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Federal Court dismisses application to set aside sale and remove Liquidators

Caseflash 15 March 2016

In the Matter of Oceanlinx Limited (In Liq) (Receivers and Managers Appointed) [2016] FCA 225.

Introduction

Vaughan Strawbridge and Jason Tracy were the Administrators (now Liquidators) of Oceanlinx Ltd (In Liq)(R&M Appointed)(Company) which operated a business that developed and commissioned electricity generators, utilising ‘wave energy’ from the ocean.

In these proceedings, the plaintiffs (unsecured creditors of the Company) sought orders:

  1. setting aside the sale of the assets of the Company by the Administrators;
  2. for damages and compensation – based upon a claim that the Administrators breached their duties during the course of the sale of assets; and
  3. for the removal and replacement of the (now) Liquidators.

On 11 March 2016, his Honour Justice Yates dismissed the plaintiffs’ application – noting that the Administrators’ conduct during the time-sensitive and difficult sale process was justified and ruling that their commercial decision ought to stand.

Background - Sale of Assets

After a number of DOCA proposals were made and subsequently withdrawn, the Administrators conducted a campaign for the sale of the Company’s intellectual property (being its principal remaining asset after the first ranking secured creditor’s claims). Two competing offers came from sources linked to two of the Company’s directors – described in the judgment as the ‘Baghaei Interests’ and the ‘Vertes Interests’ respectively. 

The Administrators conducted negotiations with the two interested parties and ultimately found themselves in a situation in which:

  • the Baghaei Interests submitted an acquisition proposal which included cash payment of $400,000 and the release of claims against the Company valued at approximately $1.6 million – but required acceptance of the offer within a number of days;
  • in the absence of a compelling counteroffer, the Baghaei offer was accepted and the parties’ lawyers began drawing up the relevant paperwork;
  • the Vertes Interests submitted an acquisition proposal which included cash payment of $2.465 million and releases assessed at $941,000;
  • the Administrators formed the view that the Vertes proposal would result in a greater return to unsecured creditors, however were wary of whether Vertes had the financial capacity to complete the proposed purchase. In particular, the planned investment vehicle had issued share capital of only $1,000 and no party was willing to offer guarantees for payment of the cash consideration. On the other hand, the Baghaei offer was backed up with proof of funding;
  • on the morning of the proposed settlement with Baghaei (which was scheduled for 12:30pm) Vertes had not provided sufficient assurances to satisfy the Administrators of its capacity to source funds for the purchase. By this stage, the Administrators also had reason to genuinely believe that the Baghaei Interests would withdraw the offer if settlement was not concluded at 12:30pm;
  • the Administrators informed the Vertes Interests that they intended to complete the sale to Baghaei at 12:30pm unless Vertes transferred a deposit in the amount of $400,000 to the Administrators prior to that time; and
  • in the absence of payment by Vertes, the Administrators completed the sale to Baghaei.

The Argument

The plaintiffs, being entities associated with the Vertes Interests, sought (amongst other orders) to set aside the sale, relying on sections 447E(1) and 1321(1) of the Corporations Act 2001 (Act), on the basis that the Administrators’ decision to transact with the Baghaei Interests, and lose the benefits which would have been received by a sale to the Vertes Interests, was unreasonable and prejudicial to creditors. 

The plaintiffs also sought that new liquidators be appointed to investigate whether claims might be brought by the Company against the Administrators for the breaches alleged.

The Decision

Justice Yates dismissed the plaintiffs’ application in full. In doing so, he made the following observations:

  • in exercising their power of sale, the Administrators were acting as the Company’s agent (s437B);
  • the Administrators were not under a duty to obtain “the best possible price” for the sale – they were entitled to take into account a wide range of considerations and make their own business and commercial judgments;
  • to enliven relief under sections 447E(1) and 1321(1) of the Act, the plaintiffs needed to demonstrate that the Administrators’ conduct was prejudicial to creditors – not that it might have been be prejudicial. In circumstances where the Vertes Interests could not satisfy the Administrators (or the Court) that it actually had the financial capacity to complete the sale, the Baghaei proposal remained the only real option for the Administrators. There was therefore no identifiable prejudice to creditors. 

In reaching its conclusion, the Court acknowledged the difficult commercial decision that the Administrators were required to make in this situation and noted that “no valid criticism can be levelled at the administrators.”


Kirsten Farmer, Partner
Sydney

Manit Oberoi, Solicitor
Sydney

Caseflash 15 March 2016
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