Ashurst Restructuring Roundup 

Special Purpose Vehicles ("SPVs") – Financing Arrangements

Canstruct Pty Limited v Project Sea Dragon Pty Limited (No. 4) [2024] FCA 112 ("Canstruct")

SPVs are typically incorporated to undertake particular projects either for their holding company or on behalf of joint venturers. The arrangements made to fund the operations of SPVs can have implications for both their directors and their shareholders.

In Canstruct, Project Sea Dragon Pty Limited ("PSD") was incorporated as a subsidiary of Seafarms Group Limited ("Seafarms") and as an SPV to establish and operate a prawn aquaculture project.

In order to satisfy it's debts, PSD would make regular calls on Seafarms to transfer funds into its account to pay invoices and other obligations shortly before they fell due. That process continued until PSD was ordered to pay some $14 million to a construction company under an adjudication conducted pursuant to the Construction Contracts (Security of Payments) Act 2004 (NT).

Seafarms was "extremely disappointed" by the result of the adjudication and thereafter decided to cease funding PSD's operations including the payment of the amount awarded to be paid to the construction company.

Not only did that decision by Seafarms have the consequence that PSD was clearly insolvent, it also raised the question of when PSD became insolvent.

The Court noted:

"…the question is whether the availability of funds from [Seafarms] or other related companies was such that [PSD] was able to pay its debts as they fell due. The answer to that question involves two related issues. The first is whether the terms on which the funds were advanced deferred the existence of any indebtedness, in the sense that existing payable debts were not merely replaced with another. The second is whether there was an appropriate degree of assuredness that the funds would become available within sufficient time to meet the entity's liabilities." (at [159])

No was the answer to both of those issues.

Those answers were founded on the considerations that:

• PSD had not entered into an agreement with any entity for the provision of funding to allow it to meet the liabilities that it stood to incur during the development phase of the project;
• it did not make arrangements with any entity pursuant to which it obtained a specific promise, commitment or assurance that funding would be provided;
• there was no agreement as to when its liabilities to Seafarms were to be repaid or any agreement as to the terms on which those funds were provided; and
• there was no agreement that funding would continue at any time in the future.

Accordingly, it was open to conclude that PSD was insolvent from the time it commenced operations or shortly thereafter. It was also open to conclude that each of PSD's directors as well as Seafarms (as PSD's parent company) may have a liability for insolvent trading. Moreover, in the case of Seafarms, any liability on that account would be able to be effectively offset against its claims as a creditor for the funds which it had advanced to support PSD's operations with the consequential impact on its ability to recover its investment in the project.

It was not necessary in Canstruct for these issues to be finally resolved. However, the decision clearly raises the need (from the perspective of an SPVs directors as well as its parent company) for clarity and a measure of certainty around the financing arrangements which are put in place to support an SPVs operations.

Authors: Richard Fisher AM.