The Court's broad power to terminate security interests

In this article, we unpack a case that highlights the Court’s broad power to terminate security interests pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS). 

On application by the Deed Administrator of NT Port and Marine Pty Ltd (subject to deed of company arrangement) (NTPM), the Federal Court granted orders to fulfil conditions subsequent in the deed of company arrangement (DOCA). These orders dealt with the transfer of shares and discharge of securities.  

JWS acted for the Administrators and Deed Administrator in this matter.

Background

On 16 December 2022, Travis Anderson and Matthew Donnelly of Deloitte were appointed joint and several voluntary administrators of NTPM (Administrators). Mr Anderson subsequently became the sole administrator, and then sole deed administrator, of NTPM (Deed Administrator).

NTPM is the port operator of Port Melville (Port), which is located on Melville Island in the Tiwi Islands, approximately 100km north of Darwin. The Port supports several industries on Melville Island including oil and gas, marine transport and forestry, and is vital to the local Tiwi economy.

The administration was beset by multiple complications, related to the need to obtain external funding to cover operational costs of the Port (through a Tripartite Deed) and two sale campaigns interposed by the negotiation of a confidential supply contract with a commonwealth government department (Supply Contract).

The administration was also complicated by the overseas liquidation of NTPM’s ultimate holding company, AusGroup Limited (AusGroup) and the security interests that NTPM granted P.T. Limited to secure the performance of AusGroup’s obligations to approximately 300 overseas noteholders.

To facilitate this complex administration, the convening period was extended for 18 months (pursuant to three six-month extensions) and court orders were obtained to limit the Administrators’ personal liability with respect to the Tripartite Deed and Supply Contract.

Following a successful sale campaign, a DOCA was entered into with the new proposed Indigenous owner, Port Melville Pty Ltd (Port Melville). A back-up Asset Sale Agreement (ASA) was also entered into with Port Melville, if the DOCA could not complete.

Completion of the DOCA was subject to certain conditions, namely:

• leave of the Court to transfer NTPM’s shares to Port Melville free of all encumbrances, for no consideration;
• directions from the Court that NTPM’s secured creditors (P.T. Limited and Aus AM Pte Ltd (Aus AM)) not enforce their security interests during the operation of the DOCA; and
• that P.T. Limited’s and Aus AM’s security interests be discharged at effectuation, in consideration for their receipt of the net proceeds of the DOCA fund.  

The Deed Administrator sought these orders to effect the successful restructure of NTPM. 

Issues

The key issues before the Court were:

1. whether granting leave pursuant to s 444GA of the Act to transfer NTPM’s share capital would unfairly prejudice the interests of NTPM’s sole shareholder, Ezion Offshore Logistics Hub Pte Ltd (Ezion);
2. in considering whether to make an order under s 444F(2) of the Act to restrain P.T. Limited and Aus AM from realising or dealing with their security interests, it was satisfied that: 
   (i) were they to realise or otherwise deal with their security, it would have a material adverse effect on achieving the purpose of the DOCA; and 
   (ii) having regard to the terms of the DOCA, the terms of any order and any other relevant matters, their interests will be adequately protected; and 
3. whether the Court should exercise its discretion in s 90-15 of the IPS to discharge P.T. Limited’s and Aus AM’s security interests at effectuation of the DOCA.

Findings

As there will be no surplus for distribution to Ezion in any scenario, the Court was satisfied that Ezion would be in no worse position should the DOCA take effect, or the back-up ASA become enforceable. The shares have no residual value because any such value depends upon NTPM and its business continuing in existence, and that will not occur unless the DOCA takes effect.

Accordingly, the Court held that an order pursuant to s 444GA of the Act would not unfairly prejudice Ezion’s interests. An order would best promote the objectives of Pt 5.3A of the Act because it would (among other orders) ensure the continued operation of NTPM and its business.

The Court granted the Deed Administrator leave to transfer the shares held by Ezion in NTPM to Port Melville free from all encumbrances.

In respect of P.T. Limited’s and Aus AM’s security interests, the Court had regard to the fact that neither creditor had taken any action to enforce their security interests and took no position in respect of the court application.

The Court was satisfied that P.T. Limited was adequately protected by the DOCA because it will receive the net proceeds of the DOCA fund, after payment of the other priorities. P.T. Limited would be in a worse position should the DOCA not proceed, as there was less consideration payable under the ASA and further costs would be incurred to complete the ASA.

In respect of Aus AM, it had not lodged a proof of debt in the administration and was not contactable. Its interest (if any) ranked second after P.T. Limited and was effectively worthless.

The Court was satisfied that an order under s 444F of the Act would not unduly prejudice the interests of P.T. Limited and Aus AM. The Court made orders that P.T. Limited and Aus AM be restrained from realising or otherwise dealing with their security interests pursuant to s 444F of the Act, and that their security interests be discharged upon effectuation of the DOCA pursuant to s 447A of the Act or s 90-15 of the IPS.

The decision illustrates that the Court’s power pursuant to s 447A of the Act or s 90-15 of the IPS is broad enough to encompass terminating security interests in circumstances where: the secured creditor has taken no steps to enforce its interest; the terms of the DOCA provide adequate protection to the secured creditor; and the continuation of its security interest would frustrate an otherwise successful restructure of the company.

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