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In the matter of Infinite Water Holdings Limited (subject to deed of company arrangement) [2024] NSWSC 1096 (27 August 2024)

Last Updated: 28 August 2024

Case Name:	In the matter of Infinite Water Holdings Limited (subject to deed of company arrangement)
Medium Neutral Citation:	[2024] NSWSC 1096
Hearing Date(s):	22 August 2024
Date of Orders:	22 August 2024
Decision Date:	27 August 2024
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Plaintiffs granted leave under s 444GA of the Corporations Act 2001 (Cth) to transfer shares in the company to deed proponents and associated orders made.
Catchwords:	CORPORATIONS — Voluntary administration — Deed of company arrangement — Application under s 444GA of the Corporations Act 2001 (Cth) for leave to transfer shares pursuant to DOCA — Whether residual equity in company — Whether shareholders unfairly prejudiced.
Legislation Cited:	- Corporations Act 2001 (Cth), ss 444GA, 447A, 608 - Insolvency Practice Schedule (Corporations), s 90-15
Cases Cited:	- Cussen, Re Big Un Ltd [2019] FCA 1162 - Re Kupang Resources Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2016] NSWSC 1895 - Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 - Re Nexus Energy Ltd (subject to deed of company arrangement) [2014] NSWSC 1910 - Re Openpay Group Ltd (recs and mgrs apptd) (subject to a DOCA) [2024] NSWSC 789 - Re OrotonGroup Ltd (Subject to Deed of Company Arrangement) ACN 000 038 675; Application of Strawbridge and Kanevsky  [2018] NSWSC 1213  - Re Paladin Energy Limited (subject to Deed of Company Arrangement) [2018] NSWSC 11 - Re Ten Network Holdings Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) [2017] NSWSC 1529 - Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301
Category:	Principal judgment
Parties:	Brett Stephen Lord and Richard Andrew Stone in their capacity as joint and several deed administrators of Infinite Water Holdings Limited (subject to deed of company arrangement) (First Plaintiffs) Infinite Water Holdings Ltd (subject to deed of company arrangement) (Second Plaintiff)
Representation:	Counsel: M L Rose (Plaintiffs) B May (Interested Party) Solicitors: Hamilton Locke (Plaintiffs) Lander & Rogers (Interested Party)
File Number(s):	2024/223897

JUDGMENT

Nature of the application

1. By Originating Process filed on 14 June 2024, Messrs Lord and Stone in their capacity as joint and several deed administrators (“Administrators”) of Infinite Water Holdings Ltd (subject to deed of company arrangement) (“IWH”) apply, under s 444GA of the Corporations Act 2001 (Cth) (“Act”) and s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPS”), for leave to transfer all of the existing shares in IWH from existing shareholders to Tri-Force Enterprise Ltd (“TEL”), Mr Gheorghe Duta and Victory Asia Investment Ltd or their respective nominees (“Proponents”) in specified shares. They also seek an order under s 447A of the Act dealing with mechanical aspects of execution of the transfers and an order that their costs of and incidental to the application be costs and expenses in the deed administration of IWH.
2. By way of background, IWH is a public non-listed company and its principal business is the provision of water treatment and purification solutions based on a patented technology known as “Hydroxon”. IWH in turn holds shares in several subsidiaries. The largest four shareholders of IWH held approximately 84% of its shares and were corporate vehicles associated with directors or former directors of IWH, namely Mr Ip, Mr Walczuk, Mr Ng and Mr Duta. Unusually, s 608 of the Act did not apply to the proposed transfer of the shares in IWH to the Proponents, because of the relatively small number of shareholders in IWS, and no relief was required from the Australian Securities and Investments Commission (“ASIC”) in respect of the transfer.
3. I made the orders sought at the conclusion of the hearing on 22 August 2024. These are my reasons for doing so and I have drawn on the helpful submissions of Mr Rose, who appeared for the Administrators, in this judgment.

