TGIF 25 October 2019: The Legend continues: Court of Appeal upholds insolvent transaction decision

This week’s TGIF considers the latest chapter in the story of Legend International Holdings Inc, where the Court of Appeal considered whether Legend was insolvent, whether mining tenements held by Legend’s subsidiary constituted ‘readily realisable assets’, and whether various deeds entered into by Legend were void as uncommercial transactions.

In March 2019, TGIF considered the decision in Re Legend International Holdings Inc (in liq) [2018] VSC 789, in which a Bond Deed and General Security Deed (Deeds) entered into by Legend International Holdings Inc (In Liq) (Legend), Paradise Phosphate Limited (Paradise) and Queensland Phosphate Pty Ltd (QP) were declared void as uncommercial transactions pursuant to s 588FB of the Corporations Act 2001 (Cth) (Act), and in which it was found that Legend was insolvent at the time of entering into the Deeds. 

This TGIF considers the latest chapter in that story – Queensland Phosphate PL v Korda [No 2] [2019] VSCA 215 – in which the Victorian Court of Appeal upheld the original decision that Legend was insolvent, that mining tenements held by its subsidiary did not constitute ‘readily realisable assets’, and that the Deeds were void as uncommercial transactions.

This article focuses on Paradise and QP’s claim that the Court at first instance failed to properly take into account the commercial realities of the business of Legend and Paradise, and the abilities of those companies to convert their mining assets to cash within a reasonable period of time.

What happened?

Legend was a phosphate mining company, which transferred its mining tenements to its wholly owned subsidiary, Paradise. Legend and Paradise had common officers at various times, including Joseph Gutnick, Peter Lee, and Mr Gutnick’s son, sister and nephew. QP was controlled by Mr Gutnick’s sister and nephew. At the time of the transfer, the book value of the tenements was $2.7m.

Legend and Paradise entered into the above Deeds with QP, pursuant to which Legend issued convertible bonds to QP, and granted security to QP over the assets of Legend and Paradise. Amounts totalling $400,000 were provided pursuant to the Bond Deed.

QP subsequently appointed a receiver of Legend’s shares in Paradise and a receiver and manager to Paradise. The receiver caused Legend to enter into a share sale agreement (SSA) with QP and Paradise. Under the SSA, all of Legend’s shares in Paradise were sold to QP for consideration of $1. The transaction effectively gave QP control of Paradise’s mining assets.

Original decision

At first instance, Randall AsJ found that Legend was insolvent at the time that the Deeds were entered into, and that Paradise ought be wound up.

He also found that the Deeds were voidable transactions and the SSA was void, and considered that entry into the Deeds was a stratagem to defeat, delay or hinder creditors, and that a reasonable person in the position of Legend would not have entered into them.

Randall AsJ noted that the detriment to Legend disproportionately outweighed any benefit it might have attained and because the transaction could not be considered ‘arm’s length’. The transaction effectively led to Legend providing millions of dollars of assets for consideration of $400,000.

The appeal

QP and Paradise appealed the decision that Legend and Paradise were insolvent at the time of entering into the Deeds. 

Notably, they conceded unless the mining tenements were found to be realisable assets, then Legend was insolvent on entry into the Deeds (if an arbitral award made against Legend was due and payable).

QP and Paradise disputed that the mining tenements were not realisable assets, and claimed that Randall AsJ erred in finding that the period of time for realisation of the tenements, being three to six months, was not ‘relatively short’ or ‘reasonable’.

The Court of Appeal upheld the findings of Randall AsJ and dismissed the appeal, finding that Legend was insolvent at the time of entering into the Deeds, and that the Deeds were void as uncommercial transactions. 

Were the mining tenements readily realisable assets?

In determining whether Legend could realise funds from its assets to pay its debts as and when they fall due, the Court of Appeal considered that relevant factors were: 

• the nature of the business and the asset - in particular, whether the asset is necessary for the continuation of the business; 
• whether realisation of the asset was contemplated; 
• whether the asset was in a position such that it could be realised; 
• whether any steps were taken towards realising the asset; and 
• how saleable the asset is, noting that if there has been difficulty selling the asset previously, it may not be realisable within the relevant timeframe.

The relevant period of time in considering the realisation of an asset is when funds from the sale of an asset become available to meet the debts, and not the period in which the asset might be sold. It was noted that, in the context of high value assets, there may be a significant delay between the execution of a sale contract and receipt of the proceeds of sale.

It was not enough for Legend to argue that the tenements could have been sold within three to six months. The Court of Appeal found there was no evidence which showed that the proceeds of any sale would be received by Legend within a reasonable period. As such, the tenements were not ‘readily’ realisable assets.

In addition, the Court of Appeal considered that even if the tenements could be realised within a reasonable period, they were not realisable assets for the purpose of determining Legend’s solvency, as they were necessary for the continuation of Legend’s business. This meant that, at the time of entry into the Deeds, Legend was insolvent.

Comment

This decision is a useful reminder of the principles that will be taken into account in determining whether an asset is ‘realisable’ for the purpose of determining solvency of a company.

It demonstrates that in assessing whether an asset is realisable:

• the relevant period of time for realising the asset is when the sale proceeds will be received, rather than when the asset could be sold; and
• an asset will not be realisable where it is necessary to the conduct of the business or where its sale, other than in the ordinary course of business.

Overall, the ending of the ‘Legend saga’ has been far from paradise for the Gutnick and Feldman families.