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[2012] FCA 1464
Federal Court of Australia
2012-12-17
Mr J, Jacobson J
Original judgment source is linked above.
Counsel for the Plaintiff: Dr AS Bell SC with Mr J Williams
Solicitor for the Plaintiff: Gilbert + Tobin
Counsel for the Applicant: Mr JC Sheahan SC with Mr GKJ Rich
Solicitor for the Applicant: Ashurst
Counsel for Goldman Sachs: Mr SG Finch SC with Mr R Alkadamani
Solicitor for the Supporting Senior Lenders: Mr L Zwier of Arnold Bloch Leibler
Counsel for UBS AG: Mr MA Jones SC
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2079 of 2012
in the matter of NINE ENTERTAINMENT GROUP LIMITED ACN 122 201 905 BETWEEN: NINE ENTERTAINMENT GROUP LIMITED ACN 122 201 905
AND: PAR LENDERS AND HEDGE COUNTERPARTIES IDENTIFIED IN THE INTERLOCUTORY APPLICATION FILED ON 17 DECEMBER 2012
SUPPORTING SENIOR LENDERS IDENTIFIED IN NOTICE OF APPEARANCE FILED 1 DECEMBER 2012
JUDGE: JACOBSON J DATE OF ORDER: 20 DECEMBER 2012 WHERE MADE: SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2079 of 2012
In the matter of NINE ENTERTAINMENT GROUP LIMITED ACN 122 201 905 BETWEEN: NINE ENTERTAINMENT GROUP LIMITED ACN 122 201 905
AND: PAR LENDERS AND HEDGE COUNTERPARTIES IDENTIFIED IN THE INTERLOCUTORY APPLICATION FILED ON 17 DECEMBER 2012
SUPPORTING SENIOR LENDERS IDENTIFIED IN NOTICE OF APPEARANCE FILED 1 DECEMBER 2012
JUDGE: JACOBSON J DATE: 20 DECEMBER 2012 PLACE: SYDNEY
Introduction and background 1 On 17 December 2012 I heard argument at the first court hearing of an application to approve a scheme of arrangement, under s 411 of the Corporations Act 2001 (Cth) (the Act), between Nine Entertainment Group Limited (the company) and its secured creditors. The company seeks orders convening meetings of two classes of secured creditors, described in the scheme documentation as the senior beneficiaries and the subordinated beneficiaries. 2 The company is a member of the Nine Holdings Group of companies, which have extensive media and other interests, including, in particular, in television through Nine Network Australia Pty Limited. 3 The purpose of the proposed scheme is to restructure the very substantial debt obligations owing by the company to its senior secured lenders (including parties described as hedge counterparties) and its mezzanine or subordinated secured lenders. The senior lenders and the hedge counterparties constitute the senior beneficiaries. The mezzanine lenders constitute the subordinated beneficiaries. 4 The amounts owing to the senior beneficiaries total approximately $2.5 billion and fall due for payment on 7 February 2013. The amounts due to the subordinated beneficiaries total approximately $1.14 billion. Failure to repay the senior debt on 7 February 2013 constitutes an event of default under the mezzanine loan facilities. 5 It is critical to note that the scheme is being proposed because it offers the only opportunity currently open to the company to repay the senior debt on or before the maturity date. If the scheme is not approved the senior debt is unlikely to be paid on maturity. 6 Failure to pay the senior debt on the due date is likely to result in the parent company of the Nine Holdings Group, Nine Entertainment Co Holdings Pty Limited (Nine Holdings) and certain other group members entering insolvency administration. It is also expected that the secured lenders would appoint a receiver to Nine Holdings and other group members who are obligors under the facility agreements. 7 Under the proposed scheme, senior beneficiaries will receive a cash payment of $573 million, representing 25 cents in the dollar of the total amount due and shares comprising 95.5 per cent of the capital of Nine Holdings. Subordinated beneficiaries will receive $22.5 million, representing 1.9 cents in the dollar and a 3.75 per cent shareholding in Nine Holdings. 8 In addition, Red Earth Holdings BV, a company incorporated in the Netherlands, which presently holds all of the issued capital of Nine Holdings (other than 11 class B shares held by members of management) will receive $4.5 million in cash and shares representing 0.75 per cent of the capital of Nine Holdings. 9 Two groups of persons who fall within the class of senior beneficiaries oppose the orders convening the meetings. The first group consists of a number of parties referred to as "par lenders." They are original senior facility lenders, who were part of a syndicate of banks which advanced loan funds to the company. They are described as the par lenders to distinguish them from other senior lenders who acquired the debt on the secondary market. That debt is often described as "distressed debt" and is purchased at less than 100 cents in the dollar of its face value. 