Supreme Court New South Wales Medium Neutral Citation: In the matter of Mirabela Nickel Ltd (subject to deed of company arrangement) [2014] NSWSC 836 Hearing dates: 12 June 2014 Decision date: 23 June 2014 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: Orders made in accordance with short minutes of order including the grant of leave under s 444GA of the Corporations Act 2001 (Cth). Catchwords: CORPORATIONS - voluntary administration - deed of company arrangement - application by deed administrators for leave to transfer shares in company under Corporations Act 2001 (Cth) s 444GA - whether transfer of shares would unfairly prejudice the interests of members of the company - whether shareholders have any residual equity in company. Legislation Cited: - Corporations Act 2001 (Cth) ss 435A, 439A, 444GA, 444GA(3), 445D, 606 - Corporations Amendment (Insolvency) Act 2007 (Cth) - Corporations Amendment (Insolvency) Bill 2007 (Cth) - Foreign Acquisition and Takeovers Act 1974 (Cth) - Uniform Civil Procedure Rules 2005 (NSW) Sch 7 Cases Cited: - Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34; (1996) 22 ACSR 169 - Lewis, In the Matter of Diverse Barrel Solutions Pty Ltd (subject to a Deed of Company Arrangement) [2014] FCA 53 - Lindholm v Tsourlinis Distributors Pty Ltd [2010] FCA 1488 - Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301 Texts Cited: - Commonwealth of Australia, Legal Committee of the Companies and Securities Advisory Committee, Corporate Voluntary Administration Report, (June 1998) Category: Interlocutory applications Parties: Martin Madden, David John Winterbottom and Clifford Stuart Rocke in their capacity as joint and several voluntary administrators of Mirabela Nickel Limited (subject to a Deed of Company Arrangement) (Plaintiffs) Representation: Counsel: I M Jackman SC/J R Williams (Plaintiffs) Solicitors: Gilbert & Tobin (Plaintiffs) File Number(s): 2014/148414 Judgment 1By Originating Process filed on 16 May 2014, Mr Martin Madden, Mr David Winterbottom and Mr Clifford Rocke as joint and several deed administrators of Mirabela Nickel Ltd (subject to a deed of company arrangement) ("Mirabela") apply, under s 444GA of the Corporations Act 2001 (Cth), for an order that they have leave to transfer 98.2% of all existing shares in Mirabela (being 98.2% of each shareholder's shares) to Mirabela Investments Pty Ltd (subject to deed of company arrangement) ("Mirabela Investments") in accordance with cl 6.1(a) of a deed of company arrangement dated 13 May 2014. The proposed transfer of those shares is a step in a broader recapitalisation and restructure plan ("Proposed Recapitalisation Plan") contemplated by cl 6.2 of that deed of company arrangement. The Proposed Recapitalisation Plan was put forward by a majority of Mirabela's unsecured noteholders in circumstances that the Mirabela Group is in a distressed financial position. 2Section 444GA of the Corporations Act provides that the administrator of a deed of company arrangement may transfer shares in a company if the administrator has obtained the written consent of the owner of the shares or the leave of the Court. An application for such leave may be opposed by a member of the company, a creditor, any other interested person or the Australian Securities and Investments Commission ("ASIC"). The Court may give leave for such a transfer if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company. I will return to the principles to be applied in determining such an application below. In this case, notice of the application was given to Mirabela's shareholders (with a qualification to which I will refer below) and no shareholder appeared to oppose the application. I will refer below to some correspondence received by the deed administrators from shareholders in that regard. ASIC was given notice of the application, and was also involved in reviewing public offer documents in respect of connected transactions, and has advised that it does not seek to be heard in respect of the application. 3On 16 June 2014, I made the orders sought by the administrators. These are my reasons for doing so. Background to the application 4I will first set out the background facts. I have drawn in this regard on the administrators' comprehensive affidavit evidence, to which I will refer in greater detail below, and the helpful submissions of Mr Jackman and Mr Williams who appear for the administrators. 5Mirabela was listed on Australian Securities Exchange ("ASX") on 14 July 2004. Mirabela had 876,801,147 shares on issue, held by approximately 3,700 shareholders, at 15 May 2014 (Madden 16.5.2014 [32]). Approximately 0.7% of those issued shares are held in an account described as the "Canadian Control Account" to which I will refer below. Mirabela had also issued certain performance rights and options which are not material to this application. Mirabela's share price had declined from a high of $2.23 in March 2011 to $0.016 when trading was suspended on 7 October 2013 at the company's request. 