Federal Court of Australia McEvoy, in the matter of KHC Group Pty Limited (Subject to Deed of Company Arrangement) [2023] FCA 1006 File number(s): NSD 853 of 2023 Judgment of: CHEESEMAN J Date of judgment: 24 August 2023 Catchwords: CORPORATIONS – application for leave to transfer existing shares in applicant Company pursuant to s 444GA(1)(b) of the Corporations Act 2001 (Cth) – where Company subject to deed of company arrangement (DOCA) – where share transfer is a condition precedent of DOCA – whether share transfer would not unfairly prejudice the interests of members of the Company – Held: leave granted Legislation: Corporations Act 2001 (Cth) ss 444GA(1)(b), 447A(1) Insolvency Practice Schedule (Corporations) s 90-15 Cases cited: Park, in the matter of Collection House Limited (Subject to a Deed of Company Arrangement) [2022] FCA 1244 Weaver (as deed admins of Midwest Vanadium Pty Ltd) v Noble Resources Ltd [2010] WASC 182; 41 WAR 301 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 27 Date of hearing: 24 August 2023 Counsel for the Applicants Mr J Pokoney Solicitors for the Applicants K&L Gates ORDERS NSD 853 of 2023 IN THE MATTER OF KHC GROUP PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 616 838 549 ANDREW JAMES MCEVOY First Applicant VINCENT JOSEPH PIRINA Second Applicant KHC GROUP PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) Third Applicant order made by: CHEESEMAN J DATE OF ORDER: 24 August 2023 THE COURT ORDERS THAT: 1. Pursuant to s 444GA(1)(b) of the Corporations Act 2001 (Cth), the first and second applicants be granted leave to transfer the 50 fully paid ordinary shares in the third applicant held by Kayne Robert Leslie Hutton Coleman (Shares) from Mr Coleman to Craig Raymond Mostyn in accordance with clause 4.1 of the deed of company arrangement dated 10 July 2023 entered into by the applicants and Mozi Group Pty Ltd. 2. Pursuant to s 447A(1) of the Act and s 90-15(1) of the Insolvency Practice Schedule (Corporations), either of the first or second applicant may, jointly or severally, in their capacity as deed administrators of the third applicant: (a) execute share transfer forms and any other documents ancillary or incidental to effecting the transfer of the Shares referred to in Order 1 above; and (b) enter or procure the entry of the name of Mr Mostyn into the share register of the third applicant in respect of all Shares transferred to Mr Mostyn in accordance with Order 1 above. 3. The operation of Orders 1 and 2 above be stayed for 7 business days from the date of these Orders. 4. The first and second applicants send a notice to all interested parties, including but not limited to Mr Coleman, Mr Mostyn and Mozi Group Pty Ltd, attaching a copy of these Orders and the reasons for judgment within 24 hours of the date of these Orders. 5. Grant liberty to any interested party to apply in relation to Orders 1 and 2, such liberty to be exercised within 7 business days from the date of these orders. 6. The first and second applicants' costs of and incidental to this application be costs and expenses in the deed administration of the third applicant. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT CHEESEMAN J Introduction 1 The first and second applicants seek leave pursuant to s 444GA(1)(b) of the Corporations Act 2001 (Cth) to transfer shares in the third applicant from Kayne Robert Lesile Hutton Coleman to Craig Raymond Mostyn. They also seek an order under s 447A(1) of the Act and s 90-15 of the Insolvency Practice Schedule (Corporations), being sch 2 of the Act, that the first and second applicants may, as deed administrators of the third applicant, effect the transfer of the shares in the third applicant's share register and that the applicants' costs of this application be costs and expenses in the deed administration of the third applicant. Evidence 2 The applicants rely on four affidavits from: (1) Andrew James McEvoy dated 11 August 2023 and 23 August 2023; (2) Cameron Alexander Hayden Adair dated 11 August 2023; and (3) Nikki Littler dated 23 August 2023. Factual Background 3 The third applicant, KHC Group Pty Limited (Subject to Deed of Company Arrangement) ACN 616 838 549, was incorporated on 16 January 2017 and provided civil construction and earthwork services to clients in New South Wales and Queensland. Mr Coleman and Mr Mostyn were previously directors and company secretaries of KHC Group with Mr Coleman overseeing the Queensland operations and Mr Mostyn overseeing the New South Wales operations. Mr Coleman and Mr Mostyn each hold 50 shares of the 100 shares issued in KHC Group. 4 The first and second applicants, Andrew James McEvoy and Vincent Joseph Pirina, are the joint and several deed administrators of KHC Group, first appointed as voluntary administrators of KHC Group on 11 May 2023 and subsequently as deed administrators on 10 July 2023. 