10 The largest of the distressed debt holdings are those of Apollo Management LP (Apollo) and Oaktree Capital Management LP (Oaktree) which between them hold approximately 45 per cent of the senior debt through a number of investment funds. Apollo and Oaktree support the scheme. The other group of entities within the category of senior lenders who oppose the orders are the hedge counterparties. I will describe them in more detail later. 11 I will refer to the par lenders and the hedge counterparties collectively as "the opponents." 12 The opponents raise two grounds of objection to the orders. The first attacks the essential nature of the scheme. The effect of the opponents' contention is that the scheme is contrary to s 231 of the Act, because if the scheme is implemented, it will compel any dissenting creditor (or indeed any creditor who fails to attend the relevant meeting) to become a member of Nine Holdings without the consent of the creditor. 13 The second objection raises the composition of the classes of creditors. The opponents submit that the senior beneficiaries do not constitute a single class. This is because one of the steps in the scheme is the adoption of a new constitution for Nine Holdings, under which Oaktree and Apollo obtain once only rights to the appointment of directors of Nine Holdings. 14 The effect of the opponents' submission on this issue is that the right to appoint directors, which will, at least initially, give Apollo and Oaktree control of the board, confers dissimilar legal rights upon them when compared with the rights conferred on other senior beneficiaries, so that they cannot consult together in a single meeting.
Details of the scheme 15 I do not need to set out the details of the scheme at length. 16 The object, as I have indicated, is to effect a restructure of the secured debt owed by the company to the secured creditors, so as to avoid an impending insolvency of the Nine Holdings Group. 17 The restructure of the debt is to be effected by an assignment of the senior debt and the subordinated debt by the senior and subordinated beneficiaries to Nine Holdings in consideration for the issue of new shares in Nine Holdings to those beneficiaries and a payment of cash to the beneficiaries using funds to be advanced under certain proposed new facilities. I have described above the total number of shares and cash payments to be made to the senior and subordinated beneficiaries. 18 Importantly, the scheme will effect a discharge and release of the indebtedness of the company to the beneficiaries and a release and discharge of the security granted for the loan facilities. The releases include all claims against and security granted by other members of the Nine Holding Groups who are obligors under the facilities agreements made between those companies and the senior and subordinated beneficiaries. 19 In addition, in consideration for Red Earth taking various steps at the request of the subordinated beneficiaries to facilitate the scheme (including under a document described as the Red Earth Facilitation Deed) Nine Holdings will allot shares and pay cash to Red Earth in the numbers and amounts described above. 20 A table describing the existing debts due to the senior and subordinated beneficiaries, the cash amounts to be paid to them and to Red Earth, the figures describing the number of cents in the dollar to be paid to the senior and subordinated beneficiaries and the percentage shareholdings of the beneficiaries and Red Earth are set out in a convenient table in section 3.2(b) of the draft explanatory statement. 21 I will not repeat the contents of that table as I have described the relevant details above. It is sufficient to repeat that in addition to the cash payments to the senior and subordinated beneficiaries and Red Earth, the senior beneficiaries will hold 95.5 per cent and the subordinated beneficiaries, together with Red Earth, will hold the remaining 4.5 per cent of the capital of Nine Holdings. 22 The senior beneficiaries comprise approximately 35 financial institutions, excluding the hedge counterparties. 23 The hedge counterparties are 13 financial institutions with whom the company entered into interest rate swaps in order to hedge its interest rate exposure on its debt. The hedge counterparties rank equally with the senior facility lenders in respect of the amounts owing under the swaps. They are, therefore, treated as senior beneficiaries. 