCA is oppressive or unfairly prejudicial or discriminatory against it as a creditor and, additionally, is contrary to the interests of the creditors as a whole. In particular, it relied upon the observations of Black J in Guo v Song at paragraph [148], where his Honour said:

Whether a deed of company arrangement is oppressive or unfairly prejudicial or discriminatory under s 445D(1)(f) will be determined by reference to the general principles underlying Pt 5.3A, including a creditor’s right to be paid or wind up a company or have the company administered by the administrator in a way which will see the creditor paid from the company’s property.

71    It also relied upon the observations of Burley J in Britax Childcare Pty Ltd v Infa Products Pty Ltd (2016) 115 ACSR 322, where his Honour observed at 346 [115] in respect of s 445D(1)(f):

[115]    In deciding whether a deed is oppressive or unfairly prejudicial within the subsection, the Court will have regard to the following factors:

(1)    the objects of Pt 5.3A;

(2)    the interests of other creditors, the company and the public;

(3)    the comparable position of the creditor on a winding up compared with their position under the deed; and

(4)    other relevant facts such as the relative position of all creditors under the Deed (that is, whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the Deed.

72    On the facts as previously set out, there is a serious question to be tried as to whether the DOCA is oppressive or unfairly prejudicial to, or discriminatory against, Canstruct as a creditor. Most notably, without any serious explanation, but for reasons that are not difficult to infer, the DOCA discriminates between Canstruct and the other arm’s-length creditors. Canstruct will receive roughly 10 to 11 cents in the dollar in respect of its debt, while other arm’s-length unsecured creditors are paid in full. The administrators made some attempt to justify this in their report to creditors by suggesting that the distribution under the DOCA is in line with the operation of the Corporations Act. However, that assertion was not defended and it is obviously not the case.

73    It was submitted on Canstruct’s behalf that the evident purpose of the distribution regime in the DOCA was to secure the votes of a majority by a number of the creditors voting in favour of the resolution, as required by s 75-115(1)(a) of the Insolvency Practice Rules (Corporations) 2016 (Cth). If that contention can be established, beyond the prima facie case that presently exists, that would potentially be sufficient to show that some discrimination attended the entry into the DOCA. This is a further ground on which the plaintiff has established a serious questions to be tried.

Other matters

74    There is sufficient basis for a serious question to be tried as to the discriminatory nature of the DOCA, and that is all that is necessary for the purposes of the current application. Accordingly, there is no need to consider whether the DOCA unfairly prejudices Canstruct because, as it contends, it has been denied the opportunity to secure more than about 10 to 11 cents in the dollar by a liquidator pursuing an action for insolvent trading. There is no need to reach a conclusion about this issue but, from what has been said earlier, a serious question may well arise on that basis as well.

75    For similar reasons, I need not consider the strength of any claim under s 445(1)(e) of the Corporations Act. However, as has been mentioned, the circumstances identified by Canstruct certainly suggest that it has been denied an opportunity to fund the liquidators to investigate the affairs of Project Sea Dragon (including its relationship with Seafarms Group Limited), and this may well amount to an injustice. The force of this ground is elevated by the fact that all of the related-party creditors voted for the DOCA whilst standing to receive no benefit in their capacity as creditors, but possibly securing some collateral advantage in their capacity as related-party entities. It may be that the collateral advantage was the prevention of an investigation into the affairs of Project Sea Dragon and its parent in the course of a liquidation.

76    Again, for similar reasons, there is no need to consider the claims under s 445D(1)(b) relating to alleged misleading information contained in the report to creditors.

77    Nor is there any need to consider the claims under s 445D(1)(c) as to whether there was a material omission in the report to creditors.

