Pursuant to section 437D of the Corporations Act 2001 (Cth) (Act), any dealing affecting a company’s property under administration that is entered into without the administrator’s consent is void subject only to an order of the Court.

The recent decision of Sev.en Gamma a.s. v IG Energy Holdings (Australia) Pty Ltd [2023] NSWSC 1032 illustrates the principles a court will consider when deciding whether to exercise its power under section 437D. The case also serves as a timely reminder of the importance of well-drafted contractual provisions.

Background

Before going into administration, IG Energy Holdings (Australia) Pty Ltd (IEHA) (acting as the borrower) had a Credit Agreement in place with Sev.en Gamma a.s. (Sev.en) (the lender). IEHA breached the terms of the Credit Agreement. Under the terms of that agreement, the breach entitled Se.ven to require IEHA to provide such security as required by Se.ven to protect Se.ven’s interests.

IEHA was placed into administration. Se.ven then sought the consent of the administrators of IHEA to enter into a General Security Deed (GSD) by which IEHA would provide security to Se.ven in respect of the debt owing under the Credit Agreement. The GSD would have the effect of converting Se.ven from an unsecured creditor to a secured creditor.

IEHA’s obligation to execute the GSD was said to arise under Art 9.1.1(c) of the Credit Agreement, which provided:

“If an Event of Breach occurs, [Sev.en] is entitled to subsequently initiate any of the following measures:
(a) …
(b) …
(c) [Sev.en] may require, and [IEHA] is obliged to immediately provide [Sev.en] any adequate securing of its obligations towards [Sev.en], in particular, imposition of security interest/lien on receivables, bank account deposits, real-estate and movables.”

IEHA’s administrators refused to provide consent. As a result, Sev.en filed proceedings in the Supreme Court of NSW, seeking the Court’s approval of the GSD under section 437D(2)(c) of the Act or alternatively, an order for specific performance requiring IEHA to execute the GSD.

Section 437D(2)(c) of the Act

The Court outlined that its power under section 437D(2)(c) must be exercised consistently with the purpose of Part 5.3A of the Act, that is, for a company to be administered to maximise the chance that it may continue to exist whilst maximising the return to the company’s creditors where that is not possible.

The Court stated that the relevant question for exercising its discretion is whether the proposed transaction is for the benefit of the company or creditors as a whole.

Se.ven submitted that the evidence established that there were no other significant creditors of IEHA, and that it had made an offer to execute a deed poll by which it agreed that, if it had security, the claims of other creditors (up to a fixed amount) would be paid in priority to its own.

The Court found that the GSD was clearly for the benefit of Se.ven alone, and that Se.ven could not prove that the proposed transaction was for the benefit of the company or creditors as a whole by demonstrating that other known creditors will not be worse off or harmed as a consequence of the transaction. The Court stated at [30]:

“More fundamentally, the question is not whether other creditors or the company are harmed by the proposed transaction (that is, entry into the GSD), but whether the proposed transaction is for the benefit of the company or creditors as a whole. Sev.en bears the onus in relation to that issue. It does not discharge that onus by demonstrating that the other known creditors will not be worse off as a consequence of the transaction.”

As a result, the Court refused to exercise its discretion to order IEHA to execute the GSD.

Specific performance of Article 9.1.1(c)

The Court separately considered whether the promise in Article 9.1.1(c) of the Credit Agreement was sufficiently certain for an order for specific performance. This question turned on whether the essential elements of the proposed security were sufficiently identified in the article’s terms or could be identified in some other way.

The Court found that there was inherent uncertainty in the drafting of Article 9.1.1(c), as the article did not identify:

  • the property over which security was to be provided
  • the circumstances in which the security may be exercised
  • the rights that attach to the exercise of the security.

Sev.en submitted that the essential elements of the security could be identified as the terms contained in the GSD were standard terms that could be expected to be found in any security, and that if IEHA had problems with any of the terms, Sev.en would consider them and amend accordingly.

The Court found the fact that many of the terms in the GSD can be found in many forms of security does not mean that those terms are to be taken to be terms agreed to by the parties, and that Se.ven’s invitation to negotiate the terms of the security supports the conclusion that the terms could not be found in the article itself. The Court concluded that the article was insufficiently clear to be enforceable and therefore to warrant an order for specific performance.

Key takeaways

The case illustrates the following two takeaway points:

  1. the relevant question for an order under section 437D(2)(c) of the Act is whether the proposed transaction is for the benefit of the company or creditors as a whole, not whether other creditors will not be worse off as a consequence of the transaction
  2. for a contractual term relating to the provision of security to be enforceable, the term needs to sufficiently identify the essential elements of the security, including the property over which security is to be provided, the circumstances in which security may be exercised, and the rights that attach to the exercise of the security.