Deadly Sins - Indirect Creditor Obtains Orders For Appointment Of Special Purpose Administrators

In the recent decision of Sev.en Gamma a.s. v IG Power (Callide) Pty Ltd (Administrators Appointed) [2024] FCA 30, the Federal Court considered an application for orders to appoint special purpose administrators to IG Power (Callide) Pty Ltd (IGPC). 

The plaintiff, Sev.en Gamma a.s (referred to for convenience in this paper as Seven), which has a 25% economic interest in IGPC and is also an indirect creditor of IGPC, claimed that the existing administrators of IGPC had failed to investigate a number of important potential claims by IGPC against its joint venture partner Callide Energy Pty Ltd (CEPL) and CEPL’s parent CS Energy Limited (CSEL) and that special purpose administrators should be appointed to investigate and, if appropriate, pursue these claims.

In considering the application, Derrington J considered a wide range of issues from standing to the extent to which administrators are required to conduct investigations, before granting the orders to appoint special purpose administrators to IGPC.

Background

IGPC and CEPL owned and operated the Callide C coal powered electricity plant in Biloela, Queensland (Plant) via an unincorporated 50/50 joint venture that included the Plant and other assets (JV).  CEPL is a wholly owned subsidiary of CSEL which in turn is ultimately owned by the Queensland state government.  CSEL was also the contracted manager of the Plant and was responsible for the day-to-day operation, maintenance and repair of the Plant.

The Plant was comprised of two generating units, referred to as C3 and C4.  On 25 May 2021, the turbine of C4 suffered a kinetic disintegration that resulted in an explosion.  C4 subsequently went offline and has remained so ever since.  In June 2021, CSEL commissioned a forensic engineer to investigate the cause of the C4 failure but no report had been published by the time of the hearing of this matter.

Then on 31 October 2022, part of the C3 cooling tower suffered a significant structural failure.  C3 subsequently went offline and has remained offline since that time.

The estimated cost for restoring C3 and C4 to full capacity is $390m.

Both IGPC and CEPL suffered significant losses in relation to the Plant, and on 24 March 2023 IGPC was placed into voluntary administration.

After the appointment of administrators to IGPC (the Administrators), the following key events took place:

• on 11 April 2023, Seven entered into a deed of cooperation with the Administrators under which the Administrators agreed to cause IGPC to progress the rebuild of the Plant as expeditiously as reasonably practicable;
• on 25 May 2023, the Administrators obtained orders approving the Administrators entering into a funding agreement with CEPL for funding to rebuild the Plant;
• on or around 30 May 2023, CEPL gave notice to the Administrators that it was exercising its right under the JV documents to acquire IGPC’s interest in the JV;
• on 1 September 2023, Seven raised its concern with CEPL that the damage to the Plant had been caused by CSEL’s conduct;
• on 29 September 2023, Seven wrote to the Administrators expressing concern that the Administrators had not investigated the cause of the incidents or the claims that IGPC might have against CSEL; and
• on 18 October 2023, the Administrators responded to Seven noting (amongst other things) that the review by CSEL’s forensic engineer was ongoing and the Administrators did not know when the report would be delivered, and the Administrators were taking legal advice regarding potential claims but that this was subject to legal privilege.

Seven then filed its application for the appointment of a special purpose administrator on 30 November 2023.

The application was opposed by the Administrators.

Standing under section 447A(4)

A threshold issue for determination was whether Seven had standing under section 447A(4) of the Corporations Act 2001 (Cth) (Act) as an “interested person” to apply for an order for the appointment of a special purpose administrator under section 447A(1).

Seven held a 25% economic interest in IGPC via shareholdings in nine companies which ultimately in aggregate held 25% of the shares in IGPC.  Seven was also a major indirect creditor of IGPC as Seven had loaned IG Energy Holdings (Australia) Pty Ltd (IEHA) over $88m, IEHA had then on-lent these funds to IGPC and the debt of IGPC to IEHA remained outstanding.