6The Mirabela Group's principal asset is an open pit nickel sulphide mine located in Santa Rita, Brazil. The Mirabela Group's interest in the mine is held in a wholly owned Brazilian registered subsidiary of Mirabela and Mirabela Investments, Mirabela Mineração do Brasil Ltda ("Mirabela Brazil"). The Mirabela Group has been in financial difficulty since at least mid-2013, as a result of declining spot nickel price and the loss of one of its major customers for nickel concentrate from the mine. Between August 2013 and February 2014, the Mirabela Group investigated a potential sale and recapitalisation, but did not achieve a positive outcome. 7At the time that trading in Mirabela's shares on ASX was suspended on 7 October 2013, Mirabela group had several principal debt facilities (Madden 16.5.2014 [29]). The first of those facilities was US$395 million of senior unsecured notes issued by Mirabela under an Indenture dated 14 April 2011, which were guaranteed by Mirabela Investments and Mirabela Brazil. Interest at 8.75% was repayable on 15 April and 15 October each year in the amount of US$17.3 million. Mirabela did not make the interest payments due to be paid to the unsecured noteholders on 15 October 2013 and 15 April 2014 and the failure to make those interest payments was an event of default under the Indenture. 8Mirabela Brazil was also party to a US$55 million master funding and lease agreement with Caterpillar Financial Services Corporation ("Caterpillar"), of which approximately US$5 million is outstanding, and the obligations of Mirabela Brazil were guaranteed by Mirabela. Mirabela Brazil was also party to a US$50 million credit facility dated 20 January 2012 with Banco Bradesco SA ("Bradesco"), of which approximately US$47.2 million was outstanding. That facility was secured against Mirabela Brazil's offtake contracts with customers and the obligations of Mirabela Brazil were also guaranteed by Mirabela. Mirabela Brazil was also party to a US$4.42 million supplier credit agreement with Atlas Copco Drilling, of which approximately US$1.5 million was outstanding, and its obligations were again guaranteed by Mirabela. 9In November 2013, Mirabela entered into standstill agreements with its financiers, including the unsecured noteholders, to allow a recapitalisation plan to be formulated. In December 2013, several of the unsecured noteholders advanced a US$45 million secured loan to Mirabela, pursuant to a Syndicated Note Subscription Deed dated 24 December 2013, to enable the Mirabela group to continue trading ("Interim Loan"). The full amount available under the Interim Loan has now been drawn down. There is urgency in this application, because the Mirabela Group is presently operating under a waiver granted by the lenders under the Interim Loan which continues to 30 June 2014 (Madden 16.5.2014 [57]). 10Mirabela and its financial advisers compiled a comprehensive list of interested parties which were approached in respect of a proposed sale or recapitalisation of the group in December 2013 and January 2014 and approximately 70 such parties were approached during that period, but no such proposal came to fruition. On 24 February 2014, the holders of approximately 65% of the unsecured notes ("Ad-hoc Group") put forward a "plan support agreement" setting out the terms of the Proposed Recapitalisation Plan, which provided, broadly, for Mirabela and Mirabela Investments to enter into deeds of company arrangement under which the claims of unsecured noteholders would be extinguished in exchange for the transfer to noteholders of 98.2% of the existing shares in Mirabela and the claims of existing shareholders would be extinguished for no consideration. The Proposed Recapitalisation Plan also contemplated that an extrajudicial reorganisation would proceed in Brazil to compromise and extinguish cross-guarantees given by Mirabela Brazil, although the Proposed Recapitalisation Plan is not conditional on the outcome of that proceeding; following the transfer of the specified proportion of the shares in Mirabela to the unsecured noteholders, Mirabela would offer secured convertible notes to raise US$115 million to all unsecured noteholders, with those notes to be convertible into shares that would represent 42.3% of the shares in Mirabela on a fully diluted basis; certain members of the Ad-hoc Group would subscribe up to US$55 million for secured convertible notes not already subscribed for by other unsecured noteholders, in return for which they will be paid a fee equal to 10.25% of their respective commitment, payable by the issue of shares in Mirabela; and any amount over US$55 million raised from the issue of secured convertible notes to unsecured noteholders would be applied to repay the Interim Loan. Any residual amount outstanding under the Interim Loan would be compromised and extinguished in exchange for the issue of secured convertible notes, with lenders under the Interim Loan also receiving a 5% commitment fee for agreeing to convert the Interim Loan to convertible notes, which would be payable by the issue of shares in Mirabela. The Proposed Recapitalisation Plan also contemplated that the Caterpillar and Bradesco facilities would remain in place on extended terms to be agreed between the parties, which have since been agreed, and that Mirabela would remain listed on ASX and the suspension on trading in Mirabela shares would be lifted. 