Federal Court of Australia

Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 5) [2024] FCA 479

ORDERS

THE COURT ORDERS THAT:

1.    Subject to the conditions in Order 2 of these Orders, and pursuant to rule 36.08(2) of the Federal Court Rules 2011 (Cth), the stay granted by Order 7 of the Orders of Justice Derrington dated 22 February 2024 be extended until determination of the Notice of Appeal filed on 14 March 2024 from the decision of Justice Derrington in Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2024] FCA 112, unless otherwise ordered.

2.    The conditions referred to in Order 1 of these Orders are as follows:

(a)    Project Sea Dragon Pty Ltd (Subject To Deed Of Company Arrangement) ACN 604 936 192 (Project Sea Dragon) to only incur debts and liabilities in the ordinary course of its business;

(b)    Seafarms Group Limited ACN 009 317 846 (Seafarms Group) to provide a formal undertaking in the form of a guarantee or an undertaking to this Court to pay all of the debts/liabilities of Project Sea Dragon as and when they are incurred in accordance with Order 2 (a) of these Orders;

(c)    Within 14 days of these Orders, Seafarms Group to provide the amount of $185,000.00 as security for the costs of Canstruct Pty Ltd ACN 008 869 467 (Canstruct) in the appeal;

(d)    Canstruct to be released from the undertaking to the Court of 3 May 2023 requiring Canstruct to retain a sum of $50,000 pursuant to an undertaking as to damages;

(e)    Orders 1 and 2 of the Orders of Justice Derrington dated 3 May 2023 restraining the distribution of the Deed Fund (subject to certain conditions) to continue until determination of the appeal.

3.    Costs of and incidental to the hearings of 19 March 2024 and 18 April 2024 be reserved to the hearing of the appeal.

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

REASONS FOR JUDGMENT

COLLIER J

1    Before the Court is an amended interlocutory application filed on 12 April 2024 in which the first and third defendants (Stay Applicants) seek the following interlocutory orders:

1.    Pursuant to rules 1.32 and/or 36.08(2) of the Federal Court Rules 2011 (Cth) and/or section 23 of the Federal Court of Australia Act 1976 (Cth) order 7 made by Justice Derrington dated 22 February 2024 be extended until the appeal filed on 14 March 2024 is heard and determined.

2.    Pursuant to section 29 of the Federal Australia Act 1976 (Cth), the Court stay or suspend the operation of orders 1 to 6 made by Justice Derrington dated 22 February 2024.

3.    Such further or other orders as the court deems appropriate.

…

5.    Costs.

(tracked changes omitted, numbering as in original)

2    As a threshold issue it is convenient to examine the decision of the primary Judge to which the amended interlocutory application relates.

DECISION OF THE PRIMARY JUDGE

3    On 22 February 2024 in Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2024] FCA 112 the primary Judge made the following orders:

1.    Pursuant to s 447A and/or s 445D of the Corporations Act 2001 (Cth), the deed of company arrangement entered into by Project Sea Dragon Pty Ltd and dated 23 March 2023 be terminated.

2.    Pursuant to s 447A of the Corporations Act 2001 (Cth), the administration of Project Sea Dragon Pty Ltd which commenced on 14 February 2023 be brought to an end forthwith.

3.    Pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act 2001 (Cth)), the resolution of creditors on 21 March 2023 that Project Sea Dragon Pty Ltd execute a deed of company arrangement be set aside.

4.    Project Sea Dragon Pty Ltd be wound up in insolvency.

5.    Robert William Hutson and David Martin Johnstone be appointed as joint and several liquidators of Project Sea Dragon Pty Ltd.

6.    Canstruct Pty Ltd be released from the undertaking recorded in the Orders of this Court made on 3 May 2023.

7.    The Orders made herein be stayed until the expiry of the period for filing an appeal from these Orders, unless earlier extended.

8.    The parties are to be heard on the question of costs.

4    In the first paragraphs of this judgment his Honour summarised the background facts and his decision as follows:

INTRODUCTION

1    The first defendant, Project Sea Dragon Pty Ltd (subject to a deed of company arrangement) (Project Sea Dragon), is a “special purpose vehicle” which was incorporated to establish and operate a large-scale prawn aquaculture project in northern Australia. As part of that project, it has facilitated the development of substantial prawn farming infrastructure in the Northern Territory at a site called “Legune Station”. Since its incorporation, however, it has had neither an income stream nor substantial assets of its own; instead, it has received funding on an ad hoc basis from its parent company, Seafarms Group Limited, the third defendant in these proceedings. Although this has enabled it to pay its debts from time to time, there has never been any agreement or arrangement in place pursuant to which Seafarms Group Limited has been obliged to, or has committed to, provide such funding.

2    In the course of the project, Project Sea Dragon accrued substantial liabilities to Seafarms Group Limited and to related companies in its corporate group in respect of the amounts that have been advanced to meet its debts. It also accrued a significant liability to the plaintiff, Canstruct Pty Ltd (Canstruct), a contractor that it engaged to carry out various construction works at the Legune Station site. In 2022, Canstruct and Project Sea Dragon fell into dispute as to the amount owed to the former for the work that it had performed at Legune Station. On 3 February 2023, Canstruct obtained an adjudication determination in its favour pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT) in the amount of approximately $14 million, including GST and interest. Project Sea Dragon and Seafarms Group Limited disputed that such an amount was properly owing, but the effect of the legislation is such that the amount was nevertheless required to be paid.

3    As the evidence addressed in the course of these reasons reveals, Project Sea Dragon and Seafarms Group Limited have since pursued a strategy by which the former company has sought to avoid the majority of its liability to Canstruct. That strategy has involved a number of steps. First, Seafarms Group Limited ceased funding Project Sea Dragon, thereby rendering the latter company immediately insolvent (at least in the view of Project Sea Dragon and Seafarms Group Limited). Secondly, Project Sea Dragon entered into voluntary administration. Thirdly, Project Sea Dragon entered into a deed of company arrangement (DOCA) proposed by Seafarms Group Limited, pursuant to which all arm’s-length creditors of the company are to be paid in full, other than Canstruct – which is estimated to receive a return of approximately 10 to 11 cents in the dollar. Finally, it is anticipated that Project Sea Dragon will resume its ordinary operations, in essentially the same position that it was in prior to its entry into the DOCA, minus its liability to Canstruct.

4    Canstruct contends in these proceedings, amongst other things, that this strategy constitutes an abuse of the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) (Corporations Act). It submitted that, were it otherwise, the corporate and financial structure of Project Sea Dragon and Seafarms Group Limited would effectively permit those companies to utilise the voluntary administration and DOCA process (hereinafter referred to as the “VA and DOCA process”) to avoid indebtedness on the part of the former to any creditor with whom they no longer desired to deal. It further asserted that the existing state of affairs as between Project Sea Dragon and Seafarms Group Limited, whereby the latter has provided funding to the former despite the absence of any obligation or commitment to do so, has in actuality meant that Project Sea Dragon has been insolvent for some time whilst continuing to accumulate substantial debts. In Canstruct’s submission, if Project Sea Dragon was now found not to have been insolvent during this time, and if its entry into the DOCA was not an abuse of Pt 5.3A of the Corporations Act, then the first and third defendants would essentially have developed a “business model to allow insolvent trading to occur”.

5    Project Sea Dragon and Seafarms Group Limited denied that the history of ad hoc funding passing from the latter to the former had the consequence that Project Sea Dragon was insolvent whilst carrying on its business, notwithstanding the fact that it was without substantial assets or financial resources of its own. They submitted that, as a matter of “commercial reality”, there was a commitment on the part of Seafarms Group Limited to fund the payment of Project Sea Dragon’s debts that was, in the circumstances, sufficient to render the latter company solvent. Project Sea Dragon was able to pay its debts as they arose, even though there was no particular assurance of funding from Seafarms Group Limited. It was further submitted that, because each individual step taken in relation to Project Sea Dragon’s entry into the DOCA was permitted by Pt 5.3A, it could not be said that any one of those steps (or any combination of them) constituted an abuse of the provisions.

6    For the reasons that follow, Canstruct’s position should be preferred. The DOCA should accordingly be terminated, the administration should be brought to an end, and Project Sea Dragon should be wound up. Whatever the intention might have been behind the financial and corporate structure adopted by Project Sea Dragon and Seafarms Group Limited, the effect of that structure was that the former company, as the special purpose vehicle that assumed the risk of the project, remained in an ongoing state of insolvency. In effect, it was a stalking horse. It accrued substantial indebtedness to its parent company, Seafarms Group Limited, held no substantial assets of its own, had no income, and had no commitment from any party to provide funds to meet its debts. Whilst in this position, it also came to be in dispute with Canstruct, a major contractor engaged on the project, which ultimately led to its incurring a further significant liability. It sought to avoid most of this liability by utilising the VA and DOCA process, pursuant to which it effectively purported to erase Canstruct’s entitlement to payment of the full amount awarded to it in the adjudication while maintaining its own operations and preserving its relationships with other arm’s-length creditors, each of whom was paid in full.

