TGIF 12 June 2020: A sale in the face of a security – Court grants leave for administrators to sell secured property

This week’s TGIF considers the decision in McCallum, in the Matter of Re Holdco Pty Ltd (Administrators Appointed) [2020] FCA 666, where the Court granted leave for administrators to sell assets in which third parties claimed ownership or security interests, after determining that those interests were adequately protected.

Key takeaways

• Leave for administrators to dispose of assets in which third parties assert ownership or security interests can only be granted where the Court is satisfied that arrangements have been made to adequately protect those interests.
  
  
• Even if so satisfied, the Court will not grant leave unless the disposal is consistent with the objectives of ensuring the continued existence of the companies in administration, or maximising return to creditors if this is not possible.
  
  
• The administrators must ensure that the proposed asset disposal is structured in a way that meets the above requirements.

Background 

The voluntary administrators of a number of companies within the Sargon corporate group (Companies), sought leave of the court under s 442C(2)(c) of the Corporations Act 2001 (Cth) to dispose of intellectual property (including software systems and domain names) owed by the Companies, which was subject to certain security interests (Assets).  The Sargon group operated businesses in the financial planning, corporate trustee, responsible entity and superannuation sectors and the Assets were important to the sale of the business.

Ensuring the right to dispose of the Assets was a condition precedent to a larger sale of all assets of the Companies. Without the granting of leave, this larger sale would likely fail.

The application was opposed by the parent company, which claimed ownership of part or all of the Assets, and by its secured creditor (Opponents).

Decision

Justice O’Bryan first commented generally on the operation of s 442C. His Honour noted that the power of the Court to grant leave to dispose of property encumbered in favour of a third party involves ‘significant intrusions’ on the rights of that third party.   Therefore, the Court must be satisfied that arrangements have been made to adequately protect the third party’s interest.  The administrator bears the onus of establishing this.

Even if the Court is so satisfied, it should only exercise its discretion to grant leave after considering consistency with the purposes of maximising the chances of the company continuing to exist, or if this is not possible, achieving a better return for creditors than what would result from its immediate winding up.

The Administrators proposed that if leave were granted, the proceeds from the sale of the Assets be deposited into a controlled monies account and only distributed in accordance with an order or direction of the Court.  The proportionate claims of all parties with an interest in the disposed assets would then be determined by the Court.

The Opponents submitted that:

• their interests were not adequately protected by the proposal, submitting that the true value of the Assets was unknown as there had been no formal valuation or expert assessment.  This was despite the value ascribed to the Assets in the sale being far greater than the value recorded in the parent company’s accounts.  
  
  
• As there was no certainty as to the amount that would be received from the sale proceeds, the Court could not be satisfied that their interests were adequately protected.

Adequate protection of the Opponents’ interests

The Court held that the process put forward by the Administrators did adequately protect the interests of the opponents, for two reasons.  

First, selling the assets as part of the larger sale of the business of the Companies would yield a higher value for the Assets than if they were sold separately to the business, as they derived a portion of their value from their connection to the business.  The proposal would, therefore, maximise the return on the Assets.

Secondly, the Administrators’ proposal required that the whole of the sale proceeds be retained to meet competing claims, instead of simply apportioning the proceeds to claimants according to the amount of their respective claims, the proceeds would be apportioned across the different asset classes by reference to the relative value of each class.  Competing claims would then be determined in respect of each asset class, ensuring a fair and equitable apportioning of the sale proceeds.

Ensuring continued existence of the companies in administration or maximising return to creditors

There was evidence that if the sale did not proceed, there was a substantial risk that the Companies would need to cease operations, impacting on their licencing arrangements and the sale of the business as a going concern.  Therefore, his Honour found that the Administrators’ approach was consistent with the purpose of s 435A that the result was a better return for creditors, and granted leave for the disposal of assets to occur under s 442C.

Comment

This decision acts as a reminder of the circumstances in which the Court will allow the sale of property despite valid security interests or questions of ownership persisting and reinforces the need for administrators to carefully consider the impact of the sale on the interests of third parties.  

Where there is a proposal to sell assets in which third parties have rights of ownership or security interests, administrators should consider the structure of the sale and the process of determining claims to the proceeds, to ensure that those third parties’ rights are sufficiently protected in the eyes of the Court.