A false sense of security – administrators obtain leave to dispose of collateral

In the case of Jones (Administrator) v Realtek Semiconductor Corporation in the matter of Nuheara Limited (administrators appointed) (No 1) [2025] FCA 267, voluntary administrators brought an urgent application to obtain leave under section 442C of the Corporations Act 2001 (Cth) (the Act) to dispose of, under a deed of company arrangement (DOCA), property subject to a security interest.

The secured party opposed the application on the basis that arrangements under the DOCA did not ‘adequately protect’ its interests by only providing it a return of less than 20c/$1, whilst also providing a return to unsecured creditors of up to 10c/$1.

The Federal Court determined that the DOCA would likely provide a superior return to the secured party and creditors as a whole as compared to a liquidation. In circumstances where there was no alternative proposal, and the Court was satisfied there would be no such proposal, it granted the leave sought.

Facts

The secured party, Realtek Semiconductor Corporation (Realtek), was a Taiwanese company that supplied integrated circuits to the applicant company in administration, Nuheara Limited (Nuheara), for the purposes of Nuheara’s research and development of headphones and other products.

Voluntary administrators (Administrators) were appointed to Nuheara and its subsidiaries, Nuheara IP Pty Ltd and Terrace Gold Pty Ltd, on 7 August 2024.

The Administrators appointed a corporate advisory firm to run a sale process to sell some of Nuheara’s property, or to recapitalise the group. The sale process was not successful and in summary, was conducted as follows:

• The corporate advisory firm approached 25 parties.
• Of those 25 parties, only two progressed with negotiations.
• Of those two parties, one expressed an interest in purchasing Nuheara subject to an agreement the Administrators could not guarantee.
• One other party also made a non-binding indicative proposal which did not progress to a binding offer.

In late 2024, Realtek also expressed an interest in a credit bid for some patents Nuheara owned, but that did not progress any further.

On 17 February 2025, eight days before the second meeting of creditors, a group of investors through a special purpose vehicle, Orecchio Pty Ltd (Orecchio), proposed the DOCA, which included the following terms:

• Orrechio will purchase the business assets of Nuheara for $500,000, which is to be paid to Realtek, and which is conditional upon discharging Realtek’s security interest.
• Orrechio would also fund the following distributions:
  • $912,115 to the administrators for their expenses incurred;
  • $1,392,754 to repay post-appointment administration funding;
  • $432,832 to pay unsecured creditors, capped at 10c/$1; and
  • $147,681 to pay employee entitlements.
• Nuheara’s current employees will either continue in their employment with Orecchio, or will receive full payment of all termination and accrued employee entitlements.
• Realtek would be an excluded creditor for the purposes of the creditor’s trust.

Realtek refused to consent to the discharge of its security interest, and so the Administrators were forced to instead seek the leave of the court under section 442C(2)(c) of the Act.

Statutory provisions

Section 442C of the Act prohibits an administrator of a company or deed of company arrangement from disposing of property that is subject to a security interest unless (relevantly) the secured party consents to the disposal, or the court grants leave to do so. The disposal itself then extinguishes the security interest.

The Court (and both parties) relied on an extract from RE Holdco Pty Ltd (Administrator Appointed) (ACN 612 592 471) & Ors [2020] FCA 666 which noted the following in relation to the court’s power to grant leave under section 442C(2)(c) of the Act:

• The administrator bears the onus of satisfying the court that arrangements have been made to protect adequately the interests of the secured party, which would ordinarily involve arrangements seeking to obtain the best available return for the property, and the payment of such amounts to the secured party in a manner consistent with Part 5.3A of the Act.
• Where the court is so satisfied, the exercise of its power to grant leave is enlivened and is otherwise unconstrained, save that it must be exercised judicially with reference to considerations arising from the objects of Part 5.3A of the Act.

Decision

The Court granted leave to the Administrators under section 442C(2)(c) of the Act on the basis that the DOCA adequately protected Realtek’s interests and was consistent with the objects of Part 5.3A of the Act.

The Court considered the following key factors in determining that the DOCA adequately protected Realtek’s interests:

• The DOCA would provide a better return to Realtek than a liquidation, being $500,000 in priority to other creditors. Realtek would likely receive nothing in a liquidation.
• The DOCA would also provide a better return to unsecured creditors and employees than a liquidation.
• The absence of an independent valuation report of the security property was not cause to decline leave as:
  • obtaining the valuation would be costly in circumstances where (as the case was) the security property was highly specialised in nature; and
  • Realtek’s complaints were unjustified in circumstances where it could not explain why it could not itself provide the valuation, even informally, despite holding a security interest over the property since 2022.
• Realtek could not evidence any credit risk in payment of the $500,000 following completion of the transactions.
• Prior to the application, Realtek and the Administrators attempted, but failed, to procure a supply agreement which Realtek contended would increase the value of the security property. Whilst the Court accepted that a supply agreement would increase the value of the security property (as any sale would be a going concern), it did not take kindly to Realtek attempting to use the benefits of a supply agreement against the granting of leave in circumstances where Realtek had ample opportunity to enter such an agreement, but failed to do so.
• Realtek would receive a return of less than 20c/$1 whilst also being excluded from the pool of unsecured creditors benefiting from the balance of funding Orecchio was providing under the DOCA (ie Realtek could not prove in the creditors’ trust for the remainder of what it was owed by Nuheara after payment of the $500,000). The Court accepted that Realtek’s complaints in this regard had merit however, as the alternative was liquidation with no return, it was to no avail.

In determining that the DOCA adequately protected Realtek’s interests, the Court’s discretion under section 442C(2)(c) of the Act was enlivened. The Court then found that the DOCA was consistent with the objects of Part 5.3A of the Act, whereas a winding up of the Nuheara group and the sale of the security property as individual assets was not. On this basis, the Court exercised its discretion.

Lavan takeaway

The key takeaway from this case is twofold:

• First, the benefits to creditors as a whole may justify a shortchanged return to a secured party where there is no prospect of a better return from an alternative arrangement (be it liquidation or otherwise).
• Second, insolvency practitioners should consider the utility of section 442C of the Act in circumstances where the source of a return to creditors is in scarce supply.

This case serves as a useful reminder that a secured party’s position is not infallible in the right circumstances. If you have any questions about this decision, or in relation to the effect of section 442C of the Act on your position, the experienced Lavan team is available to help.

Thank you to Mitchell Davis, Solicitor, for his valuable research and assistance with this article.

Disclaimer

The information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.