7    That use of the VA and DOCA process constituted an abuse of the provisions of Pt 5.3A of the Corporations Act. As such, the DOCA should be terminated pursuant to s 447A or s 445D(1)(g). Alternatively, it should be terminated because:

(a)    as contemplated by s 445D(1)(f), it was unfairly prejudicial to, or unfairly discriminatory against, Canstruct;

(b)    as contemplated by s 445D(1)(e), effect cannot be given to the DOCA without injustice;

(c)    as contemplated by s 445D(1)(b), misleading information was provided to the creditors voting on the DOCA; and/or

(d)    as contemplated by s 445D(1)(c), there were material omissions from the information given to those creditors.

8    When the conduct of Project Sea Dragon and Seafarms Group Limited is considered in full, as set out below, it is unsurprising that one set of facts has triggered the operation of several provisions of the Corporations Act that are designed to prevent the misuse of the provisions of Pt 5.3A.

5    I gratefully adopt this background summary.

6    By way of further detail, the primary Judge explained that the deed of company arrangement (DOCA) proposed by Seafarms Group Ltd (Seafarms Group) to the administrators of Project Sea Dragon Pty Ltd (Project Sea Dragon) was explained to be for the following purpose:

The proposed DOCA for the Company is intended to satisfy the objectives of Part 5.3A of the Act, including to maximise the chances of the Company, or as much as possible of its operations, continuing in existence, or to achieve better outcomes for the Company, compared to the expected outcome were the Company to be immediately wound up and assets liquidated.

7    Its key elements were summarised at [61] of the decision of the primary Judge as follows:

(a)    Seafarms Group Limited would contribute $3.5 million (described as the “Seafarms Contribution”) to a “Deed Fund”, which would first be used to repay the working capital facility provided by Seafarms Group Limited for the administrators’ expenses, after which an amount of $1.9 million to $2.03 million would be available for creditors.

(b)    The remainder of the Deed Fund would be distributed according to a priority arrangement so as to:

(i)    meet the claims of employees and “Small Claim Creditors” (presenting claims of $300,000 or less) such that they received 100 cents in the dollar; and

(ii)    thereafter, pay the “Balance Creditors” — that is, Canstruct — an estimated amount of 10.11 cents to 11.12 cents in the dollar, equating to approximately $1.4 to $1.55 million.

(c)    Other than the repayment of the interim funding, neither Seafarms Group Limited nor any of the other related companies in the Seafarms Group would receive anything from the Deed Fund.

(d)    Upon the effectuation of the DOCA, all claims against Project Sea Dragon would be released and extinguished in full, save for any claims by any landlord in respect of premises occupied by Project Sea Dragon.

8    By a “Report to Creditors by Voluntary Administrators pursuant to section 75-225 of the Insolvency Practice Rules (Corp) 2016 & Section 439A of the Corporations Act 2001” the administrators recommended to the creditors that Project Sea Dragon execute the DOCA because the DOCA proposal would result in a higher and more certain return to all unsecured creditors; the company’s operations being continued; the avoidance of crystallisation of the associated employee entitlements; and would result in all classes of creditors receiving more than estimated to be returned in a liquidation scenario.

9    In particular, as the primary Judge explained:

64.    In the next section of the Report, the administrators purported to estimate the return to creditors in two possible scenarios. It was suggested that, under the DOCA, all creditors would receive 100 cents in the dollar except for the one “Non-Small Claim Creditor”, which was Canstruct. By contrast, it was suggested that, in a liquidation, all creditors would receive zero cents in the dollar.

10    At [67] the primary Judge observed:

67    It is an uncontroversial fact that, at the time that Seafarms Group Limited proposed the DOCA, it had the ability to fund the payment of the debt owed by Project Sea Dragon to Canstruct. So much had been asserted by Seafarms Group Limited in its announcement to the ASX on 3 February 2023, which stated relevantly as follows:

Seafarms provisioned $8.7m for a settlement of this dispute in its 2022 accounts, and has the capacity to cover the balance.

11    When the resolution to enter the DOCA was put to the meeting of creditors, 19 creditors voted in its favour, and Canstruct voted against it. The vote was carried by majority in the number of creditors and majority in the value of the creditors voting. An announcement released to the ASX by Seafarms Group on 24 March 2023 stated, inter alia, that control of Project Sea Dragon was returned to the directors, and that Seafarms Group understood that the DOCA discharged Canstruct’s claims against Project Sea Dragon (at [75]-[77]).

12    Canstruct commenced proceedings on 5 April 2023, including the filing of an interlocutory application on 24 April 2023 to restrain the deed administrators from finalising the distribution of the Deed Fund to creditors. The application was heard on 3 May 2023, and orders sought by Canstruct made on that day. As at the date of the hearing before the primary Judge the entirety of Canstruct’s debt remained unpaid.

13    Before the primary Judge, Canstruct claimed that the DOCA should be terminated pursuant to s 447A and/or s 445D of the Corporations Act 2001 (Cth) (Corporations Act) on grounds including:

(a)    as contemplated by s 447A(2)(b), and within the ambit of s 445D(1)(g), entry into the DOCA constituted an abuse of the provisions of Pt 5.3A;

(b)    as contemplated by s 445D(1)(f), it was unfairly prejudicial to, or unfairly discriminatory against, Canstruct;

(c)    as contemplated by s 445D(1)(e), effect could not be given to the DOCA without injustice;

(d)    as contemplated by s 445D(1)(b), misleading information was provided to the creditors voting on the DOCA; and

(e)    as contemplated by s 445D(1)(c), there were material omissions from the information given to those creditors.

14    Canstruct also sought orders including:

(a)    pursuant to s 447A of the Corporations Act, the administration of Project Sea Dragon be brought to an end;

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

(c)    Project Sea Dragon be wound up in insolvency; and

(d)    Mr Robert William Hutson and Mr David Martin Johnstone be appointed as joint and several liquidators of Project Sea Dragon.

15    In respect of whether the DOCA constituted an abuse of provisions of the Corporations Act pursuant to s 447A(2)(b), his Honour had extensive regard to relevant case law. His Honour noted the submission of Canstruct that the real object of Project Sea Dragon and/or Seafarms Group in putting the former company into administration and proposing the DOCA was to avoid having to fund payment of the adjudicator’s decision that went against Project Sea Dragon, while at the same time avoiding the scrutiny of Project Sea Dragon’s arguably insolvent trading over the previous two years that might occur in a liquidation. This, so it was submitted, amounted to a relevant abuse of Pt 5.3A of the Corporations Act (at [103]).

16    To the extent that Canstruct contended that there had been abuse of Pt 5.3A because Project Sea Dragon and Seafarms Group had used the voluntary administration and DOCA process to avoid most of the debt owed to Canstruct, his Honour was satisfied that the predominant purpose of the voluntary administration and DOCA process was to allow Project Sea Dragon to avoid paying the full amount owed to Canstruct. His Honour concluded:

124.    …That purpose was improper, and alien to that for which Pt 5.3A is to be used. The process was not a bona fide attempt to use Pt 5.3A to achieve an arrangement by which Project Sea Dragon could continue in existence and provide a better outcome for creditors than a liquidation. Accordingly, the VA and DOCA process constituted an abuse of the provisions of Pt 5.3A, enlivening the powers in ss 447A and 445D(1)(g) to set aside both the administration and the DOCA.

17    To the extent that Canstruct contended that there had been abuse of Pt 5.3A because Project Sea Dragon and Seafarms Group had used the voluntary administration and DOCA process to avoid scrutiny into possible insolvent trading on the part of the former company, his Honour examined in detail whether the evidence disclosed insolvency of the company during the relevant period. In particular, his Honour considered whether the availability of funds from Seafarms Group or other related companies was such that Project Sea Dragon was able to pay its debts as they fell due, and noted that there was no agreement (for example by Seafarms Group to provide funding, the evidence did not support a finding of any real commitment to Project Sea Dragon by Seafarms Group (at [170]). Accordingly, his Honour concluded:

173.    The necessary conclusion is that Project Sea Dragon was insolvent from, at least, June 2020. From that time, it had substantial indebtedness, whether that was to its trade creditors or to entities in the Seafarms Group, and no funds which rendered it able to discharge it. Although it received funds from Seafarms Group Limited to meet its debts to trade creditors, it was simply replacing one existing liability with another. Additionally, there was no assuredness at any time, or at all, that the payment of any or all non-related party debts would be funded.

18    His Honour found that the directors of Project Sea Dragon were aware of relevant facts and circumstances (at [175]), and that entry into the DOCA had the benefit of preventing a liquidator from examining the conduct of Project Sea Dragon’s directors and Seafarms Group in relation to possible recovery actions for insolvent trading (at [176]). His Honour continued:

176.    … That, combined with the improper purpose for which the VA and DOCA process was used, is sufficient to establish that the entry into the DOCA constituted an abuse of Pt 5.3A.

19    His Honour further found that it was most unlikely that the directors of Seafarms Group and Project Sea Dragon would not have been alive to the risk that the liquidation of Project Sea Dragon might expose them and Seafarms Group to claims in respect of Project Sea Dragon’s insolvent trading (at [177]).