24 Under the terms of the scheme, the swaps will be closed out. It is expected that the total amount owing to the hedge counterparties will be about $45 million. 25 The subordinated beneficiaries comprise six institutions associated with Goldman Sachs who hold their interests through 10 separate funds. These interests consist of notes issued under a mezzanine note deed. 26 Although the notes do not mature until April 2014, they may be accelerated under the mezzanine note deed and another instrument, called the "inter-creditor deed", if the company fails to repay the senior debt on 7 February 2013. 27 The scheme is to be implemented through 12 steps, which are described in section 7.3 of the explanatory statement and are set out in full in clause 3.5 of the scheme. 28 It is unnecessary for present purposes to describe each of the steps. The critical step which gives rise to the opponents' submission in relation to s 231 of the Act is step 9. It provides that in consideration for the senior and subordinated beneficiaries assigning their debts to Nine Holdings, Nine Holdings allots and issues a number of new shares to each scheme beneficiary. The number of shares issued and allotted is calculated in accordance with a formula. There is a separate formula for the allotment to senior and subordinated beneficiaries. 29 There are a number of corporate restructuring steps which are required to facilitate the scheme. They include the repurchase by Nine Holdings of the B class shares held by members of management so that the whole of the capital in Nine Holdings will be owned by senior and subordinated beneficiaries and Red Earth in the proportions referred to above.
Independent expert report 30 The company engaged PPB Advisory to prepare an independent expert report. PPB has expressed the following critical opinions. The value of the Nine Holdings Group's assets is less than the secured debt owed by the company to the senior beneficiaries, and accordingly, to the senior and subordinated beneficiaries on a combined basis. Subject to the various assumptions made in the report, the Nine Holdings Group will be solvent following the implementation of the scheme up to March 2014. Should the scheme not be implemented, it is highly likely that Nine Holdings Group will be placed into receivership and, potentially, that there would be an "Opco receivership" of the operating companies in the Nine Holding Group, with the result that the senior beneficiaries may receive between 4.4 cents and 34 cents in the dollar dividend. The subordinated beneficiaries would receive a nil return in any insolvency scenario that may come about as a consequence of the failure of the company to repay the senior debt on its due date.
Issue 1 - s 231 of the Act 31 The starting point for consideration of the opponents' submission is that s 411 of the Act does not authorise the approval of a scheme that contains a provision which is inconsistent with another provision of the Act. This submission must be accepted: see Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 and 502. 32 The next steps in the argument are, however, more difficult to sustain. They turn upon the interaction between s 231 and s 411 of the Act. The substance of the argument is that s 231 of the Act requires the agreement of a person to become a member and that s 231 is not subject to an exception found in the express terms of s 411. 33 Mr Sheahan SC accepts that his proposition is a large one. If it is correct, it would exclude from the purview of s 411 not only debt for equity swaps, but also schemes under which a shareholder exchanges equity in one company for equity in another. 34 It is true, as Lockhart J held in Re Hunter Resources Limited (1992) 34 FCR 418 at 425, that the predecessor of the present s 231 requires the agreement or assent of a person to become a member of a company. His Honour held that a reduction of capital which had the practical effect of compelling shareholders in the company to become shareholders in a different company was contrary to the equivalent provision of s 231. 35 However, his Honour went on to say at 426 that if the company wished to achieve that objective, it should invoke the provisions of the law concerning schemes of arrangement or takeover schemes which have special provisions designed to protect the interests of minority shareholders. 