5 On 7 June 2023, Mr McEvoy received a proposal for a deed of company arrangement in respect of KHC Group from the solicitor for Mr Mostyn and Mozi Group Pty Ltd (DOCA proposal). Mr Mostyn is the sole director of Mozi Group which was established in June 2022. No other DOCA proposal was received from any other person or entity. 6 Clause 4.1(b) of the DOCA proposal provides as a condition precedent to effectuation of the DOCA that the shares held by Mr Coleman in KHC Group must be transferred to Mr Mostyn. For completeness, I note that the DOCA also included another condition precedent in relation to Mr Coleman which required that he resign or be removed as a director of KHC Group: cl 4.1(a). 7 On 8 June 2023, by means of a report, the first and second applicants recommended the DOCA proposal to the creditors on the basis that they estimated that under the DOCA proposal the unsecured creditors of KHC Group would likely receive a return of between 22 cents and 45 cents in the dollar whereas if KHC Group went into liquidation the unsecured creditors would likely receive a return of between 0 cents and 34 cents in the dollar. 8 The estimates provided by the Administrators were revised shortly before the second meeting of creditors. The revised estimates in the two scenarios were as follows: (1) under the DOCA proposal — between 22 cents and 48 cents in the dollar; and (2) in the event of liquidation — between 0 cents and 33 cents in the dollar. 9 On 19 June 2023, at the second meeting of creditors the creditors of KHC Group resolved to execute a deed of company arrangement on the terms contained in the DOCA proposal. 10 On 10 July 2023 the applicants and Mozi Group executed a deed of company arrangement (DOCA) which included both the condition precedents outlined above. 11 Mr Coleman was removed as a director of KHC Group on 10 July 2023. The extant condition precedent is that which requires a transfer of shares. 12 Mr McEvoy deposes to his belief that Mr Coleman would not suffer unfair prejudice by reason of the transfer of his shares to Mr Coleman as in a liquidation scenario the best estimated return to creditors in a liquidation scenario is 33 cents in the dollar and, in that case, there would be no return to shareholders of the Company. 13 As mentioned, Mr McEvoy deposes that he had not received any other proposal for a deed of company arrangement in respect of KHC Group and with the DOCA having been executed he believes that the only plausible alternative scenario would be for KHC Group to be placed into liquidation as it is insolvent and may have been from as early as 2 August 2022. Notice to Interested Parties Notice to Mr Coleman 14 Ms Littler, solicitor for the applicants, deposes to having provided notice to Dale Cliff, the solicitor for Mr Coleman, of this application and having provided him with the originating process. On 17 August 2023, Ms Littler chased Mr Cliff by email requesting that he advise whether Mr Coleman intended to oppose the application. 15 On 18 August 2023, my Associate required the applicants to bring notice of their application to all parties who may be interested in this matter. On 21 August 2023, Ms Littler forwarded the email from my Associate to Mr Cliff and requested that he advise whether Mr Coleman opposed the application. As at the time of affirming her affidavit on 23 August 2023, Ms Littler deposes to not having received a response from Mr Coleman or his solicitor. Notice to ASIC 16 Ms Littler deposes to also having provided ASIC with the originating process on 15 August 2023. On 22 August 2023, Ms Littler was informed by Donna Spinks of ASIC that ASIC did not propose to intervene in the application. Notice to creditors 17 Mr McEvoy deposes that on 21 August 2023 he caused a notice to be issued to the known creditors of KHC Group advising, inter alia, the details of the application, time of listing and inviting the creditors to file an appearance if they wished to be heard on the application. Creditors were also informed that a copy of the Court documents filed in the proceedings was available on request. The notice was sent to thirty seven creditors by email, eighteen creditors by post and the Deputy Commissioner of Taxation via the Australia Taxation Office online business portal. 18 As at the time of his second affidavit, Mr McEvoy had not received a response from the creditors apart from one response from a creditor seeking to observe the proceedings remotely. 19 Included in the evidence on the application is the correspondence that comprises the notice that interested persons have been given in relation to this application. Subject to one exception discussed below, I am satisfied that adequate notice has been provided to any parties who may have been interested and that they have been provided with an opportunity to seek to be heard if they were so inclined. 