20    Reviewing the conduct of the administrators, his Honour further found:

180.    Though keeping in mind the short period of time available for the administrators to conduct their investigations and prepare their report, their apparent lack of investigations into the obvious key questions relating to Project Sea Dragon’s insolvency reveals their view to be unreliable.

21    His Honour continued:

The powers in ss 447A and 445D are enlivened

182    There is more than sufficient material available to support the conclusion that the DOCA was entered into for the purpose of the Seafarms Group relieving itself of the debt owed by Project Sea Dragon and to continue with the project as if that debt was never incurred. That was the effect of the VA and DOCA process and its purpose. It was asserted by Mr Dyer during his evidence that the desire was to keep the Project Sea Dragon business going and thus ensure the survival of the group. However, as Seafarms Group Limited had more than sufficient funds to meet Canstruct’s debt and have working capital to spare, the reality is that in circumstances where the project had been placed on hold, the group did not wish to pay the large debt which had accrued. That was particularly so given that, prior to the dispute with Canstruct, Project Sea Dragon’s development operations were effectively paused pending consideration of the project and the raising of additional capital. In that paused state, the ongoing costs of maintaining the status quo were small compared to those which would be incurred in continuing the development, and it is difficult to see that Canstruct’s debt could not be paid. The evidence supports the conclusion that, rather than being a necessity for survival, the VA and DOCA process was used as method of defeating a significant debt which the group did not want to pay and thereby making a significant saving.

183    The avoidance of an unwanted indebtedness is not an appropriate purpose for a DOCA. No aspect of Pt 5.3A is designed to permit a company to use the DOCA process to rid itself of a liability, merely to restart operations in an almost identical position to the pre-DOCA state save for the existence of the erstwhile debt. In that sense, the DOCA in the present case was entered into to achieve a purpose which was alien to the objects of Pt 5.3A. That is more than sufficient to warrant setting both the administration and the DOCA aside.

184    The above conclusion necessarily involves an acceptance of the commercial reality that Project Sea Dragon acted as part of the Seafarms Group, and the purpose of the VA and DOCA process should be regarded in that light. That is, the Seafarms Group, or at least Seafarms Group Limited and Project Sea Dragon, acted in concert with the intention to orchestrate Project Sea Dragon’s claimed insolvency from February 2023 in order to utilise the VA and DOCA process to extinguish Canstruct’s debt, and then continue Project Sea Dragon’s business as before. To a large extent, this was admitted by Mr Dyer in the course of his evidence where he acknowledged that the corporate desire was to not pay Canstruct in full because it was believed that it was not owed any other money.

185    The first and third defendants’ submission that Project Sea Dragon had to be considered on its own and be regarded as a company which had lost the support of its parent such that the DOCA was the only option apart from liquidation must be rejected. That is artificial in the extreme. Indeed, they were at pains to point out that Project Sea Dragon was a special purpose vehicle, meaning that it had a single development role in the Seafarms Group’s overall operations. Further, the evidence of Mr Dyer was that the common directors intended that the cessation of funding by Seafarms Group Limited would trigger the VA and DOCA process through which Project Sea Dragon would obtain a release of Canstruct’s debt. Those directors had also intended to recommence funding from Seafarms Group Limited to Project Sea Dragon once the DOCA had been entered into and they resumed directorial control of Project Sea Dragon.

The discretion

186    The seriousness of the misuse to which Pt 5.3A has been put in this case is sufficient on its own to warrant the exercise of the Court’s power to terminate the DOCA and the administration. On any view, the consequence of the misuse of s 436A, if it were permitted to stand, would be that Canstruct would be denied any possibility of a substantial recovery of its debt. It might also be seen as giving the Court’s imprimatur to inappropriate commercial conduct.

22    His Honour considered the prospect of an insolvent trading action being funded, and noted that Canstruct had made provision for the funding of public examinations during any liquidation (at [190]).

23    His Honour then turned to whether the DOCA should be terminated pursuant to s 445D(1)(f) of the Corporations Act. His Honour found that the DOCA discriminated against Canstruct in a number of ways (at [209]), and that Canstruct was greatly prejudiced such that it should be permitted the opportunity for the claim be pursued against the Project Sea Dragon directors and Seafarms Group (at [223]).

24    His Honour also considered that his discretion to terminate the DOCA under s 445D(1)(b) was enlivened (at [237]), as well as under s 445D(1)(c) (at [247]).

25    His Honour considered whether the discretion to terminate should be exercised. After weighing relevant factors, his Honour found that relevant considerations weighed heavily in favour of terminating the DOCA and winding up Project Sea Dragon (at [260]).

26    The relief ordered by his Honour was described as follows:

262.    On any of the bases for relief relied upon, Canstruct is entitled to relief which it seeks. In the first instance, pursuant to either s 447A or s 445D of the Corporations Act, the DOCA dated 23 March 2023 should be set aside and the administration which commenced on 14 February 2023 should be terminated.

263    Canstruct also applied pursuant to s 75-41 of the IPS for an order setting aside the resolution of creditors on 21 March 2023 that Project Sea Dragon execute the DOCA. There is a significant overlap between the considerations under that section and the earlier answered question of whether the DOCA should be set aside under s 445D(1)(f) of the Corporations Act. For the reasons which are given above, Canstruct is also entitled to the order it seeks under s 75-41 of the IPS.

264    Further, as Project Sea Dragon was and is insolvent, it ought now be wound up in insolvency. In that respect, Mr Robert William Hutson and Mr David Martin Johnstone have both consented to act as liquidators and it is appropriate that they be appointed joint and several liquidators of Project Sea Dragon.

265    Canstruct also seeks to be released from the undertaking given to the Court on 3 May 2023 in which it undertook to pay damages for any loss occasioned by the granting of the injunction restraining the administrators from completing the DOCA. In the circumstances of Canstruct’s success, there is no reason why it should not be released.

27    Importantly his Honour concluded his judgment by reference to whether a stay ought be granted:

266    In the course of the hearing, it was accepted that, regardless of the outcome, it would be appropriate to grant an interim stay so that the unsuccessful party might consider their position in relation to an appeal. That is appropriate in these particular circumstances where the position of whichever party that was unsuccessful at first instance, would be irrevocably damaged were a stay not granted. In those circumstances, the orders which are made are to be stayed until the expiry of the appeal period, unless extended.

NOTICE OF APPEAL

28    The defendants filed a notice of appeal against the decision of the primary Judge on 14 March 2024. The grounds of appeal are lengthy. In summary, they are:

(1)    The learned primary judge erred in finding that the powers in ss 447 A and 445D of the Corporations Act were enlivened and that the deed of company arrangement entered into by the first appellant dated 23 March 2023 (DOCA) ought to be terminated and the first appellant wound up in insolvency;

(2)    The learned primary judge erred in finding that the discretion ought to be exercised to terminate the DOCA and order that the first appellant be wound up in insolvency;

(3)    The learned primary judge erred in finding that the DOCA should be terminated pursuant to s 445D(1)(f) of the Act;

(4)    The learned primary judge erred in finding that the DOCA should be terminated pursuant to s 445D(1)(e) of the Corporations Act;

(5)    The learned primary judge erred in finding that the DOCA should be terminated pursuant to s 445D(1)(b) of the Corporations Act; and

(6)    The learned primary judge erred in finding that the DOCA should be terminated pursuant to s 445D(1)(c) of the Corporations Act.

29    The grounds of appeal included challenges to:

    the primary Judge’s characterisation of the predominant purposes of the DOCA process;

    the finding of insolvency in circumstances where the appellants claimed that the primary Judge confused a debt due and owing with a debt repayable on demand, and erred in failing to give sufficient weight to the commercial reality that Project Sea Dragon could continue to rely upon Seafarms Group for continued funding and thus was solvent at all material times;

    the matters the primary Judge considered when exercising discretion to wind-up Project Sea Dragon; and

    the findings that the DOCA should be terminated pursuant to ss 445D(1)(b), (c), (e) and (f) of the Corporations Act.

EVIDENCE AND ARGUMENTS OF THE PARTIES

30    Both Canstruct and the Stay Applicants filed affidavits and lengthy written submissions in respect of the present interlocutory application.

31    In summary, the Stay Applicants submitted:

    The appellants sought a continuation of the stay granted by the primary Judge until the appeal was heard and determined.

    There were six grounds of appeal of the decision of the primary Judge which met the relatively low threshold of the requirement that there was an “arguable point” or some “rational prospect of success”.

    A stay was appropriate because, unless stayed, the orders of the primary Judge provided for the immediate winding-up of Project Sea Dragon which would cause irrevocable damage that could not be remedied if the appellants were ultimately successful in the appeal.

    The irrevocable damage was to be compared to the prejudice to the respondent who would be unable to commence investigations or recovery proceedings if a stay remained in place. Such investigations and proceedings were subject to a number of risks in any event, and no return could be expected for a number of years even if such litigation ultimately succeeded.