Affidavit evidence

4. The Plaintiffs rely on the affidavit dated 14 June 2024 of Mr Lord, who is one of the Administrators. His evidence is that he and Mr Stone were appointed as joint and several voluntary administrators of IWH on 27 December 2023 and, on 12 April 2024, IWH’s creditors resolved that IWH execute a deed of company arrangement (“DOCA”) proposed by the Proponents, having the terms set out in the Administrators’ supplementary report to creditors dated 5 April 2024 (Ex P1, CB 91). That DOCA was executed on 6 May 2024 and the Administrators were then appointed as the deed administrators of IWH on that date.
5. Mr Lord refers to the assets held by IWH at the time of the appointment of the Administrators, including shares in subsidiary companies, cash at bank in the sum of $49,981, a term deposit in the sum of $157,559, debtors in the sum of $23,510 (of which $10,674 has been recovered), work in progress with an estimated realisable value of $163,813, plant and equipment with an estimated realisable value of $172,304, prepayments with an estimated value of $199,346, and a research and development refund claim from the Australian Taxation Office with an estimated value of between $500,000 and $630,000 (Lord 14.6.24 [21]). A subsidiary of IWH, Infinite Water Technologies Pty Ltd, holds the intellectual property and patents utilised by IWH and has entered into two intellectual property licence agreements with third parties in respect of that intellectual property (Lord 14.6.24 [22]). Mr Lord also notes that IWH then had debts of $10.5 million (Lord 14.6.24 [23]).
6. Mr Lord also outlines the steps taken by the Administrators in the early stages of the voluntary administration and refers to negotiations with TEL, a company in which Mr Ip was a director and shareholder, with respect to a proposed DOCA, which took place in the context of proceedings brought by TEL against IWH which were ultimately dismissed on 15 February 2024; to the DOCA proposal put by the Proponents on 3 April 2024; and to the Administrators’ recommendation that creditors vote in favour of IWH executing the proposed DOCA on several grounds. Mr Lord’s evidence is that the likely return to ordinary unsecured creditors in a liquidation scenario ranged from nil in the low case to 15 cents in the dollar in the high case, with the difference in that return depending upon the level of any recovery from TEL under a claim referred to as the “Warrants Claim”, for a net sum of $2 million less the costs of litigation and recovery action. His estimate is that, under the DOCA, priority employee creditors would be paid in full and ordinary unsecured creditors would receive 6 cents in the dollar, which would be paid earlier than any distribution in a liquidation.
7. Mr Lord also refers to the creditors’ decision to authorise execution of the DOCA proposed by the Proponents at a resumed second creditors’ meeting on 12 April 2024, and outlines the key features of the DOCA, which include that the Proponents will acquire all of the shares in IWH in specified percentages, conditional on the outcome of this application. Mr Lord also referred to correspondence received from a company associated with Mr Ng and Armana Investments Pty Ltd (“Armana”), a company associated with Mr Luke Armanasco, objecting to the DOCA and the proposed transfer. These companies were initially joined as interested parties so they could be heard in the application and they initially indicated that they would oppose the relief sought, but neither appeared at the hearing. Mr Armanasco, on behalf of Armana, subsequently sent a letter to the Court advancing a series of allegations against IWH and its officers (MFI 1), although those allegations were not established by evidence where Armana did not seek to lead evidence or appear in the proceedings. Mr Lord also noted that both Mr Ng and Mr Armanasco had contended that IWH’s intellectual property assets exceeded the nil value attributed to those assets by the Administrators. That proposition, however, has the difficulty that Mr Ng had previously valued those intellectual property assets at $528,184 in his report dated 5 January 2024 on IWH’s activities and property provided to the Administrators, which was much less than IWH’s debt. Mr Lord also pointed out that IWH had been loss-making for a significant period of time prior to the commencement of the voluntary administration and had been unable to commercialise its intellectual property, and no third party (other than the Proponents) had expressed any interest in purchasing that intellectual property or IWH’s business, by way of a competing deed proposal or otherwise.
8. Mr Lord also referred to the Administrators’ engagement of Mr Taylor, an experienced liquidator, to prepare an independent expert report as to the value of the equity in IWH and to Mr Taylor’s conclusion that the shares in IWH had no value, given the material shortfall of assets available to meet IWH’s liabilities. Mr Lord expresses the view, on that basis, that the proposed share transfer to the Proponents would not cause unfair prejudice to shareholders, where there is no residual value in the shares of IWH, the estimated return to shareholders in a liquidation is nil and there is no reasonable prospect of the shares obtaining value within a reasonable time. Mr Lord also pointed to the likelihood that the DOCA would be terminated and IWH would be wound up, if this application fails, and pointed to the disadvantage of that outcome to IWH’s employee creditors, who would receive a delayed return, and non-employee creditors who would potentially receive no return in a liquidation.
9. The exhibit to Mr Lord’s affidavit (Ex P1) in turn included a copy of the Administrators’ supplementary report to creditors, which outlined the features of the DOCA proposal put by the Proponents and addressed the estimated return to creditors on the high and low scenario in a liquidation and under the DOCA. That exhibit also included the 2023 agreement between IWH and TEL that would be the basis of any claim brought by IWH against TEL in respect of the Warrants Claim. The Administrators’ report dated 8 February 2024 explained that claim as follows (Ex P1, CB 212):

