Majority shareholder in the Savannah: The Federal Court of Australia decision in VRM Global Holdings Pty Ltd v Savannah AG Research Pty Ltd (Admin Apptd) [2023] FCA 131

In a recent case involving Savannah AG Research Pty Ltd (Savannah), the Federal Court of Australia considered an application for relief by Savannah’s majority shareholder under section 447A(1) or section 447C(2) Corporations Act 2001 (Cth) which alleged that the directors did not hold a genuine opinion Savannah was insolvent or likely to become insolvent and were motivated by an improper purpose. The shareholder’s application was dismissed on evidentiary grounds that the directors’ held a bona fide opinion as to future insolvency, attributed in part to the shareholder’s conduct over the company.

Background

Savannah (First Respondent) operated a biotech business for the production and development of sustainable crops, which included the sale of seed-based products, planting and seed development.

In January 2022, Savannah became a licenced distributor and manufacturer of VRM products pursuant to a licence agreement with VRM International Pty Ltd, another company in the VRM Group. The agreement had two components, a Cash Flow Agreement and a Share Option Agreement and comprised several relevant features including that:

1. VRM would purchase 500 ordinary shares for a total purchase price of $360,000
2. Savannah would issue a further 250 allotted shares to VRM at a capital value of $220,000
3. Savannah would appoint a VRM nominee as a third director of its Board, Ms Waters
4. VRM would fund a salary for Mr Matchett (Management Payments) totalling $120,000 of 12 monthly payments of an amount equivalent to the Net Salary applicable for a Gross Salary of $10,000 per month, including superannuation and tax
5. VRM would purchase $125,000 of Savannah product, among several other conditions.

In March 2022, VRM defaulted on its obligation to make the monthly Management Payment which was due under the Cash Flow Agreement, and viewed by the Matchetts’ that VRM was in breach. Only one Management Payment was made by VRM, and throughout the course of 2022, with subsequent Management Payments made from Savannah’s account.

Mr Bellamy, the president of the VRM Group, was not a member of the Board of Savannah. The Matchetts asserted throughout the trial that Mr Bellamy assumed entitlement to direct the day-to-day business judgment decisions of Savannah’s Board, including matters affecting Savannah’s future profitability.

Two issues arose, the first is referred to as the ‘Mareeba Issue’ which arose when VRM insisted on Savannah’s seed stock being removed from a storage facility in Mareeba to one in Townsville that it owned and operated. The Mareeba facility owner would not release the seed until payment for use of the facility had been made, of which Mr Marchett informed VRM that Savannah owed money, despite not being disclosed in the financial records provided by Savannah to VRM.

The second issue, referred to as the ‘Rossi issue’ arose where Mr Matchett and Mr Bellamy disputed payments that should be made to seed growers to recompense them for use of products known as catalyst and groundswell. Savannah had previously operated on a business model where it made those payments and brought back the crops for resale at a profit and Mr Ballamy’s view was that growers should cover those costs and that there should be no buy-back of crops. An invoice, at Mr Bellamy’s request, was issued to the Matchett’s, of which the Matchett’s paid from their own funds.

In the beginning of August, Mrs Matchett identified that there was $5,000 in a transaction account and $60,000 in a savings account for Savannah. At that time, the profit and loss report provided by Savannah’s bookkeeper showed a negative income of $30,000 which comprised mostly of salaries and wages. With VRM not paying $10,000 each month, Mr Matchett’s salary would drain Savannah’s accounts.

On 15 August 2022, Mr Matchett obtained legal advice and subsequently met with a representative of SV Partners (the office of the administrators) to discuss the status of Savannah, potential appointment and to obtain adequate information about the financial position, solvency potential risks, unique stakeholders, circumstances that would affect any formal appointment and the consequences of insolvency appointment and potential actions available to a Liquidator against a director of an insolvent company.

The Application

On 22 August 2022, the Matchetts, in their capacity as directors, passed a resolution under s 436A Corporations Act 2001 (Cth) (Act) for the voluntary appointment of joint and several administrators to Savannah (Resolution).

VRM, as the majority shareholder of Savannah, brought proceedings alleging that the Resolution was not validly made as the Matchett’s did not hold a genuine belief as to the present or future insolvency of Savannah and instead, passed the Resolution for a purpose extraneous to the Act, namely to defeat VRM’s interests in having the Matchetts removed as directors, and sought relief under s 447A(1) or s 447C(2) Act.

On 9 September 2022, Downes J granted an interlocutory injunction made on application by VRM, which restrained the administrators from undertaking the commencement of its duties. Following this, at an EGM held on 14 September 2022, VRM exercised its voting rights as majority shareholder to remove the Matchetts as directors of Savannah.

Conclusion

Justice Charlesworth found that VRM had not proven Savannah was not likely to become insolvent at some future time and, at the time that the Resolution was passed, VRM did not rely on an expert report as to solvency. Additionally, at the time of the Resolution, the evidence submitted as a whole, supported the Matchett’s conclusion as to the likelihood of Savannah becoming insolvent.

Key Takeaway

The Court is unlikely to find directors are motivated by an improper purpose based solely on a deteriorating relationship between shareholders and directors when there is a disagreement regarding a resolution being passed for voluntary administration. Rather, the Court is more likely to weigh the evidence as to the future solvency of a company against the states of mind of the directors who instituted voluntary administration and whether the applicant has discharged their onus as to directors being motivated by an extraneous purpose.

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Authored by: 
Matthew Bode, Partner
Zira Norman, Senior Associate