    The balance of convenience overwhelmingly favoured the grant of a further stay.

32    In summary, Canstruct submitted:

    An order for the stay of execution of an order that a company be wound up in insolvency, and that liquidators be appointed, was ineffective because the provisions of the Corporations Act were engaged upon the making of an order for winding up, and appointment of liquidators. A valid order was an order for a stay of execution of the process of winding up, i.e. a stay of some action or proceeding that was to occur as part of the winding up of the company.

    A stay order could not prevent provisions of the Corporations Act which were engaged upon the making of orders for winding up and appointment of a liquidator.

    It was not appropriate to order a stay if it would not be effective.

    While there were a number of cases in the past where Courts ordered the stay of an order for winding up of a company, and reasoned that the Court had power to do so, none provided an analysis that persuasively explained how a Court order for a stay could hold back the tide of provisions of the Corporations Act that operated upon the making of such orders. Those authorities include Brinds Ltd v Offshore Oil NL [1986] VR 635 at 638, (1985) 63 ALR 94; Austral Brick v Falgat Constructions (1990) 21 NSWLR 389; Deputy Commissioner of Taxation v Ansett Resources (2010) 79 ACSR 347; [2010] FCA 833; McVeigh v Linen House (2000) 1 VR 31; Ample Source International v Bonython Metals Group (No.7) [2012] FCA 137 and Australian Securities and Investment Commission (ASIC) v Aviation 3030 Pty Ltd (No.2) [2019] FCA 391.

    For similar reasons, it is not appropriate to order a stay of the order that the DOCA be terminated pursuant to s 445D.

    The trial judge concluded that a number of grounds had been established, each of which enlivened the power to terminate the DOCA under s 445D. For the appeal to succeed, the appellate court would have to be persuaded to overturn all of the grounds. The defendants have failed to demonstrate that their appeal has arguable prospects of success.

    Even if the Court could effectively stay orders that Project Sea Dragon be wound up, liquidators be appointed to Project Sea Dragon, and the DOCA be terminated, the balance of convenience did not favour a stay because:

•    The appeal would not end, even if Project Sea Dragon did not continue with the appeal. Seafarms Group is an appellant, and could run the appeal and have all of the trial judge’s orders set aside, whether or not Project Sea Dragon continues with the appeal.

•    The prospect of the liquidation of an appellant if the stay was not granted did not, of itself, warrant a conclusion that the appeal would be rendered nugatory.

•    The evidence was that Project Sea Dragon was put on hold in 2022, and they remain dormant and under care and maintenance only.

•    To grant the stay would be to allow Project Sea Dragon to trade whilst insolvent pending determination of the appeal, which is contrary to the public interest.

•    It is unclear whether Seafarms Group is able or willing to fund liabilities likely to be incurred by Project Sea Dragon pending determination of the appeal.

•    Granting the stay would prevent the liquidators of Project Sea Dragon from pursuing recovery against Seafarms Group pursuant to s 588V and s 588W, and from pursuing recovery from the directors of Project Sea Dragon pursuant to s 588G(2) and s 588M of the Corporations Act.

•    The remainder of the Deed Fund may be available to the liquidators if a stay was refused, but would not be available to the directors if a stay was granted.

•    If the continuation of the stay is granted, the stay should be subject to conditions.

33    In reply, the Stay Applicants submitted:

    Canstruct was wrong to contend that the Court could not stay the execution of its orders of 22 February 2024.

    There is a low threshold to succeed in showing that there is an arguable point on the proposed appeal, or some rational prospect of success: Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2008] FCA 1867; Ng v Van Der Veldt [2010] FCA 89.

    The submission that in order to succeed on appeal, the appellate court would have to be persuaded to overturn all of the grounds for termination was incorrect. Project Sea Dragon may succeed on appeal, without disturbing findings as to specific grounds, if it established that the learned primary Judge erred in deciding whether to exercise the discretion to terminate the DOCA based on that ground.

    The grounds of appeal pressed by the appellants were arguable.

    Project Sea Dragon would suffer permanent and irreversible damage if the stay was not granted.

    The balance of convenience favoured a stay pending the appeal, and must be assessed against the fact that this was not a monetary judgment.

CONSIDERATION

34    During the course of the hearing before the primary Judge the following exchange occurred:

HIS HONOUR: Yesterday I mentioned – I had asked both parties if they agreed with – if, that any order I make on the handing down of the decision be stayed without any party having to make an application. I just- I put it to Mr O’Donnell that because - - -

MR MARTIN: We are happy with that, your Honour.

HIS HONOUR: Because if he failed, then things could happen and his ability to appeal would be prejudiced. Likewise, your side, I was going to – I’m saying – I am just saying that I think I should stay the operation of any order for a period of time so that the parties can consider the judgment. Is that convenient - - -

MR MARTIN: Yes. Thank you. That is a convenient way to do it. Thank you, your Honour.

HIS HONOUR: Yes, yes. Thank you. Yes, Mr O’Donnell. Are you content with that, too, that I stay it for a period of time so the parties can consider the judgment?

MR O’DONNELL: Yes. Yes, your Honour.

HIS HONOUR: I just - - -

MR O’DONNELL: There is one other complication. Your Honour’s interlocutory injunction runs, I think, until determination.

HIS HONOUR: Right. So I should extend that interlocutory injunction.

MR O’DONNELL: Extend that for the same period.

HIS HONOUR: Yes.

MR MARTIN: Yes, that’s appropriate, your Honour.

(transcript of hearing on 15 August 2023, p 151-152)

35    Accordingly, the primary Judge ordered a stay of his orders of 22 February 2024 “until the expiry of the period for filing an appeal from these Orders, unless earlier extended”. Relevantly his Honour said:

266.    In the course of the hearing, it was accepted that, regardless of the outcome, it would be appropriate to grant an interim stay so that the unsuccessful party might consider their position in relation to an appeal. That is appropriate in these particular circumstances where the position of whichever party that was unsuccessful at first instance, would be irrevocably damaged were a stay not granted. In those circumstances, the orders which are made are to be stayed until the expiry of the appeal period, unless extended.

36    I understand that the period for filing an appeal from his Honour’s orders expired on 21 March 2024. When the matter came before me on 19 March 2024 I ordered an extension of the stay granted by his Honour until determination of the present interlocutory application, which in turn sought an extension of that stay until determination of the appeal.

37    It follows that, technically, the Stay Applicants seek a continuation of an existing stay rather than a new stay.

38    Having said this however, I am satisfied that the principles applicable to the grant of a stay of orders apply. I further understand that the parties accepted that that was the case.

Relevant principles

39    Section 29 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) provides:

Stay of proceedings and suspension of orders

(1)     Where an appeal to the Court from another court has been instituted:

(a)     the Court or a Judge, or a judge of that other court (not being the Federal Circuit and Family Court of Australia (Division 2) or a court of summary jurisdiction), may order, on such conditions (if any) as it or he or she thinks fit, a stay of all or any proceedings under the judgment appealed from; and

(b)     the Court or a Judge may, by order, on such conditions (if any) as it or he or she thinks fit, suspend the operation of an injunction or other order to which the appeal, in whole or in part, relates.

(2)     This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the stay of proceedings.

40    Rule 36.08 of the Federal Court Rules 2011 (Cth) (Federal Court Rules) provides:

Stay of execution or proceedings under judgment appealed from

(1)     An appeal does not:

(a)     operate as a stay of execution or a stay of any proceedings under the judgment subject to the appeal; or

(b)     invalidate any proceedings already taken.

(2)     However, an appellant or interested person may apply to the Court for an order to stay the execution of the proceeding until the appeal is heard and determined.

(3)     An application may be made under subrule (2) even though the court from which the appeal is brought has previously refused an application of a similar kind.

Note: Interested person is defined in the Dictionary.

41    Further, I am satisfied that notwithstanding specific provision in rules of the Court referable to an order for a stay, there is also inherent jurisdiction in the Court, as a superior court of justice, to stay its own orders. That this is so appears from such decisions as Walton v Gardiner [1989] HCA 46; (1989) 168 CLR 23 (in respect of superior courts); Australian Nursing Federation; Ex parte State of Victoria (1993) 112 ALR 177; [1993] HCA 8 (in respect of the inherent jurisdiction of the High Court); and Re Gye and Perkes Ex Parte Mcintyre [1989] FCA 398 at [101] and Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited [2016] FCA 787 at [112] (in respect of the inherent jurisdiction of the Federal Court).

42    The principles to be applied in determining whether the execution of proceedings pending appeal should be stayed are well-established. They were summarised by Abrahams J in Viagogo AG v Australian Competition and Consumer Commission [2021] FCA 175:

10.     Rule 36.08 confers a broad discretion. Generally, there must be demonstrated “a reason or an appropriate case” to warrant the exercise of discretion in favour of granting a stay . It is not necessary to establish special or exceptional circumstances for the grant of a stay: Powerflex Services Pty Ltd v Data Access Corp [1996] FCA 460; (1996) 67 FCR 65 at 66.