11On 25 February 2014, the directors of Mirabela and Mirabela Investments placed those companies into voluntary administration and steps were thereafter taken to advance the Proposed Recapitalisation Plan. In the administrators' section 439A report prior to the second meeting of creditors, the administrators expressed the view that creditors' interests were best served by executing the proposed deeds of company arrangement in respect of Mirabela and Mirabela Investments, giving effect to the Proposed Recapitalisation Plan. Mr Madden confirms that he continues to hold that view in his first affidavit filed in this application (Madden 16.5.2014 [95]). 12At the second creditors' meetings held on 13 May 2014, a substantial majority of creditors of Mirabela and Mirabela Investments resolved that the companies execute proposed deeds of company arrangement which would give effect to the Proposed Recapitalisation Plan. Clause 3 of the Mirabela deed of company arrangement provided that: "The purpose of this Deed is to give effect to certain elements of the recapitalisation component of Mirabela involving the following elements: (a) The transfer of the Transfer Shares with leave of the Court pursuant to section 444GA of the Act and in accordance with the terms of this Deed; and (b) The compromise of the Notes and the Shareholder claimants' claims; and (c) The satisfaction and discharge of the Secured Syndicate Note Debt pursuant to the Deed of Amendment and the Acknowledgement; and (d) The issuance of the Convertible Secured Notes and the New Rollover Fee Shares and the New Capital Shares." Clause 6.1 of that deed of company arrangement in turn provided that all claims of unsecured noteholders arising under the notes and all claims of existing shareholders are to be released and extinguished. Under cl 6.2 of the deed of company arrangement, if the Court grants leave, 98.2% of each existing shareholder's Mirabela shares are to be transferred to Mirabela Investments as bare trustee on the terms of that deed. Following confirmation from each unsecured noteholder of their respective entitlement to shares, Mirabela Investments will either transfer to each noteholder its proportionate entitlement to the shares or sell those shares and account to the noteholder for the proceeds. The deeds of company arrangement will terminate when the conditions required to effect the recapitalisation plan are complete, which relate to the amendment of the Bradesco and Caterpillar facilities; the receipt of approval under the Foreign Acquisition and Takeovers Act 1974 (Cth) for the steps contemplated by the Proposed Recapitalisation Plan and necessary ASIC and ASX relief; the transfer of Mirabela shares to noteholders with the Court's leave; and the receipt of funds from the issue of convertible notes. Control of the companies would then revert to directors to be appointed and an application would be made to ASX for the resumption of trading in Mirabela shares. If these conditions are not satisfied by 31 July 2014, the administrators must convene creditors' meetings to consider terminating the deeds of company arrangement and the winding up of Mirabela and Mirabela Investments. I note that the transfer of the beneficial ownership of the shares to noteholders would not take place until those conditions are satisfied. 13Some of the conditions to the Proposed Recapitalisation Plan have already been satisfied and others are expected to be satisfied by 30 June 2014. Approval has also been obtained under the Foreign Acquisition and Takeovers Act for the steps contemplated by the Proposed Recapitalisation Plan and ASX has granted the waivers necessary for the proposal. ASIC has indicated that, in principle, it is prepared to grant the relief sought to implement the proposal, but that relief has not yet been granted on a final basis. The administrators' section 439A report 14In their section 439A report for the second meeting of creditors, the administrators estimated the possible return to creditors if Mirabela and Mirabela Investments were placed into liquidation. They noted that Mirabela Brazil relies on Mirabela for funding and, if Mirabela and Mirabela Investments are wound up, Mirabela Brazil would not be able to continue operations and would likely be placed in liquidation. The administrators estimate that, in that situation, employees of Mirabela would be paid in full, secured creditors would receive 7.08 cents in the dollar and unsecured creditors and shareholders would receive no return. The administrators point out, and I accept, that that analysis demonstrates that shareholders have no residual equity in Mirabela. I will return to the significance of that matter below. The administrators also prepared, with third party assistance, a discounted cash flow valuation of the Mirabela group on a going concern, non-distressed arm's length transaction basis to determine an implied return to shareholders in such a scenario. That valuation yielded an enterprise valuation range of US$153.7 million to US $232.7 million, which is materially lower than Mirabela's total interest bearing liabilities of US $526.8 million. That valuation implies that the unsecured notes are worth between 13 and 32 cents in the dollar and the shares in Mirabela have a nil value. The administrators' section 439A report also expressed the view that the transfer of shares and issue of convertible notes contemplated by the Proposed Recapitalisation Plan represented the only option available to Mirabela and Mirabela Investments to reduce its debt to a sustainable level and that shareholders were in no worse position under the Proposed Recapitalisation Plan than if Mirabela and Mirabela Investments were wound up. The explanatory statement 15As a condition of the relief from s 606 of the Corporations Act to enable the Proposed Recapitalisation Plan to proceed, ASIC required Mirabela to make an explanatory statement and independent experts' report available to shareholders prior to this hearing. That explanatory statement was the subject of a verification process, which relied largely upon the verification process employed for the prospectus under which the convertible notes are to be issued (Clee 5.6.2014, [21]-[34]). 