36 It is to be noted that in making that statement, Lockhart J appears to have assumed that s 411 can be invoked, notwithstanding his view that s 231 requires agreement for a person to become a member, at least in the sense of assenting to do so. 37 In my opinion, this assumption is borne out by a long line of authority dating back over 120 years. 38 The seminal authority is the decision of North J in Re Empire Mining Company (1890) 44 Ch D 402. It seems to me that this case is authority for the proposition that the power of the Court to approve a scheme of arrangement between a company and its creditors confers jurisdiction on the Court to deprive dissenting debenture holders of their security and to require them to accept shares in the company in full satisfaction of their claims as creditors. 39 Mr Sheahan submitted that the principle for which the decision in Re Empire Mining stands cannot be stated so widely. This is because the agreement under which the debentures were issued contained express provision for the cancellation of the debentures and the allotment in substitution for them of shares in the company. 40 However, in my opinion, later authorities indicate that the limitation on the scope of the principle for which Mr Sheahan contends cannot be maintained. 41 Indeed, in Re Alabama, New Orleans, Texas and Pacific Junction Railway Company (1890) 1 Ch 213 at 223, North J said: Again, Mr. Justice Chitty, in In re North Western, &c., Company, and I myself in In re Empire Mining Company, held that debenture-holders could be compelled to give up their debentures in exchange for fully paid-up shares. (Citations omitted.) 42 Moreover, the qualification to which Mr Sheahan referred in his careful analysis of the case law is one which is so far-reaching that it is difficult to see how it could be justified. The essence of a scheme is that it involves a compromise or arrangement between a company and its creditors or members. A compromise entails the resolution of a dispute. Section 411 confers jurisdiction on the Court to approve it, provided the statutory majorities are achieved. Of course, the effect of the Court's approval is to bind dissenting creditors or members. 43 Thus to read into the principles stated in Re Empire Mining that the Court's power is subject to a qualification that creditors may only be compelled to give up their debentures in exchange for shares if they have agreed to do so, would be antithetical to the nature of schemes of arrangement. A scheme which requires the consent of all creditors is not a scheme of arrangement at all. 44 Importantly, the broad proposition for which Re Empire Mining seems to me to stand was endorsed without qualification by the High Court in Isles v Daily Mail Newspaper Ltd (1912) 14 CLR 193 at 199 per Griffith CJ and at 209 per Isaacs J. 45 Mr Sheahan sought to read a qualification into the statements of principle expressed by their Honours in Isles, because the terms on which the debentures were issued suggested that the element of compulsion may not have been present in the arrangement under which the debenture holders were required to exchange the debentures for fully paid shares in the new company. 46 However, the principle stated by Griffith CJ at 199, does not seem to me to bear out that submission. Isaacs J put it even more succinctly at 205, by stating: The mere fact that the substituted right is a paid up share instead of a debenture is no valid objection: In Re Empire Mining Co… (Citation omitted) 47 In my view the principle stated by Isaacs J (and by Griffith CJ) is quite clear and cannot be read down in the manner suggested by the opponents. Nor was there any qualification in the principle stated, to the same effect, by the Full Court of the Supreme Court of Victoria, in Re City of Melbourne Bank (in liq) (1897) 19 ALT 80 at 283. 48 There may be some tension between the statement in Re City of Melbourne Bank that it would be open to a creditor to renounce its entitlement to shares and the practical considerations to which Lockhart J pointed in Re Hunter at 426. The same may be said of the remarks of North J in Re Empire Mining at 410 that the debenture holders need not take up the shares. 49 But I do not consider that it is necessary to resolve that question. The short answer to the essential question of construction is that a compromise or arrangement between a company and its creditors, under which the creditors receive shares in the company in substitution for their debts, is one which falls within s 411. 50 Section 231 must be read subject to s 411. To do otherwise would be to emasculate the broad scope of s 411. There is nothing in s 231 to suggest that it is an exhaustive definition of the circumstances in which a person is a member. Authorities of over 100 years standing, including a decision of the High Court of Australia, suggest otherwise. 