11.     Two questions must be considered: first, is there an arguable point on the proposed appeal: Nolten v Groeneveld Australia Pty Ltd [2011] FCA 1494 (Nolten) at [24] or some “rational prospect of success” in relation to any of the grounds of appeal: Burns v AMP Finance Ltd [2005] FCA 761 at [5]; and second, does the balance of convenience favour the grant of a stay: Nolten at [24], [46].

12.     The party seeking the order bears the onus of demonstrating a proper basis for a stay, which must be fair to all parties: Alexander v Cambridge Credit Corporation Ltd (receivers appointed) (1985) 2 NSWLR 685 (Alexander) at 695. That party must demonstrate that there is a real risk that it will suffer prejudice or damage if a stay is not granted, which will not be redressed by a successful appeal: Kalifair Pty Ltd v Digi-Tech (Australia) Ltd, McLean Tecnic Pty Ltd v Digi-Tech (Australia) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 (Kalifair) at [18]; Flight Centre Limited v Australian Competition and Consumer Commission [2014] FCA 658 (Flight Centre) at [9(f)]. This requirement will be satisfied if a successful appeal will be rendered nugatory unless a stay is granted: Ali v Australian Competition and Consumer Commission [2020] FCA 860 at [11]; Australian Competition and Consumer Commission v BMW (Australia) Ltd (No 2) [2003] FCA 864 (BMW) at [5]; Alexander at 695; Kalifair at [18].

13.     The successful party at first instance is entitled to presume that the judgment appealed from is correct: Powerflex Services Pty Ltd v Data Access Corp [1996] FCA 460; (1996) 67 FCR 65 at 66, citing Re Middle Harbour Investments Ltd (in liq) (unreported, Court of Appeal NSW, 15 December 1976); Flight Centre at [9(b)]; Wooldridge v Australian Securities and Investments Commission [2015] FCA 349; (2015) 106 ASCR 551 (Wooldridge) at [11]; Urban Alley Brewery Pty Ltd v La Sirène Pty Ltd (No 2) [2020] FCA 351 at [48], [51].

Does the Court have jurisdiction to order such stay?

43    Importantly in this proceeding however, Canstruct has contended that the Court lacks power to order a stay of the termination of the DOCA and the commencement of the winding up of Project Sea Dragon. In essence, Canstruct contends that, because his Honour made the order that Project Sea Dragon be wound up in insolvency, provisions of the Corporations Act referable to the making of an order for winding up and appointment of liquidators have been engaged, in particular :

    Section 5-15 of Schedule 2 to the Corporations Act Insolvency Practice Schedule (Corporations), which deems a company to be under external administration upon the appointment of liquidators;

    Section 198G (1), which prohibits directors from performing the function of directors or exercising the powers of directors once the company was under external administration;

    Sections 513A(d) and s 513C(b), which had the effect that the winding up of Project Sea Dragon is taken to have commenced on the day the administration began, namely 14 February 2023;

    Section 477, which invests liquidators with powers;

    Section 474(1), which imposes a statutory duty on the liquidators to take all of the property of the company into their custody or control;

    Section 468, which made void dispositions of property of the company that occurred after the commencement of the winding up (namely 14 February 2023);

    Section 468A, which made void transfers of shares after commencement of the winding up (namely 14 February 2023);

    Section 471B, which prevents a person commencing or proceeding with proceedings in the Court against the company without leave;

    Section 470(1)(b), which requires the applicant for the order to lodge notice of the making of the order with ASIC within two business days after the making of the order; and

    Section 475, which requires directors to make out and verify a statement in writing and provide it to the liquidators as to the affairs of Project Sea Dragon, and to do so within 10 business days after the making of the winding up order.

44    In short, Canstruct submitted that a stay order could not prevent the operation of the above provisions of the Corporations Act engaged upon the making of the orders for winding up and appointment of a liquidator, and even if the Court ordered a stay the provisions of the Corporations Act would operate, and would immediately affect the legal rights and obligations of the company, as well as its directors, creditors, and shareholders.

45    Canstruct submitted that it is not appropriate to order a stay if it will not be effective. This submission requires a finding by me not only that an order by me in the terms sought by the Stay Applicants would be ineffective, but that the original order of the primary Judge of 22 February 2024 was similarly ineffective.

46    I am not prepared at this interlocutory stage to make such findings, for the following reasons.

47    First, the weight of authority favours the existence of a power vested in the Court to make stay orders suspending or postponing the coming into effect of orders such as those made by the primary Judge.

48    As the Full Court explained by reference to general principles in Fuchs Lubricants (Australasia) Pty Ltd v Quaker Chemical (Australasia) Pty Ltd (No 2) [2021] FCAFC 114:

11.    In our view, the judgment of the Full Court in Arnhem Land Aboriginal Land Trust is distinguishable. In that case, the Full Court had already made a declaration and in that context considered whether or not the declaratory order could be stayed. In the present case, in contrast, the Court has not yet made a declaration and what is proposed is a stay of a package of orders proposed to be made by the Full Court, including a declaration. In these circumstances, the proposed stay is akin to an order suspending or postponing the coming into effect of the declaration. The power to make such an order seems to have been accepted by Carr J in Bunnings Forest Products Pty Ltd v Bullen [1994] FCA 1526; (1984) 54 FCR 342 at 347:

... if an appeal were foreshadowed and the circumstances warranted taking such a course, a Full Court might before pronouncing judgment or, perhaps, before entry of judgment stay a declaratory order by suspending or postponing its coming into effect for a period fixed by reference to some appropriate stage of the further appellate process. Alternatively, the court or a judge might, in an appropriate case, stay the exercise of rights which might be declared to exist, pending an appeal which might have the result of the declaration being set aside.

12.    The above passage was cited with apparent approval by the Full Court in Arnhem Land Aboriginal Land Trust at [5].

13.    In the circumstances of this case, where the Court proposes to make a declaration of invalidity of certain patents, we consider it prudent to stay not only the revocation order but also the declaration of invalidity, pending the outcome of the special leave application and any appeal. Otherwise, the declaration may convey an incomplete and thus misleading impression to the general public. Further, we consider it appropriate to stay paragraph 4, as this forms part of the package of consequential orders.

(emphasis added)

49    However, and possibly even more relevantly, the extent to which a superior Court has inherent jurisdiction to stay a winding up order was explained by the Full Court of the Supreme Court of Victoria in Brinds Ltd v Offshore Oil N.L. [1986] VR 635. In that case the Full Court considered an application for a stay of an order for the winding up of Brinds Ltd, and for an order suspending some or all of the powers of the liquidator, pending an appeal from an earlier Full Court to the Privy Council. At first instance Tadgell J had made an order for the winding up of Brinds Ltd on 5 May 1983, and on the same date granted a stay of 14 days staying all operation of his order for winding up. As the Full Court observed, this stay was continued by other orders pending the determination of the Full Court appeal, until a period of time during which the stay lapsed and a fresh application for a stay was made.

50    In considering the jurisdiction of the Full Court to grant a stay, Fullagar J (with whom Southwell and Nicholson JJ agreed) said at 637:

In my opinion the liquidator, conducting a winding up by this Court, is under the control of this Court, and in my opinion this Court has inherent jurisdiction to direct him not to do certain acts pending the hearing of the appeal to Her Majesty in Council, if this Court should be of opinion that the doing of such acts in that interim would be calculated to work injustice. I am not at the moment speaking of the necessary procedure applicable to obtaining an order on that basis.

Further, quite apart from the Court's powers over the liquidator in a winding up by the Court, the weight of authority is, I think, in favour of there being an inherent power in this Court to stay any order, or to stay proceedings under any order, pending an appeal where the refusal of a stay would be likely to work a substantial injustice: see Howarth v. Walker (1903) 3 S.R. (N.S.W.) 235; Battle Creek Toasted Corn Flake Co. v. Kellogg (1924) 55 O.L.R. 127 (Can.), and F.A.I. Insurances Ltd. v. Registrar of Workers' Compensation Commission of New South Wales [1982] 1 N.S.W.L.R. 239. With respect, I would prefer the reasoning in those cases to that in the recent South Australian case of Van Reesema v. Giameos (No. 2) (1978) 17 S.A.S.R. 390, in which Howarth v. Walker was apparently not cited. Each of the regulations relevant in Victoria (namely r. 6 of the Order in Council and s. 218 of the Supreme Court Act) is in my opinion purely enabling in character. At the time of the first order in council regulating appeals to the Privy Council, if such an order can now be located, I think the position must have been that there were various colonies of Britain in differing stages of economic and political and judicial development, and thus when the authorities by order in council gave minimal power the intention, I think, must have been to give just that minimal power without affecting other powers which a superior court in a colony might have. Similarly, I think that the legislation in Victoria was intended only to give somewhat more minimal power, whereas I think neither the order in council nor the legislation should be read as restrictive of such powers as the superior court of a colony or State might have which are not inconsistent with the permissive provisions already referred to. As will be seen, however, these considerations are not essential to our ultimate decision.