16The explanatory statement outlined the steps involved in the Proposed Recapitalisation Plan (paragraphs 1.2 and 5.3) and drew attention to the key findings in a further independent experts' report prepared by the administrators to which I will refer below. The explanatory statement drew attention to the opportunity for shareholders to appear in this application to oppose approval of the transfer of the shares and to the manner in which that could be done (paragraph 1.5) and also drew attention to the hearing date for this application (paragraph 2). The explanatory statement summarised the Mirabela Group's current structure and its current debt arrangements (paragraph 4) and set out the background to the Proposed Recapitalisation Plan, the reasons for it and, as I noted above, the steps involved in it and the conditions to implementation of it. 17The explanatory statement also set out the effect of the proposal on Mirabela's assets and liabilities, outlined the interest which would be held by major noteholders after the implementation of the recapitalisation proposal, including after the issue of convertible notes as contemplated by that proposal, and provided a summary of the advantages and disadvantages for shareholders in the proposal in a common and desirable form. That summary fairly noted that the recapitalisation proposal had the advantages of removing the suspension from trading on ASX, removing the costs, delay and uncertainty arising from a liquidation or receivership of the Mirabela Group and improving the financial position of the Mirabela Group and also fairly noted that (at paragraph 7.1): "Shareholders may have the opportunity to reduce the loss of value in their Shares and to recoup some losses sustained from the transfer of Shares under the Recapitalisation Proposal, through any subsequent increase in the value of their Shares on a sale. Shareholders may consider that the potential to recover value through the Shares is an advantage when compared to the crystallisation of loss that would occur for some or all Shareholders on a winding up of Mirabela." 18On the other hand, the explanatory statement also recognised that Mirabela's existing shareholders would hold low percentages of the shares in Mirabela following implementation of the Proposed Recapitalisation Plan, both compared to the holdings to be obtained by noteholders and to existing shareholders' holdings before implementation of the Proposed Recapitalisation Plan; drew attention to the risks associated with being a minority shareholder in a company and pointed that some shareholders would have less than a marketable parcel following implementation of the Proposed Recapitalisation Plan; noted the further dilution which would arise if the convertible notes to be issued were converted to shares; and recognised the possibility (which seems, on the evidence, to be remote) that insolvency may provide a better outcome as follows: "The voluntary administrators' report to creditors states that there would be no return to Shareholders on a winding up and a diminished return to unsecured creditors of Mirabela and Mirabela Investments. Notwithstanding this, Shareholders may consider that there is a potential for a better return under a winding up of with Mirabela, than the nil return to Shareholders assessed by the voluntary administrators". The explanatory statement also drew attention, in broad terms, to the potential tax consequences of the recapitalisation proposal for shareholders and to the terms of ASIC relief and ASX waivers contemplated by the proposal. The independent experts' report 19The administrators acted as independent experts in preparing the relevant independent experts' report, with ASIC's consent. They confirm that report was prepared in accordance with the Expert Witness Code of Conduct under Uniform Civil Procedure Rules 2005 (NSW) Sch 7 and also in accordance with requirements applicable to chartered accountants in respect of providing forensic accounting and valuation services, and also express the view that their engagement as administrators did not impair the independence in preparing that report. I see no reason to question that assessment. 20An analysis of the Mirabela Group's cash flows for the financial years 2010 - 2013 contained in the independent experts' report indicated a positive cash flow in the 2010 financial year, a negative cash flow in the 2011 financial year, a positive cash flow in the 2012 financial year and a negative cash flow in excess of US $100m in the 2013 financial year. Mirabela also had a substantial deficiency of net assets against liabilities of US $375.8 million as recorded in its audited accounts for the year ended 31 December 2013. 