“Pursuant to a series of agreements entered into with TEL, in order to fund the $4m payable to [a third party] in respect of the Deed of Release dated 8 August 2022, TEL had agreed to provide funding to IWH in the amount of $4m payable on or before 12 January 2024. As part of the agreements, TEL was also to organise for first ranking mortgages over commercial property in Auckland New Zealand be provided to IWH ... One of the reasons for failure of IWH is attributed to TEL advising that it would not provide the security or funding as part of the various agreements with TEL.”

That report also referred to the Administrators’ view that TEL was obliged to contribute that amount to IWH in exchange for the issue of ordinary shares in IWH; to their demand issued to TEL for payment; and to TEL’s having disputed that claim and terminated the agreement on the basis that IWH had repudiated the agreement.

10. That exhibit also contained correspondence from companies associated with Mr Ng (Ex P1, CB 295) which had contended, inter alia, that there was greater value in the intellectual property of IWH than had been assessed by the Administrators, and Armana had made the same claim by a letter dated 10 April 2024 (Ex P1, CB 299) and had also emphasised the availability of research and development tax credits to IWH, a matter to which the Administrators had had regard.
11. By a second affidavit dated 18 July 2024, Mr Lord referred to notice of this application given to ASIC and to shareholders in IWH and referred to further steps which had been taken under the DOCA. By an affidavit dated 19 August 2024, Mr Farquhar, a solicitor acting for the Plaintiffs, referred to correspondence with Mr Ng’s company which indicated that it no longer opposed this application and to a letter dated 2 August 2024 by which Armana also withdrew its grounds of opposition to the application, although I have referred to Armana’s subsequent letter to the Court above and will return to that letter below.
12. The Administrators also read the affidavit dated 14 June 2024 of Mr Taylor, which outlined his extensive experience as a liquidator and the scope of his engagement to prepare an independent expert report in respect of the application. Mr Taylor confirmed that he had complied with the requirements of ASIC Regulatory Guide 111 and the Expert Witness Code of Conduct in respect of his report (“Taylor IER”) which was exhibited to his affidavit (Ex P2).
13. The Taylor IER addresses the question “whether the share[s] in [IWH] have any residual value which could be lost to the existing shareholders if leave permitting the share transfer is granted” and “[w]hether there is any prospect of the shares in [IWH] obtaining some value within a reasonable time” (Taylor IER, [3.1].) Mr Taylor concludes that the shares in IWH have nil value, where a material factor in the valuation of IWH is the value of patents held by it and, in the absence of those patents being of material value, there will be a significant shortfall in residual equity (IER, [8.6]). Mr Taylor notes that, as Mr Lord’s evidence indicates, IWH and a related entity have not, in a period of more than six years, achieved commercialisation of the patents and IWH has, over that period, incurred significant trading losses of $18.6 million (Taylor IER, [8.4]). He also observes that IWH’s inability to generate profits from the commercialisation of patents held by it would impact their likely realisable value and, if those patents were able to be sold, it is highly unlikely that their realisable value would exceed the low and high equity shortfall amounts identified by Mr Taylor in the range $6.8 million to $11.6 million (Taylor IER, [8.5], [8.6]). I have also referred to Mr Lord’s evidence as to that matter above.
14. As I noted above, I have also had regard to a further letter dated 21 August 2024 from Armana to the Court, in which Mr Armanasco explained the basis on which Armana does not consider it worthwhile to pursue its opposition to the application. Armana then made a series of allegations in respect of the conduct of IWH’s affairs and pointed to the fact that Mr Armanasco was referring matters to ASIC and the Australian Taxation Office. Mr Armanasco there advanced a series of allegations in respect of the Proponents; he challenged a claim for a debt against IWH by an entity which he contended was associated with one of the Proponents; he contended that the independent expert report did not consider ongoing activities by the Proponents in an entity in China; and also advanced criticisms of the conduct of the Administrators. I note these allegations are made, but, as I noted above, Armanasco has not sought to establish their truth by evidence, and I cannot treat them as proved in determining this application.