(emphasis added)

51    His Honour continued at 638:

I come now to turn to what might be called the merits of the application or alternative applications. It is, I think, important, first, to recognize the effect of the winding-up order made by Tadgell J., which became effective on the day the Full Court delivered judgment, that is 16 December 1983. It has remained fully effective ever since: "The effect of the winding-up order, so far as it caused a change of status, was immediate and definite ... [it had the] effect of taking the property of the Company out of its own hands ... and placing it under the entire control of the official liquidator, with power to carry on the Company's business and to dispose of its property": Robert H. Barker & Co. Ltd. v. Simon (1914) 19 C.L.R. 24, at p. 27, per Griffith C.J.

It is one thing to seek and perhaps obtain a stay of a winding-up order before it has become effective; it is another thing altogether to allow the liquidator to proceed for a year or more, during which time the liquidation fees are mounting (in May 1985 they totalled some $57,000), before applying for a stay, or for some restraints upon the liquidator's powers to be exercised in the winding up.

When there is a profitable business being carried on, as was the case in Re A.&.B.C. Chewing Gum Ltd. [1975] 1 W.L.R. 579; [1975] 1 All E.R. 1017, Plowman J. said that "as a matter of practice a stay is never granted". In my opinion, even where it is not a case of a profitable business being carried on, it must only be in rare circumstances that a company, the subject of a winding up, can stand by for a long period while liquidation proceeds, and then obtain a stay or an order severely restricting the liquidator's activities, whether for a short period pending some event, or generally.

52    The Full Court plainly had no issue with a stay of winding up orders or an order for the appointment of a liquidator, on the basis that such orders fell under the inherent jurisdiction of the Court.

53    An earlier case in which the power of a court to stay a winding up order was considered was Krextile Holdings Pty Ltd v Widdows [1974] VR 689. In that case an order had been made by the Supreme Court winding up Brush Fabrics Pty Ltd and associated companies. A liquidator was appointed pursuant to s 231A of the Companies Act 1961 (Vic). A shareholder of each of the companies applied for a stay of the liquidation proceedings. Gillard J observed at 693 as follows:

By s. 283 every company being wound up must add the words ''in liquidation" after the name of the company in all invoices, order forms etc. lt might be herein interpolated that the governing words in this section are: "Where a company is being wound up." If, therefore, a permanent stay of proceedings in relation to winding up were granted, it is patent that the company concerned would no longer be in a state of being wound up. Accordingly, the operative words in the section would be no longer applicable to the company concerned and the company would not be required to add the expression "in liquidation", if an order for a stay were granted. Upon the staying order becoming effective, as a matter of mere interpretation of the section itself the provisions of the section are no longer operative. It might be added that it is not easy to so interpret the verbiage used in other sections of the Act as will be seen when s. 227 is examined more closely.

By Subdivision 3 of Division 4 of Part X various transactions with the company may be set aside and execution against the company stayed. It is unnecessary to deal with these various sections in this subdivision in detail.

As well as these various powers and duties conferred and imposed on the company, its members and the liquidator, this Court is also given wide jurisdiction to control the winding up and applications may be made to it in relation to the various aspects of winding up the affairs of the company. The list of sections set out above was not intended to be exhaustive but merely indicative of the kind of matters which necessarily arose from the making of a winding-up order.

Although the important and operative expression in s. 243 contains a reference to "proceedings", in my view, the word is not limited merely to applications to the Court, or to any proceedings that must be brought to the Court under the Act in relation to a winding up. In my opinion, all the matters that flow directly from or are invoked by the making of an order as a part of the process of winding up under the provisions of the Companies Act 1961 are "proceedings in relation to the winding up". It is the performance or observance of all the statutory powers and duties indicated above which are comprehended within the expression "all proceedings in relation to the winding up".

Accordingly, if an order were made under s. 243 of the Companies Act 1961 it would be the process of winding up referred to in the various statutory consequences set out above and which directly flow from the making of the order that would be stayed. The Court, of course, is not empowered to revoke or recall its order once it is passed and entered. The effect of a perpetual stay of proceedings under s. 243, however, must mean a virtual end to the winding-up process under that order. The statutory provisions that ordinarily would cause certain things to be done no longer apply to the company and the order for winding up becomes quite inoperative: see, per Molesworth, J., in Re Oriental Bank Corporation (1884), 10 V.L.R. (E.) 154, at p. 185; Re Western of Canada Oil, Lands and Works Co., [1874] W.N.148; Re Stephen Walters& Sons Ltd. (1926), 70 Sol.Jo. 953; Re South Barrule Slate Quarry Co. (1869), L.R. 8 Eq. 688; cf. Re Telescriptor Syndicate, Ltd., [1903] 2 Ch. 174.

(emphasis added)

54    See also Austral Brick Co Pty Ltd v Falgat Constructions Pty Ltd (1990) 21 NSWLR 389 at 392 where Krextile was cited.

55    More authority is also relevant. As O’Callaghan J explained in Australian Securities and Investment Commission (ASIC) v Aviation 3030 Pty Ltd (No 2) [2019] FCA 391:

1.    Yesterday, I pronounced certain winding up orders in this proceeding: see Australian Securities and Investment Commission v Aviation 3030 Pty Ltd [2019] FCA 377.

2.    After I did so, counsel for the defendants made an application for a short stay of the winding up orders. I granted the application.

3.    Because of the public interest involved, I will now briefly explain why.

4.    The court has the power to order such a stay as an incident to its general power to control its own proceedings, as well as pursuant to s 23 of the Federal Court of Australia Act 1976 (Cth) and r 36.08(2) of the Federal Court Rules 2011 (Cth).

5.    …

6.    …

7.    The principles governing the exercise of the Court’s discretion to order a stay of winding up orders were summarised by Reeves J in Deputy Commissioner of Taxation v Ansett Resources & Industries Pty Ltd [2010] FCA 833; (2010) 79 ACSR 347 at [11]-[12]:

... [I]t is clear, in my view, that I have the power under s 23 of the Federal Court Act 1976 (Cth) to order a stay of the winding-up order pending an appeal to the Full Court. The grant of such a stay is a matter for the discretion of the court in all the circumstances of the case: see HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638; (2002) 44 ACSR 169 at [47]- [48] (HVAC) per French J. Furthermore, the principles applicable to this stay application are the same as those that apply under the Rules of Court to the stay of any order of the court pending an appeal: see Kalifair Pty Ltd v Digi-Tech (Aust) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 at [18] (Kalifair); Masri Apartments Pty Ltd (in liq) v Perpetual Nominees Ltd [2004] NSWCA 255; (2004) 209 ALR 86 at [17] (Masri); and Gronow, McPherson’s Law of Company Liquidation (Lawbook Co, subscription service) at [16.190].

Under the Federal Court Rules, the normal principles are these. First, it is not necessary to demonstrate some “special” or “exceptional” reason for the stay : see Powerflex Services Pty Ltd v Data Access Corporation [1996] FCA 460; (1996) 67 FCR 65 at 66 and HVAC at [48]. Secondly, there is an onus on the applicant to make out a reason or appropriate case for the discretion to be exercised in its favour: see HVAC at [48] and Ng v Van Der Velde [2010] FCA 89 at [20] and [21] (Ng). Thirdly, the fact that an appeal will be rendered nugatory if a stay is not granted, is usually regarded as a substantial factor in favour of a stay. This, in turn, requires some assessment to be made to the prospects of success on the appeal: see, variously, Alexander v Cambridge Credit Corp Ltd (receivers appointed) (1985) 2 NSWLR 685 at 695; Kalifair at [18]; Masriat [17]; HVAC at [49(b)] and Ng at [21]. That assessment has been described as: “a preliminary non­speculative assessment of whether the appellant by the grounds of appeal has raised an arguable case ... [involving] ... a low threshold of arguability”: see Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2008] FCA 1867 at [40] per Greenwood J and Ng at [36]. Fourthly, if the grounds of appeal disclose an arguable case, it is necessary to consider where the balance of convenience lies. See Kalifair at [18] and Masri at [17] ...

56    I am not satisfied that a stay of winding up orders, granted by this Court, would be unable to “hold back the tide” of the provisions of the Corporations Act to which Canstruct has referred. Further, contrary to submissions of Canstruct, I am not persuaded that no analysis was conducted by Judges in the cases to which I have referred. Rather, the plain conclusion consistently reached was that superior courts of justice have inherent jurisdiction to stay a winding up order.

57    I am satisfied that the Federal Court has inherent power to stay any order, or to stay proceedings under any order, pending an appeal where the refusal of a stay would be likely to work a substantial injustice. This includes orders which would otherwise trigger processes under winding up provisions of the Corporations Act.

58    Second, I note the detailed arguments put by Canstruct referable to the analogy between relevant provisions of the Corporations Act and the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).

59    In support of the proposition that a stay cannot prevent the operation of provisions of the Corporations Act engaged upon the making of a winding up order, Canstruct submitted that bankruptcy law provided a comparable situation.