21The administrators undertook a further valuation of Mirabela in preparing that independent experts' report, using updated financial information, updated consensus nickel forecasts, updated nickel price assumptions and models prepared by specialist mining consultants. The independent experts' report adopted a discounted cash flow analysis as its primary valuation methodology but also referred to the expressions of interest received as part of the 2013 - 2014 sale and recapitalisation process as a cross check on the discounted cash flow valuation. The discounted cash flow analysis is based on two production cases for the Santa Rita mine forecast by specialist mining consultants which provided a technical expert's report. The valuation based on those production cases produced a higher enterprise value on a discounted cash flow basis than that indicated in the section 439A report, of US $207.9 million to US $278.5 million on the first production case and US $213.5 million to US $265.9 million on the second production case. The difference primarily resulted from an uplift in consensus forecast nickel prices to 2026 reflected in that report. As a cross-check, the administrators noted that the enterprise value of the Mirabela Group reflected in the range of expressions of interest received during the sale and recapitalisation process in 2013 - 2014 was in the range of US $150 million - US $235 million, excluding new money provided as part of proposed transactions. The analysis undertaken in that report also took account of a range of analysts' nickel price forecasts, and only one of the nineteen analyst forecasts, which was substantially outside the range of other forecasts, would have indicated any return to existing shareholders derived from future nickel prices. It would, of course, only be possible for the Mirabela Group to benefit from that possibility if it could survive to take advantage of any improvement in those prices in the absence of the Proposed Recapitalisation Proposal. 22On any of the relevant valuations in that report, the Mirabela Group's net interest bearing liabilities of US $526.8 million materially exceeded the enterprise value of its assets and, in the administrators' opinion, Mirabela shares had no value and there would be no return to shareholders if Mirabela and Mirabela Investments were placed in liquidation. Each of Messrs Madden, Rocke and Winterbottom confirm in their affidavit evidence that they continue to hold the opinions expressed in that report and have not become aware of any facts or circumstances since they prepared that report which would cause them to change the opinions expressed in that report. The affidavit evidence 23The administrators rely on detailed affidavits from Mr Madden and supporting affidavits of Mr Winterbottom and Mr Rocke. Each of those persons has extensive experience as a liquidator, including experience in respect of complex insolvencies and reconstructions. 24Mr Madden swore two affidavits in support of the application dated 16 May 2014 and 5 June 2014. Mr Madden's evidence is that he expects that Mirabela Brazil would cease operations and would be wound up if Mirabela or Mirabela Investments were placed in liquidation without an alternative source of funding (Madden 16.5.2014 [97]); that the proceeds available to Mirabela from realisation of Mirabela Brazil's assets, on a liquidation of Mirabela Brazil, would likely be exhausted by the costs of that process and prior ranking claims; and the likely result in a liquidation is that employees of Mirabela would be paid in full, secured creditors would receive a return of approximately 7¢ in the dollar and unsecured creditors would receive no return (Madden 16.5.2014 [117]). 25Mr Madden's evidence is also that Mirabela's assets were best valued in the manner undertaken in the independent experts' report, by a discounted cash flow methodology, cross-checked against offers made by third parties in the course of negotiations for a potential sale of the company's business (Madden 16.5.2014 [121]-[122]); that, even on the somewhat optimistic assumption of a non-distressed arms' length transaction, and assuming immediate ongoing funding was available to continue mining operations by Mirabela Brazil while the transaction was executed, Mirabela's outstanding debt as at 30 April 2014 substantially exceeds the value of its assets, and the likely return of an asset sale would be in the range of 13¢ to 32¢ for unsecured noteholders and nil for shareholders (Madden 16.5.2014 [130]-[131]). Mr Madden also leads evidence of the 2013/2014 sale and recapitalisation process which, as I noted above, was used in the independent experts' report to provide a cross-check on the discounted cash flow valuation in that report (Madden 16.5.2014 [134]ff). 