The man, the myth, the Legend: Court unravels insolvent transactions

This week’s TGIF considers Re Legend International Holdings Inc (In liq) [2018] VSC 789, the next chapter in the story of Legend International Holdings Inc, where the Court found a company to be insolvent on the basis of a foreign debt.

In June and July 2016, TGIF considered the decision in Legend International Holdings Inc (In liq) v Indian Farmers Fertiliser Cooperative Ltd & Ors [2016] VSCA 151, in which it was held that s 581 of the Corporations Act 2001 (Cth) (Act) does not prohibit a winding up order where Chapter 11 proceedings are on foot in the US. Since that time, the liquidators of Legend International Holdings Inc (In Liq) (Legend) issued proceedings against related parties Queensland Phosphate Pty Ltd (QP) and Paradise Phosphate Limited (Paradise) seeking, amongst other things, declarations that a Bond Deed and General Security Deed were void as uncommercial transactions and, therefore, asking the question - at what point was Legend insolvent? It is this aspect of the decision that is considered further here.

BACKGROUND

Legend was incorporated in Delaware, US and was registered in Australia as a Part 5.7 Body. On 2 June 2016, the Supreme Court of Victoria ordered that Legend be wound up.

Paradise is an unlisted public company incorporated in Australia and a wholly owned subsidiary of Legend. Legend and Paradise had common officers, including Joseph Gutnick and Peter Lee and Mr Gutnick’s son, sister and nephew, Mr Feldman. QP was incorporated in Australia and controlled by the Feldmans.

Legend was a phosphate mining company based near Mt Isa, Queensland. The primary asset of Legend, its mining tenements, were transferred to Paradise in 2012 in exchange for an issue of 100m Paradise shares. At this time, the book value of the tenements was $2.7m.

Following a dispute with key shareholders, an arbitral award was obtained against Legend in Singapore on 7 May 2015 and on 21 December 2015 Croft J delivered judgment enforcing the award in Australia (the appeal against this decision was dismissed).

On 25 November 2015, Legend and Paradise entered into a Bond Deed and the General Security Deed with QP (Deeds). The question for determination was whether those agreements can be declared void as uncommercial transactions pursuant to s 588FB of the Act, and if so, whether the transactions were void as insolvent and voidable transactions (ss 588FC – 588FF of the Act).

ARGUMENTS

Each element of the uncommercial and voidable transactions provisions was challenged by Paradise and QP. We have considered only the question of solvency here.

On the issue of whether Legend was insolvent at the time the Deeds were entered into, Randall AsJ considered:

1. Should a balance sheet circulated between the parties at the relevant time showing Legend to be insolvent be accepted as evidence of that fact?
2. Did Legend have a realisable asset?
3. Was the debt the subject of the Singapore arbitration a debt for the purposes of the s 95A definition of insolvency?

DETERMINATION

A balance sheet dated 30 September 2015 and circulated by email on 19 November 2015 showed Legend to be hopelessly insolvent. The liquidators relied on s 1305 of the Act to say that the books and records are prima facie evidence of Legend’s financial position and its insolvency. The Court was concerned with the origin of the balance sheet, which was not prepared in accordance with generally accepted accounting principles and did not identify the primary asset (the shares in Paradise) as a non-current asset.

Ultimately, weight could be attributed to the aspects of the document supported by other evidence, but not otherwise.

While the defendants foreshadowed that Mr Lee, the CFO and secretary of Legend at the relevant time, would be called by them to give evidence he ultimately was not. The liquidators asked the Court to draw an adverse inference that his evidence would not have assisted their case on the basis of the principle set out in Jones v Dunkel. The failure to call Mr Lee or explain his absence was telling in circumstances where he was involved in the circulation of the balance sheet and the drafting of the Deeds. Mr Lee had sought to have a warranty as to solvency removed from a draft of the Deeds.

As to whether Legend had realisable assets, it was not in dispute that the primary asset was the shares in Paradise and, by extension, the mining tenements. The value of the tenements was said by Mr Feldman to be $10-20m. However, the Court found that the value of the tenements was impossible to determine. Evidence was given by the liquidators that it would have taken three to six months to realise the tenements, which was said to undermine the cash flow test of insolvency.

The Court also found that the foreign debt was a debt for the purposes of the s 95A definition of solvency from at least the date of determination of the Singapore arbitration, despite that debt not yet being enforceable in Australia. It was sufficient for the Court that Legend had the obligation to pay from that time and that no appeal or challenge was made to the underlying debt or the arbitral award. The debt was also distinguished from the foreign tax debt.

Ultimately, the Court found Legend was insolvent at the time of entry into the Deeds.

Randall AsJ observed that there was no external support to cover the foreign debt and the aged trade creditors in Australia and there was not a point in the future at which Legend would be likely to produce income or secure ongoing substantial investment until it did. Simply maintaining the tenement cost money and there was no indication that Legend would be moving into the production phase of mining at a relevant time in the future.

Funds advanced to Legend through the Bond Deed, although it was conceded afforded some benefit to Legend, were in fact aimed at the defence of the enforcement of the foreign debt in Australia. The provision of financial support while a company attempts to eliminate the enforcement of a debt is distinct from support covering trade creditors until income is produced or an asset realised.

The evidence appeared to showed that the focus of the parties throughout appeared to be to protect the primary asset, the tenements, from creditors at all costs and, even putting aside the familial relationships, the transactions were designed to obtain or retain benefit for shareholders without accounting to Legend’s creditors.

COMMENT

This case stands in support of the proposition that a debt arising in a foreign jurisdiction is a debt like any other, even where that debt is not yet enforceable in Australia. The question is whether the company has an obligation to pay and that the debt has fallen due. It was said that even if the application for registration of the arbitral award in Victoria had been unsuccessful, the debt nevertheless existed.

It remains to be seen whether there is yet another chapter to play out in the Legend saga.