60    Specifically, Canstruct submitted that upon the making of a sequestration order, provisions of the Bankruptcy Act were automatically engaged causing property to immediately vest in the trustee in bankruptcy. Canstruct relied on Endresz v ASIC [2014] FCA 1139 at [8] in support of the proposition that it was not appropriate to order a stay of such sequestration order which caused automatic legislative operation:

“……It is conceptually incoherent to contemplate a judicial stay order as being available to countermand automatic legislative operation where no question of invalidity is involved.”

61    Canstruct further relied on The Owners – Strata Plan No.20,347 v Saha [2021] FCA 961 where Stewart J observed:

[21]     I was well aware that in the context of an appeal from a sequestration order the court has no power to order a stay of the sequestration order, but only to order that proceedings under the sequestration order be stayed. That is because a sequestration order takes effect immediately it is made; the debtor immediately becomes a bankrupt, and their property immediately vests in the trustee in bankruptcy. Those are the effects of ss 43(2) and 58(1) of the Bankruptcy Act. Section 52(3) of the Bankruptcy Act provides that the court may stay all proceedings under a sequestration order for a period not exceeding 21 days, but it does not provide the power to stay a sequestration order. Also, under s 37(2) the court does not have power to suspend the operation of a sequestration order. I had discussed this issue not long before in Du Bray v ACW [2020] FCA 1142 at [4] –[11] where I had cited Endresz v ASIC [2014] FCA 1139 at [8] –[11] .

62    An important provision of the Bankruptcy Act in this context is s 37 which specifically provides:

Power of Court to rescind orders etc.

(1)     Subject to subsection (2), the Court may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order.

(2)     The Court does not have power to rescind or discharge, or to suspend the operation of:

(a)     a sequestration order; or

(b)     an order for the administration of the estate of a deceased person under Part XI.

(emphasis added)

63    Further, s 52(3) of the Bankruptcy Act specifically permits the Court, if it thinks fit, and upon such terms and conditions as it thinks proper, to stay all proceedings under a sequestration order for a period not exceeding 21 days.

64    There is no equivalent to s 37 or s 52(3) of the Bankruptcy Act under the Corporations Act in respect of winding up orders.

65    Canstruct submitted that s 37 however was not at the core of reasoning that the Court does not have power, rather it was that “upon the making of sequestration order, the Bankruptcy Act by force of its provisions, changes the status of the debtor, enlivens powers of the trustee, and brings about changes to property”.

66    At this interlocutory stage I am not prepared to find that principles arising from ss 37 and 52 of the Bankruptcy Act preventing a stay on a sequestration order have equivalent application to a winding up in insolvency. That there is no such specific legislation in the Corporations Act militates against such a finding. Following a sequestration order, property of the bankrupt vests forthwith in the trustee (s 58(1) Bankruptcy Act). The consequences of winding up in insolvency are different – as summarised in McPherson’s Law of Company Liquidation at [7.100]:

As far as the company is concerned, the commencement of winding up therefore has a number of important consequences. Admittedly it has no immediate effect upon the corporate personality and powers of the company, and there is not, as there is in bankruptcy, an automatic transfer of the property of the company to the liquidator; but the effect of a company's going into liquidation is to:

•    prevent it from carrying on business except for the limited purpose of winding up;

•    impose a general prohibition upon its power to dispose of property, save for dispositions authorised by the Act or authorised realisations and other transactions by the liquidator;

•    make the liquidator, generally speaking, the only person who can bring or defend proceedings on behalf of the company (see [7.1200], [8.1120]);

•    require persons wishing to commence or continue proceedings against the company to obtain leave (see [7.900]-[7.1200]);

•    fundamentally alter the rights of members or shareholders of the company (see [7.700]-[7.740]); and

•    convert the rights of those with claims against the company from a right to pursue payment in the normal ways into a right to prove in the winding up in accordance with the Act.

This is partly the result of the specific provisions of the Corporations Act 2001 itself, but it is also a necessary consequence of the fact that, on winding up, control of the company's affairs is taken from the directors and vested in the liquidator, whose powers are restricted by statute to dealing with the assets for the purpose of winding up the company…

(footnotes omitted)

67    As I explained earlier, I am satisfied that the Court has inherent jurisdiction to stay the transfer of control of the company’s affairs from the directors to the liquidator, in terms ordered by the primary Judge.

68    It is appropriate to now turn to the stay for which the Stay Applicants apply.

Is there an arguable point of appeal?

69    Canstruct has contended that, in order to succeed in the appeal against the decision of primary Judge, the appellate court would need to be persuaded of all grounds of appeal. The Stay Applicants contest this submission.

70    The key provision of the Corporations Act founding the power of the Court to terminate a DOCA is s 445D, which relevantly provides:

When Court may terminate deed

(1)    The Court may make an order terminating a deed of company arrangement if satisfied that:

(a)     information about the company's business, property, affairs or financial circumstances that:

(i)     was false or misleading; and

(ii)     can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;

was given to the administrator of the company or to such creditors; or

(b)    such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or

(c)     there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or

(d)     there has been a material contravention of the deed by a person bound by the deed; or

(e)     effect cannot be given to the deed without injustice or undue delay; or

(f)     the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

(i)     oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii)     contrary to the interests of the creditors of the company as a whole; or

(g)     the deed should be terminated for some other reason.

(2)    …

71    As I noted earlier in this judgment, the reasons of the primary Judge are lengthy and detailed. His Honour found that the DOCA should be terminated for multiple reasons, referable to ss 445D(1)(b), (c), (e) and (f) (see [249] of the primary judgment) and that events have occurred which have infected the DOCA process. The Stay Applicants have submitted, however, that central to the proceedings at first instance was the question of solvency of Project Sea Dragon, and the finding of the primary Judge that it was insolvent, which finding in turn was based on other findings of the primary Judge (including the absence of a specific arrangement in writing compelling its parent company to pay moneys in support). I note from the primary judgment that a key argument before his Honour was whether Project Sea Dragon had been “insolvent for some time whilst continuing to accumulate substantial debts” such that the entry into the DOCA was an abuse of the provisions of Pt 5.3A (at [4]), or whether management of Project Sea Dragon and its parent company had

4.    essentially … developed a “business model to allow insolvent trading to occur”.

(See also [103] of the primary judgment)

72    This argument was in addition to the case of Canstruct that Project Sea Dragon and Seafarms Group had used the voluntary administration and DOCA processes to avoid most of the debt owed to Canstruct (see [104] of the primary judgment).

73    During the hearing I put to the parties whether the essential thread running through the primary judgment was his Honour’s finding that Project Sea Dragon was insolvent at all material times. The Stay Applicants agreed with that hypothesis. Mr O’Donnell for Canstruct however submitted, in summary, that irrespective of issues of insolvency, the primary Judge found that the abuse of Part 5.3A was so serious that termination of the DOCA and winding up of Project Sea Dragon were justified.

74    Certainly his Honour devoted considerable analysis to the issue of abuse of process. However, there is authority to the effect that discrimination between classes of creditors to preserve a profitable part of a company’s business at the expense of an unprofitable part is a valid purpose of a DOCA: see for example Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd [1996] 70 FCR 34. This is notwithstanding such cases as Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509 at 521. A key issue here is that the primary Judge has exercised his discretion to terminate the DOCA, and ordered instead that Project Sea Dragon be placed into winding up in insolvency.

75    The crux of this point is that I do not consider that the Stay Applicants must necessarily substantiate every ground of appeal in order for the appeal to be successful.

76    I consider it is arguable that, if the primary Judge had not found that Project Sea Dragon was insolvent at material times, his findings of abuse of process in respect of the DOCA may have been different, and his Honour may have exercised his discretion differently. There is accordingly an arguable point on the proposed appeal within the meaning of such authorities as Nolten v Groeneveld Australia Pty Ltd [2011] FCA 1494 at [24]. To that extent, I find that there is some rational prospect of success of the appeal such as to warrant a continuation of the stay of the orders of the primary Judge until determination of the appeal: Burns v AMP Finance Ltd [2005] FCA 761 at [5].

Balance of convenience

77    As I have already noted, the primary Judge considered it appropriate that an interim stay of his orders be granted. Importantly, his Honour did so because the position of Project Sea Dragon would be irrevocably damaged were a stay not granted. Plainly, his Honour considered that the balance of convenience favoured Project Sea Dragon in respect of an order for stay.

78    During the hearing Canstruct focussed its submissions on the question of balance of convenience. In particular, Mr O’Donnell submitted that the balance of convenience did not favour continuation of the stay because, in summary:

    There would be no loss of operations of Project Sea Dragon as alleged by the Stay Applicants if the stay was not continued, because the company was already operating at a limited capacity;

    The commencement of winding up would not trigger rights prejudicial to Project Sea Dragon (for example, the termination of subleases);

    To grant the stay would be to permit Project Sea Dragon to trade whilst insolvent whilst there were doubts as to whether its parent company could and would continue to fund Project Sea Dragon’s business;

    The remainder of the Deed Fund would be available to creditors if continuation of the stay was refused;

    The grant of a stay would diminish assets which would otherwise be available to creditors of Project Sea Dragon in a winding up and would prevent liquidators from commencing recovery action; and

    The appeal would not be rendered nugatory by the refusal of the continuation of the stay.