26Mr Madden expresses the administrators' opinion that (Madden 16.5.2014 [142]): "(a) If the Proposed Recapitalisation Plan is not implemented, the only alternative scenario is the winding up of Mirabela and Mirabela Investments; (b) If the Mirabela Group does not receive the continued financial support of the Ad-Hoc Group, the Shareholders will receive nothing on a winding up that would result; and (c) Shareholders are in a better position under the Proposed Recapitalisation Plan and if Mirabela and Mirabela Investments were wound up." Mr Madden also confirmed his opinion that, if the Proposed Recapitalisation Plan is not implemented, the likely alternative is the winding up of Mirabela and Mirabela Investments, that shareholders would receive no return on a liquidation and that shareholders are in a better position under the Proposed Recapitalisation Plan than if Mirabela and Mirabela Investments were wound up (Madden 16.5.2014 [164]). Messrs Rocke and Winterbottom, in their further affidavits each dated 5 June 2014, express their agreement with the opinions expressed by Mr Madden in these respects. 27In Mr Madden's second affidavit, he continues to express the view that the Proposed Recapitalisation Plan offers the only opportunity open to the Mirabela Group to refinance its existing debt arrangements and indicates his view that it will have some advantage to existing shareholders so far as it would allow the suspension of trading of their shares to be lifted (Madden 5.6.2014 [23]). Mr Madden expresses the view that a public capital raising is not viable, given the extent of the Mirabela Group's net interest bearing liabilities, and the significant amount of funds that would need to be raised (Madden 5.6.2014 [25]-[27]). Mr Madden confirms that, based on his experience in corporate insolvency matters, the opinions expressed in the outline of the advantages and disadvantages of the Proposed Recapitalisation Plan for shareholders in Mirabela, as set out in the explanatory statement, are reasonably held (Madden 5.6.2014 [28]-[30]). 28Mr Madden expresses the opinion (Madden 5.6.14 [43]) that, on the basis of the valuations undertaken by the administrators, employees would be paid in full in a liquidation, secured creditors would receive a nominal return and unsecured creditors and shareholders would receive no return; and the Mirabela Group's net interest bearing liabilities of US$526.8 million materially exceeds the enterprise value of its assets and, accordingly, the shares have nil value. Mr Madden also confirms that the revised enterprise valuation of the Mirabela Group, based on the updated information to which I referred above, does not affect the opinions expressed in the administrators' section 439A report (Madden 5.6.2014 [52]). Mr Madden also points to advice received from Brazilian legal advisers that Mirabela's inter-company loan to Mirabela Brazil would be subordinated to all other debts of Mirabela Brazil if that entity filed for bankruptcy, reinforcing his opinion that Mirabela would be unlikely to receive any repayment of its inter-company loan in that position (Madden 5.6.2014 [54]). Messrs Rocke and Winterbottom also confirm their agreement with the opinions expressed by Mr Madden in this regard. 29Mr Madden, with whom Messrs Rocke and Winterbottom agree, also summarises his view as being that, if the Proposed Recapitalisation Plan does not proceed, Mirabela will be insolvent and will have to be placed in liquidation and that it is in the best interests of creditors to make the orders sought in the Originating Process (Madden 5.6.2014 [64]). 30An affidavit of David Varcoe dated 3 June 2014 confirms the views expressed in the mining consultants' report on which the administrators relied in the independent experts' report. An affidavit of Eduardo Mattar dated 3 June 2014 confirms the views expressed by Mr Madden in his affidavit evidence, in reliance on Brazilian legal advice, that inter-company loans to Mirabela Brazil would be subordinated in a bankruptcy of that entity. An affidavit of David Clee, a partner of Gilbert & Tobin, dated 5 June 2014 deals with correspondence with ASIC, ASX, the FIRB application and the manner in which the explanatory statement was prepared and with the verification process adopted in respect of the prospectus for the convertible notes which was also relied upon as a basis for verification of the explanatory statement. An affidavit of Carol Chan, an account manager with a third party which provides share registry services to Mirabela, dated 4 June 2014 sets out the process adopted for providing notice of the application to shareholders by two letters to which I will refer below. The views of shareholders 31Subject to one issue that I will address below, shareholders were given notice of this application including details as to how they might appear in order to oppose the application. On 16 May 2014, a notice was sent by pre-paid post to existing shareholders (Ex KM2 p 1) which drew attention to the nature of the application to be made by the administrators; the steps to be implemented under the deeds of company arrangement; the requirement for court approval under s 444GA of the Corporations Act to the transfer of the shares; the effect of a successful application so that 98.2% of the shares held by shareholders would be transferred to the trustee for noteholders; the means by which shareholders could participate in the court hearing; and the information available to them in respect of the proposal. On 30 May 2014, a further notice was sent by prepaid post to shareholders (Ex KM2 p 3) which