Relief sought under s 444GA of the Act

15. Section 444GA of the Act provides that:

"(1) The administrator of a deed of company arrangement may transfer shares in the company if the administrator has obtained:

(a) the written consent of the owner of the shares; or

(b) the leave of the Court.

(2) A person is not entitled to oppose an application for leave under subsection (1) unless the person is:

(a) a member of the company; or

(b) a creditor of the company; or

(c) any other interested person; or

(d) ASIC.

(3) The Court may only give leave under subsection (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company."

16. I summarised the applicable principles in Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 at [38] ff as follows:

“In Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301 [(“Weaver”)], Martin CJ undertook a detailed review of the history of s 444GA of the [Act], which I gratefully adopt. This section was introduced into the [Act] by the Corporations Amendment (Insolvency) Act 2007 (Cth) with effect from 31 December 2007 and adopts a recommendation made in a report of the Legal Committee of the Companies and Securities Advisory Committee ("CAMAC") on Corporate Voluntary Administration (June 1998) that the law should grant deed administrators the ability to compulsorily sell company shares where necessary for the purposes of implementing a deed of company arrangement under which payment of creditors' debts is dependent upon such a transfer occurring (Recommendation 42, para [6.75], noted in Weaver v Noble Resources Ltd above at [65]-[71]). The Explanatory Memorandum to the Corporations Amendment (Insolvency) Bill 2007 in turn notes (at [7.53]) that, prior to the introduction of the section, there was some uncertainty as to whether deed administrators had the power to transfer shares without the holder's consent, and the weight of authority was against such a power. The Explanatory Memorandum in turn notes (at [7.54]) that the purpose of the section is to enable a deed administrator to transfer shares in the company without the consent of shareholders where such a transfer is necessary for the success of the deed.

The Court may only grant leave for a transfer of shares under this section if satisfied that the transfer would not unfairly prejudice the interests of members. In Weaver v Noble Resources Ltd above, Martin CJ noted (at [67], [70]-[71]) that this requirement in s 444GA of the Corporations Act reflects the view expressed in the CAMAC report that the possibility of prejudice to a shareholder would arise if there were some residual equity in the company. His Honour also noted (at [79]) that:

"... [t]he notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair."

... His Honour also noted (at [80]) that something more than a mere transfer of shares without compensation would be necessary to establish unfair prejudice.

The approach adopted in Weaver v Noble Resources above is consistent with that adopted by the courts in respect of the similar concept used in s 445D of the [Act], where the question whether a deed of company arrangement gives a class of creditors less than they would receive in a liquidation is highly material to whether unfair prejudice to creditors is established: Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd [1996] FCA 899; (1996) 70 FCR 34 at 48; [1996] FCA 899; 22 ACSR 169.

In Lindholm v Tsourlinis Distributors Pty Ltd [2010] FCA 1488 at [9]- [10], Finkelstein J took a similar view to that taken by Martin CJ in Weaver v Noble Resources above. In Lewis, In the Matter of Diverse Barrel Solutions Pty Ltd (subject to a Deed of Company Arrangement) [2014] FCA 53 at [19], White J noted (at [19]) that the terms of s 444GA(3), in focusing on the concept of "unfair prejudice" to shareholders, contemplated that a transfer of shares may result in some prejudice to the interests of shareholders and that:

"Whether or not 'unfair prejudice' will result from a transfer of the shares is to be determined having regard to all the circumstances of the case and to the policy of the legislation. Relevant matters would seem to include whether the shares have any residual value which may be lost to the existing shareholders if the leave is granted; whether there is a prospect of the shares obtaining some value within a reasonable time; the steps or measures necessary before the prospect of the shares attaining some value may be realised; and the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence. A relevant comparison will be between the position of the shareholders if the proposal does not proceed and their position if leave to transfer shares is granted."