20 At hearing, counsel for the applicants properly raised, in accordance with the duty on an ex parte application, that the creditors who were sent the notice via post may not have received it prior to the hearing or may have had limited time to consider the notice and respond to it. Counsel noted that post was utilised by the applicants in circumstances where the applicants did not have an email address for those creditors. Counsel submitted that the applicants did not have reason to expect that any of the creditors would seek to oppose the application in circumstances where the creditors had assented to entry into the DOCA. Counsel also submitted that were I minded to make the relief sought, it would be appropriate to stay the orders for a period of seven days to provide any interested parties who may seek to be heard an opportunity to do so. I accept that it is appropriate to adopt that course. Applicable principles 21 A court may grant leave under s 444GA(1)(b) of the Act only it is satisfied that the transfer would not unfairly prejudice the interests of members of the company: s 444GA(3) of the Act. 22 I have previously set out the applicable principles in Park, in the matter of Collection House Limited (Subject to a Deed of Company Arrangement) [2022] FCA 1244 at [3] to [7], which I extract for convenience: 4. The critical issue is the Court's assessment of whether the share transfer results in any "unfair prejudice" to the members of the company: s 444GA(3). Whether a transfer is unfairly prejudicial is to be determined having regard to all the circumstances of the case and the policy of the legislation: Re Habibi Waverton Pty Ltd (in liquidation) (administrator appointed) (2021) 154 ACSR 701; [2021] NSWSC 1443 at [31]. 5 The applicable legal principles with respect to the assessment of unfair prejudice in the present context are well settled and were canvassed in detail in: Re Paladin Energy Limited (Subject to Deed of Company Arrangement) [2018] NSWSC 11 at [28] to [35]; Tucker, in the matter of Black Oak Minerals Ltd (Subject to a Deed of Company Arrangement) (in liq) (2019) 134 ACSR 472; [2019] FCA 293 at [31] to [37]; and Strawbridge, in the matter of Virgin Australia Holdings Ltd (administrators appointed) (No 9) (2020) 148 ACSR 648; [2020] FCA 1652 (Virgin (No 9)) at [29] to [35]. 6 That the transfer of shares is to occur without compensation cannot on its own establish unfair prejudice: Weaver v Noble Resources Ltd (2010) 41 WAR 301; [2010] WASC 182 at [80]; Re Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 at [39]; Diverse Barrel Solutions Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 53 at [22] to [23]. In circumstances where the equity in the company has no residual value, the members are unlikely to suffer prejudice, and certainly not unfair prejudice, by reason only of the absence of consideration: Noble Resources at [79]; Diverse Barrel Solutions at [19] and [22]; Virgin (No 9) at [33] to [34]; Habibi Waverton at [31]. 7 Orders in the nature of machinery orders may be made under s 447A of the Act to put into effect the proposed transfer of shares, including orders permitting deed administrators to execute and lodge share transfer documents and to ensure the entry of the acquirer's name on the company's register of members: Black Oak Minerals at [39] to [40]; Virgin (No 9) at [36]. (emphasis in original) 23 The following principles are also relevant: (1) the interests that are required to be taken into account are those of the members generally, not just the member whose shares it is desired to transfer: Weaver (as deed admins of Midwest Vanadium Pty Ltd) v Noble Resources Ltd [2010] WASC 182; 41 WAR 301 at [73]; (2) s 444GA(3) is directed to the interest of members in their capacity as members, rather than as creditors: Weaver at [74]; (3) the relevant assessment involves a comparison between the circumstances of the affected party under the proposal for the transfer of shares as compared to their circumstances under a winding up, if liquidation is the only alternative to the transfer proposed: Weaver at [76]; and (4) the question of whether any prejudice is unfair only arises if it is demonstrated that there is prejudice following the relevant comparison: Weaver at [79]. 24 I adopt and apply those principles here. Consideration 25 Having regard to the factual background and applicable principles set out above and the evidence relied upon by the applicants, I am satisfied that in making the orders sought, the members of KHC Group will not suffer unfair prejudice because in the event of the alternative scenario of a winding up, the members are highly unlikely to receive any return on their shares. 26 Further, I am satisfied that by giving effect to the DOCA through the satisfaction of the condition precedent, it will provide the potential for a materially better return to creditors in comparison to a winding up. Conclusion 27 I will make orders substantially in the form sought by the applicants whilst making additional orders to safeguard the opportunity for any interested parties to be sought to be heard on this application by staying the orders for a period of seven days. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman. Associate: Dated: 24 August 2023