drew attention to the detailed explanatory statement in respect of the application and the independent experts' report and to the availability of those documents on Mirabela's and the administrators' websites and to their release to ASX and again advised shareholders of how they could go about participating in this application and of the nature of the information available to them. 32Several communications received by the administrators from shareholders in relation to the present application are in evidence (Ex KM2 pp 5-12). There is evidence that telephone enquiries have also been received although none has involved a shareholder expressing opposition to the present application (Madden 5.6.2014 [13]). Mr Jackman properly drew attention to that correspondence. One holder of a substantial number of shares in Mirabela raised the possibility that Mirabela was solvent, pointed to improvement in nickel prices in recent months and noted the possibility that Mirabela might avoid insolvency if additional funding could be made available by a capital raising through a public offering, implementation of the deed of company arrangement or another source and also expressed the view that: "Unless a company is actually insolvent, any assessment [under s 444GA(3)] that links credit share transfer priority to creditor payment priority seems invalid as it would be assuming something that has not occurred and, in the case where public capital raising is possible, it would be assuming an insolvency that is not yet likely." 33The administrators provided a fair response to that shareholder's comments by their letter dated 2 June 2014, which drew attention to the fact that administrators had been appointed on the basis of the directors' resolution that Mirabela was likely to become insolvent and to the view formed by the administrators that Mirabela would have been unable to operate beyond December 2013, other than on the basis of standstill agreements formed with its creditors, and their assessment that the Mirabela Group was likely to be placed in liquidation if the Proposed Recapitalisation Plan did not proceed. In his response dated 2 June 2014, the shareholder acknowledged the facts set out in the section 439A report and the independent experts' report and again drew attention to the possibility that the company could raise additional capital through a public offering. The administrators addressed the prospect of a public capital raising in their evidence and I am satisfied that that option has been adequately assessed by them. 34Other shareholders in Mirabela raised matters including objections to their shareholdings being reduced to 1.8% of their current value, with a significant effect on the capital they had invested in Mirabela, objections to the fact that the majority noteholders would effectively determine the fate of their shares and concerns that they had been unfairly treated by Mirabela. I have had regard to these concerns, which reflect the understandable disappointment of shareholders with the position in which Mirabela now finds itself and the consequential loss they have suffered. It must be recognised, however, that the legislature has conferred power upon the Court to grant leave for a transfer of shares that does not unfairly prejudice the interests of members of Mirabela, under s 444GA of the Corporations Act; and, second, that the position in which shareholders will find themselves if that leave is granted must be compared, not with the position if Mirabela continues as an ongoing concern with their shareholdings intact, since the evidence plainly establishes that there is no realistic prospect of that occurring, but with the result in a liquidation of Mirabela which would be even less favourable to them. 35A further complexity emerged at the hearing, having come to the attention of the administrators and their legal representatives immediately prior to the hearing. An account maintained by Mirabela's share registry, titled the "Canadian Control Account", presently holds shares that represent approximately 0.7% of the shares in Mirabela. Those shares represent shares held in a Canadian register of the company, which was established in 2007 when Mirabela was dual listed in Australia and Canada. Mirabela subsequently delisted in Canada in October 2013, and shareholders on the Canadian register were requested to transfer their shareholdings to the Australian register. The majority of shareholders on the Canadian registry had taken steps to do so and were advised of the application in accordance with the steps taken to notify shareholders generally. However, some 18 shareholders, which are brokers and other financial institutions participating in a clearing and depository service that holds shares for the benefit of clients, had not transferred their shares to the Australian register and remain on the Canadian register. The Canadian firm that manages the Canadian register had not been requested to, and had not, despatched individual notices to shareholders in the Canadian registry in respect of the application. However, the initial notice to shareholders, the administrators' section 439A report and the explanatory statement sent to shareholders generally had been made available on the SEDAR electronic document access platform, which is a centralised filing system maintained by Canadian securities regulatory authorities, which permits public access to information filed by public companies with Canadian regulatory authorities. The relevant information had also been made available on Mirabela's and the administrators' website. 