79    The Stay Applicants submitted that the balance of convenience was in favour of the continuation of the stay because, in summary:

    The damage that Project Sea Dragon would suffer if a liquidator was appointed would be permanent and irreversible, including the loss of permits, licenses and approvals and the loss of third-party investments;

    If Project Sea Dragon was placed into liquidation, the evidence before the Court was that the parent entity would not fund the liquidators to continue the operation of Project Sea Dragon whilst in liquidation;

    The balance of convenience supported the maintenance of the status quo pending the outcome of the appeal;

    The contention that a stay would allow insolvent trading should be rejected as the finding of insolvency has been challenged on appeal;

    Project Sea Dragon was agreeable to the stay conditions proposed by Canstruct which limited the suggestions of insolvent trading; and

    Upon termination of the DOCA, the Deed Fund would not be available to creditors, rather would be repaid to Seafarms Group. The balance of convenience supported the continuation of Seafarms Group funding the operations of Project Sea Dragon while the appeal was being heard and determined.

80    In assessing the balance of convenience, it is necessary to consider whether the appeal (if successful) would be rendered nugatory in the absence of stay, and the prejudice that Canstruct would suffer if a stay was granted: Nolten at [30]. It is not necessary that there be “special or exceptional circumstances” to warrant the grant of a stay: ASE24 v Minister for Immigration, Citizenship and Multicultural Affairs [2024] FCA 173 citing Cook’s Construction Pty Ltd v Stork Food Systems Australasia Pty Ltd [2008] 2 Qd R 453; [2008] QCA 322 at [12].

81    I am persuaded that the balance of convenience favours the continuation of the stay.

82    First, as a general proposition, the making of an order for winding up in insolvency plainly entails for a company consequences of a serious and adverse kind (Scope Data Systems v Bdo Nelson Parkhill [2003] NSWSC 137 at [25]; Tatlers.com.au Pty Limited v Davis [2006] NSWSC 1055 at [27]), described in one case as “potentially catastrophic” (In the matter of K-Bek Motors Pty Ltd [2017] NSWSC 1838 at [12]). This was clearly the view of the primary Judge in the present case (see [266] of the primary judgment). The serious and potentially catastrophic consequences that Project Sea Dragon may be subject to can be drawn from the evidence of Mr Rodney Dyer. In his affidavits filed 2 June 2023 and 5 April 2024, Mr Rodney Dyer referred to the prospect of receiving investment from potential investors while Project Sea Dragon remained under the DOCA, which would not be the case if the company entered liquidation.

83    During the hearing submissions were made concerning whether any triggering of provisions in lease or licence documents would take place on the commencement of liquidation. My understanding of the submission of the Stay Applicants in this respect was that funding for Project Sea Dragon would cease if it entered liquidation, and in turn the absence of that funding would result in defaults under various agreements (including sub-leases and aquaculture agreements) to which Project Sea Dragon was a party. While there were no specific provisions in for example relevant sub-leases to which my attention was taken, it does appear that the risk of default was real in the event that funding of Project Sea Dragon ceased forthwith.

84    To the extent that Canstruct invited the Court to accept that the consequences of a winding up order can be reversed with minimal damage to the company, I do not accept it. I consider that the appeal filed on 14 March 2024 would be rendered nugatory if the stay were not granted and Project Sea Dragon proceeded to winding up.

85    Second, the evidence before the Court indicated that Project Sea Dragon was an active corporate vehicle, such that there would be loss of operations if a stay were refused. Mr Rodney Dyer gave evidence in his affidavit filed 5 April 2024 and orally at the hearing that the Cardwell facility continued to operate with funding from Seafarms Group. Further, Mr Dyer in his affidavit filed 16 April 2024, and again orally at the hearing, gave evidence that the Exmouth Grow Out facility continued to operate.

86    Third, to the extent that Project Sea Dragon has viable businesses employing workers in regional areas, the evidence before the Court is that those businesses would cease operation on the commencement of winding up because the parent would cease funding Project Sea Dragon should the stay not be granted. In respect of the Cardwell facility at least, Mr Dyer gave evidence that Seafarms Group would cease funding the facility if Project Sea Dragon went into liquidation (affidavit filed 5 April 2024 para [7]).

87    Fourth, in respect of the Deed Fund it is by no means clear to me at present that those monies would be available to the liquidator in the event that Project Sea Dragon went into liquidation. The Stay Applicants strongly contend that the balance of any such monies would be repayable to Seafarms Group should the stay be refused. As matters stand, that is a plausible outcome.

88    Fifth, the question of the solvency or insolvency of Project Sea Dragon at material times is, as I have already noted, a hotly contested issue. I further note evidence tendered during the hearing of what was initially an unsigned agreement, but which was subsequently executed, facilitating a line of credit to Seafarms Group, which I understand from the evidence and submissions would be available to be drawn down immediately, ongoing for 4 months, and include benefit to Project Sea Dragon. Whilst this evidence is relatively weak, it does support a finding that funds are available to Project Sea Dragon to pay debts as they fall due. I am not satisfied for the purposes of this interlocutory application that to grant the stay would be to permit Project Sea Dragon to trade whilst insolvent.

89    Finally, the balance of convenience in favour of continuation of the stay is served by the imposition of conditions proposed by Canstruct, which accords some protection to the creditors of Project Sea Dragon, and to which I will now turn.

CONCLUSION

90    It follows that it is appropriate that the stay originally granted by the primary Judge and extended by orders made by me on 20 March 2024 be further extended until determination of the appeal filed on 14 March 2024.

91    Conditions proposed by Canstruct referable to the continuation of the present stay are:

(a)     PSD only incurs debts and liabilities in the ordinary course of its business;

(b)     SGL provides a formal undertaking in the form of a guarantee or an undertaking to this Court to pay all of the debts/liabilities of PSD as and when they are incurred in accordance with (a) above;

(c)     SGL provide $185,000 security for the costs of Canstruct in the appeal;

(d)     Canstruct be released from the undertaking to the Court on 3 May 2023 requiring Canstruct to retain a sum of $50,000 pursuant to an undertaking as to damages;

(e)     Order 11 [sic] of the Court on 3 May 2023 restraining the distribution of the Deed Fund (subject to certain conditions) continue until determination of the appeal.

92    I understand that these proposed conditions were accepted by the Stay Applicants as reasonable, with the exception of the amount of security for costs payable by the Stay Applicants. Specifically, Canstruct submitted that the Stay Applicants should pay security for costs in the amount of $185,000.00, while the Stay Applicants submitted that an amount of $120,000.00 was appropriate.

93    An order for security for costs is, of course, made in the exercise of a discretionary power: Federal Court Act s 56, Federal Court Rules r 19.01, Corporations Act s 1335(1), Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 at 3, Commissioner of Taxation (Cth) v Vasiliades (2016) 344 ALR 558; [2016] FCAFC 170 at [65]. Guidelines assisting the Court in determining whether security for costs should be ordered were explained by Hill J in Equity Access Ltd v Westpac Banking Corporation [1989] FCA 361 at [24] as including:

    the chances of success of the applicant;

    whether the applicant's claim is bona fide or a sham;

    the quantum of risk that the applicant cannot satisfy a cost order;

    whether use of the power would shut out a small company from making a genuine claim against a large company, i.e. is the power being used oppressively;

    whether the impecuniosity arises out of the Act in respect to which relief is sought; whether there are aspects of public interest which weigh in the balance against the making of an order; and

    whether there are any particular discretionary matters peculiar to the circumstances of the case.

94    I consider that an order for security for costs is appropriate in circumstances where

    the continuation of a stay is for the benefit of the Stay Applicants;

    the solvency of Project Sea Dragon is before the Full Court on appeal such that any costs order made in favour of Canstruct may in future not be satisfied; and

    it appears from submissions that the Stay Applicants do not oppose the making of an order for security for costs as a condition of the continuation of the stay.

95    The amount of $185,000.00 submitted by Canstruct was, I understand, referable to detailed evidence set out at [9] in the affidavit of Scott David Guthrie filed 29 March 2024. No rationale for security for costs fixed at $120,000.00 was submitted by the Stay Applicants. In my view it is appropriate to make an award of security for costs supported by the evidence before the Court, namely in the amount of $185,000.00.

96    I note that the conditions proposed by Canstruct propose that “Order 11” of the orders of the primary Judge made on 3 May 2023 continue until determination of the appeal. Insofar as I can see, no “Order 11” was made by his Honour that day. However, Orders 1 and 2 of 3 May 2023 related to the distribution of the Deed Fund. I understand that the parties actually meant that those Orders be extended until determination of the appeal, rather than “Order 11”.

97    No submissions were made referable to the costs of the present interlocutory application, including the hearings of 19 March 2024 and 18 April 2024. In the circumstances I consider it appropriate to order that such costs continue to be reserved to the hearing of the appeal.

Associate:

Dated:    9 May 2024