His Honour there held that a transfer of shares involved no unfair prejudice where those shares had no residual value and the shareholders would not receive any return on a winding up.”

17. In Re Nexus Energy Ltd (subject to deed of company arrangement) [2014] NSWSC 1910 (“Nexus”) at [22], I again followed the observations of Martin CJ in Weaver that the possibility of prejudice to a shareholder “would arise if there was some residual equity in the company.” Conversely, it is difficult to see how shareholders could be prejudiced by the transfer of their shares in the absence of any residual value or equity in the company: Weaver at [70]. The case law also seems to me to establish that there would not ordinarily be any prejudice, or no prejudice that has the requisite quality of “unfairness”, if the shares to be transferred have no value and there would be no distribution in the event of a liquidation which is the only realistic alternative to the proposed transfer: Re Kupang Resources Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2016] NSWSC 1895 at [16]; Re Ten Network Holdings Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) [2017] NSWSC 1529 at [32]- [39]; Re Openpay Group Ltd (recs and mgrs apptd) (subject to a DOCA) [2024] NSWSC 789 at [20] ff on which I have drawn for this summary.
18. In Cussen, Re Big Un Ltd [2019] FCA 1162 at [5], Jagot J observed that:

“the test involves unfair prejudice to the interests of the shareholders. Further, in order to determine this, the Court must consider whether there is any residual value in the company as the issue involves comparing the circumstances in the event of a transfer of shares with the circumstances which would prevail in a liquidation.”

19. Mr Rose accepts that the Administrators bear the legal onus of proving that the Court’s discretion to allow the share transfer should be exercised in their favour: Nexus at [27]. The Administrators rely on Mr Lord’s first affidavit and the Taylor IER in order to prove that matter, and I have summarised that evidence above. Mr Rose submits and I accept that that evidence establishes, at least on the balance of probabilities, that the shares in IWH have nil value, where the equity shortfall calculated by Mr Taylor is, at least, $6,821,127 and could exceed that amount by nearly $5 million (Taylor IER, [8.6]). There is no basis to think that intellectual property which IWH has been unable to commercialise or sell (other than through the DOCA) would generate sale proceeds sufficient to extinguish that equity shortfall and restore value to the equity in IWH. Mr Rose submits and I accept that the DOCA represents the best outcome for creditors in the circumstances and, in any liquidation scenario, there is a significant shortfall to creditors and therefore no prospect of any return to IWH’s shareholders. I accept that there can be neither prejudice nor unfair prejudice to IWH’s shareholders in making the orders sought by the Administrators.

Relief sought under s 447A of the Act and costs

20. Mr Rose points out that, under s 447A of the Act, the Court may make such order as it thinks appropriate about how Pt 5.4A is to operate in relation to a particular company, and such an order can be made, where a company has executed a deed of company arrangement, on application by the deed administrators. Mr Rose submits and I accept that orders of the kind sought by the Administrators, to give effect to the share transfers, have been made under that section in earlier cases including Re Paladin Energy Limited (subject to Deed of Company Arrangement) [2018] NSWSC 11 and Re OrotonGroup Ltd (Subject to Deed of Company Arrangement) ACN 000 038 675; Application of Strawbridge and Kanevsky  [2018] NSWSC 1213.  Mr Rose submits and I accept that the Court has power to make and should make the orders sought to facilitate the transfer of shares in IWH, where an order has been made under s 444GA of the Act in respect of that transfer.
21. It is also plain enough that this application was properly brought in the performance of the Administrators’ role as deed administrators and to advance the implementation of the DOCA and the interests of creditors and I will make the order as to costs sought by the Administrators on that basis.

Orders

22. For these reasons, I made the orders sought by the Administrators at the conclusion of the hearing on 22 August 2024.

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