36Mr Jackman points out, and I accept, that there is no specific requirement for notification of each individual shareholder in respect of an application of this kind, which is instead a matter relevant to the exercise of the Court's discretion. In my view, the inadvertent failure to notify the 18 Canadian institutions individually of this application does not warrant the Court declining to grant the order sought. First, that failure was inadvertent and the circumstances in which it occurred have been explained by the evidence in the application. Second, although those brokers and institutions were not individually notified of the application, if they maintain a continued interest in Mirabela, then they are likely to have become aware of it either by reason of the publication of information concerning it on the SEDAR platform or on Mirabela's and the administrators' website. It is, of course, possible that they do not maintain such a continued interest, given that Mirabela's shares had minimal value before they ceased to trade and are not currently able to be traded. Third, so far as those entities are brokers and other financial institutions, and so far as their clients are retail or other investors, there is no reason to think that they would take a different view from other investors in Mirabela which have had notice of the application and which have not sought to be heard in opposition to it. The applicable legal principles 37Section 444GA of the Corporations Act provides as follows: "(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." 38In Weaver v Noble Resources Ltd [2010] WASC 182; (2010) 41 WAR 301, Martin CJ undertook a detailed review of the history of s 444GA of the Corporations Act, which I gratefully adopt. This section was introduced into the Corporations 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. 39The 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." The evidence, to which I have referred above, indicates that is the present position in respect of Mirabela. His Honour also noted (at [80]) that something more than a mere transfer of shares without compensation would be necessary to establish unfair prejudice. 40The 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 Corporations 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) 70 FCR 34 at 48; 22 ACSR 169. 41In 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. Outcome 42As the administrators point out, the question whether shareholders have any residual equity in the company has to be determined by comparison with their position on a winding-up, at least where that is the likely or necessary consequence of the transfer of shares not being approved, the Proposed Recapitalisation Plan not proceeding and the deeds of company arrangement being terminated. The independent experts' report prepared by the administrators makes clear that Mirabela's liabilities very substantially exceed its assets and, in a liquidation, it is very likely or certain that unsecured creditors and shareholders would receive no return. On the other hand, the evidence to which I have referred above establishes that the Proposed Recapitalisation Proposal, so far as it contemplates that shareholders will retain a minimal equity in Mirabela, with potential economic value, is more favourable to them (albeit possibly only marginally) than the loss of their entire equity in a winding up. 43It also seems to me that, as Martin CJ noted in Weaver v Noble Resources Ltd above at [79], the question whether any prejudice to shareholders arising from the transfer of shares is unfair must also be determined with regard to the object of Pt 5.3A as set out in s 435A of the Corporations Act, namely, for the business property and affairs of an insolvent company to be administered in a way that, inter alia, results in a better return for the company's creditors and members than would result from an immediate winding up of the company. In the present case, the Proposed Recapitalisation Plan, of which the transfer of shares is an essential aspect, preserves Mirabela's business which would otherwise inevitably fail, or at least be lost to Mirabela following the liquidation of Mirabela Brazil; allows Mirabela's employees to be retained and their entitlements preserved; and allows payment of trade creditors' debts paid in full in the ordinary course of business. These are important matters, albeit Mirabela's shareholders will suffer the loss of substantially all of their shares - although, as I have noted above, not a loss of value - to achieve that result. 44In these circumstances, I was comfortably satisfied that there is no unfair prejudice to shareholders in the proposed transfer of their shares so as to implement the Proposed Recapitalisation Plan. I accordingly made orders in accordance with the short minutes of order initialled by me and placed in the file including granting the leave sought by the administrators. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 June 2014