Derrington J carefully considered the authorities in relation to when a party will qualify as an “interested person” for the purposes of section 447A(4) and made the following findings:

• there is authority for the proposition that where a party’s material legal rights or pecuniary or other economic interests are or may be substantially affected by the matter in issue, then that party will qualify as an “interested person” under section 447A(4);
• while there is some authority to the effect that where a party’s interests are indirect or reflective then such a party would not have standing as an interested person, this authority has not been subsequently cited or followed; and
• given the above, Seven had standing as an interested person by reason of its material economic interest as a major (albeit indirect) creditor of IGPC.  Further, it is possible that Seven could have had standing as an interested person by reason of its 25% economic interest in IGPC (via its sequential shareholdings in IGPC).  

Decision

In disposing of the application, Derrington J noted at the outset that:

• it is clear that the power under section 447A(1) extends to the appointment of a special purpose administrator;
• there is no fixed regime as to the matters that might be taken into account when considering the appointment of a special purpose administrator; and
• the factors that apply in relation to the appointment of special purpose liquidators provide a useful guide but they do not impose a limit on the matters that can be taken into account. 

Derrington J then went on to consider the following matters:

• the key issue for consideration was the extent to which an administrator is obliged to carry out investigations (as compared to liquidators) and whether the Administrators had met those obligations;
• it is clear that administrators are required to carry out sufficient investigations to allow them to prepare a report to creditors in accordance with section 439A of the Act and rule 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth);
• the requisite level of investigation will necessarily vary with the circumstances of each case, but investigations must be proper, adequate and careful such that creditors can be appropriately informed;
• while it is true that an administrator’s investigation is preliminary and must be considered in the context of the timeframes imposed by Pt 5.3A of the Act, an administrator still has a duty to conduct investigations that are practical and proportional in the circumstances;
• in this case, the potential claims by IGPC were likely to carry a not insignificant value, and the convening period had been extended twice;
• however, it appeared that the Administrators had not initiated any independent investigation into the causes of the failures at the Plant and were instead relying on (and waiting for) the report of the engineer commissioned by CSEL as well as any findings that might come from an ongoing investigation by the Australian Energy Regulator;
• while there was reference in the materials to books and records reviewed by the Administrators that might be relevant to understanding the failures at the Plant, these were said to be either subject to common interest privilege, the Harman undertaking, or confidentiality restrictions;
• further, while there was evidence that the Administrators had sought legal advice regarding the potential claims against CSEL (and CEPL), this advice had not been put into evidence; and
• finally, the Administrators had not put on any evidence as to whether they did hold a positive view as to the cause of the failures at the Plant or whether there was a plan to actively seek further information about these matters before the second creditors’ meeting.

Given all of the above matters, Derrington J found that the Administrators had not met the requirements for conducting adequate and appropriate investigations into the causes of the failures at the Plant and the potential claims of IGPC.

Derrington J then considered the following additional matters (amongst other things):

• as Seven had confirmed that it was willing to fund the investigations of, and any recovery action by, the special purpose administrators, there was no risk that the appointment might burden IGPC with additional costs or negatively impact IGPC’s creditors;
• the appointment would likely benefit the administration and creditors as a whole in that an investigation and valuation of IGPC’s potential claims would assist in any sale of IGPC’s interests in the JV or the development of a DOCA; and
• there did not appear to be any concerns about the impartiality of the special purpose administrators, or the timing and other impacts of the proposed appointment, that would sufficiently weigh against the appointment.

Having regard to these factors, the Court granted the application for the appointment of special purpose administrators.

Lavan comment

This decision provides some useful guidance in relation to the test for standing under section 447A(4) and the applicable standards for the investigations to be carried out by an administrator.

It also provides an interesting case study of the difficult forensic decisions that can sometimes arise in the conduct of Court proceedings.  In this case, it appears that there may have been additional evidence that could have been put forward on a number of issues, but it also appears that a strategic and forensic decision was made not to adduce this evidence.  While there can be many valid reasons for this type of approach, this decision shows what can happen when the Court notices the exclusion of potentially relevant evidence.

If you have any questions regarding this case or in relation to administrator investigations, the experienced Lavan team is here to help.