Balance of convenience

78    The consequence for Canstruct if the injunctive relief is refused is that it will be exposed to a claim on the part of the defendants that its action is defeated by the effectuation of the DOCA. The evidence discloses that, by 24 May 2023, the deed administrators will distribute the Deed Fund pursuant to cl 5.4 of the DOCA. That will amount to “Effectuation” of the Deed, within the meaning of that term as it is defined cl 1.1 of the Deed, and, as a consequence, all claims of participating creditors will be fully released and discharged. In those circumstances, Canstruct will be deprived of standing to pursue the orders sought in its originating process and, in any event, there will be no utility in the Court making any order to terminate the DOCA. In other words, the proceedings would be rendered inutile and the possibility of the relief sought by Canstruct being granted would disappear.

79    Conversely, if the injunction is granted, the only real practical consequence is the postponing of the distribution of the Deed Fund and the loss of the use of that money by those to whom it would otherwise be paid. For the period of the postponement, the funds might appropriately be invested in an interest bearing account.

80    It was submitted on behalf of the defendants that the trade creditors will suffer prejudice because they will have to wait for payment. Though that is correct, there is no evidence as to their circumstances, or as to what might happen if they are not paid now rather than in the future, or to suggest that payment in the future with interest will render them any worse off. In that respect, it is relevant that the evidence shows that the trade creditors have all been informed of this application and none have attended to oppose it. Nor have they sworn affidavits for the defendants to use in these proceedings.

81    Further, in order to mitigate any prejudice to those creditors, the plaintiff has deposited the sum of $50,000 into an account to be held in trust by its solicitors, Thomson Geer, for the purpose of supporting an undertaking as to damages. That amount has been calculated as the amount of interest that the sum of $2.1 million would generate at a commercial rate of 7%. These funds are intended to provide some comfort to the Court that any concerns arising from the loss of use of money by the trade creditors will be able to be remedied. It should be said that the plaintiff has also provided the usual undertaking as to damages in support of the injunction. That undertaking and the deposit of the $50,000 are sufficient to assuage any detriment that might follow from the grant of the injunction.

82    Mr Martin KC submitted that, instead of the injunction, Canstruct would be entitled to request that the administrators not make payments in accordance with the DOCA, and it could seek to defer receipt of any payment to it, thereby continuing the DOCA’s operation and avoiding the consequences of its effectuation. That is an inappropriate course. First, it is not clear that such a request by Canstruct to the administrators might not, in effect, be inviting them to breach their statutory obligations to perform the DOCA. Secondly, it might mean that the expectations of third parties, such as the trade creditors or others, are frustrated, as they are entitled to have the DOCA performed according to its terms. Finally, it is not even clear that the deed administrators would agree to such a proposal.

83    In those circumstances, the balance of convenience weighs in favour of granting the injunctive relief. Orders to that effect should be made.

Costs

84    Canstruct has been substantially successful on its interlocutory application. In the ordinary course, costs follow the event, and that suggests that Canstruct should be allowed its costs. However, as Mr O'Donnell KC acknowledged, this was an application for an interlocutory injunction and it may well be that, in time, the facts as alleged might not be established to the standard required for the final relief that Canstruct seeks to be granted. As Mr Martin KC submitted, it is for that reason that costs in relation to interlocutory injunctions are often reserved, and there is a deal of force in that as well.

85    Nevertheless, importantly in this case, the making of the application for an injunction was telegraphed well in advance by Canstruct’s solicitors. Agreement was twice sought in relation to the making of the orders, and twice that was refused. On the other hand, as Mr Martin KC quite rightly submitted, this application had to be made regardless of the defendant’s consent because the orders would affect other parties who might wish to be heard, including the trade creditors. In any event, the deed administrators would be in a very difficult position to agree to the orders that Canstruct sought. Such factors make it difficult to conclude what costs might have been incurred by Canstruct had the defendants consented to the application. That having been said, there is no circumstance in which the defendants should recover their costs of it. It follows that the appropriate order is that Canstruct have its costs of the application in the cause, but only as against Project Sea Dragon and Seafarms Group Limited. If Canstruct succeeds in the action, it will recover its costs of this application. If the defendants succeed, they will not.

Associate:    

Dated:    13 June 2023