51 So too do more recent Australian authorities: see Re Crusader Limited [1995] 1 Qd R 117 at 128 - 129 per Thomas J. It is true that his Honour said at 129 that on the facts of the case there was sufficient assent or agreement on the part of the note holders to satisfy the requirements of the predecessor of s 231. But his Honour went on to express a preference for the view that Re Empire Mining and later authorities support the view that a scheme under which debenture holders exchange their security for paid up shares in a new company, can be approved under s 411, provided that they are not an evasion of some requirement of the law: see also the decision of Santow J in Re Advance Bank Australia Limited (No 2) (1997) 22 ACSR 513 at 529-530. 52 The only authority which seems to me to lend support to Mr Sheahan's submission is the decision of Heenan J in Re Bulong Nickel Pty Ltd (2002) 42 ACSR 52, at [4]. However, with respect to the learned judge, the authorities to which he referred, namely, Re Empire Mining, Re Alabama Railway and Re Crusader, seem to me to stand for the opposite of the proposition stated in the last sentence of [4] of his Honour's reasons.
Classes of creditors 53 The approach which has been adopted in relation to the composition of classes of creditors has its genesis in the statement of Bowen LJ, in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. The test for composition of different classes of creditors is whether their rights are so dissimilar as to make it impossible for them to consult together with a view to their common interest. 54 The test has been applied and explained in a large number of cases and it is not necessary or productive to refer to all of them. 55 It has been emphasised that when creditors are broken up into classes each class is given power to veto the scheme and that such a process tends to undermine the basic approach that it is for the statutory majority to decide the question. See Re NRMA Limited (No 1) (2000) 156 FLR 349 at [82] per Santow J, see also Re Opes Prime Stockbroking Ltd (No 2) (2009) 73 ACSR 385 at [56] per Finkelstein J. 56 The test was stated succinctly by Barrett J in Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12]. It is not one of identical treatment, but of community of interest. The focus is not on differentiation of interest, but on its effects. It is only if the differentiation of interest "destroys the ability" or makes it impossible for the creditors to consult together that the creditors are to be divided into classes. 57 This approach reflects that which is stated in other leading authorities, see, for example, the analysis of Street J in Re Jax Marine Pty Limited [1967] 1 NSWR 145 at 147-149. 58 Mr Sheahan submitted that considered in its full context the scheme confers separate and distinct legal rights upon Apollo and Oaktree, which differentiates their interests from those of other senior beneficiaries. This is because of the right to appoint directors under the new constitution and, thereby, to obtain de jure control of the board. 59 He, therefore, submitted that Apollo and Oaktree constitute a separate class who should meet on their own, thereby leaving a residual class of senior beneficiaries comprised of all those entities other than Apollo and Oaktree. 60 The debate, therefore, is about the rights of corporate governance conferred on Apollo and Oaktree under the proposed new constitution. 61 I do not consider that the interests of Apollo and Oaktree on that question are so different that it is impossible for them to consult with other senior beneficiaries. There is nothing which destroys their ability to consult on the terms of corporate governance provided for in the draft constitution. Nor is there anything which renders it impossible for the opponents to consult all of the other senior beneficiaries (including Apollo and Oaktree) in one class meeting. 62 Indeed, the effect of Mr Sheahan's submission at transcript page 49 seems to me to contain the implied concession that it would be possible for the senior beneficiaries, including Apollo and Oaktree, to consult on that question. The debate will be one of whether there ought to be an independent board at the outset or whether the composition of the initial board should be dominated by the nominees of Apollo and Oaktree. 63 In my view, not only is it not impossible for all the senior beneficiaries to meet as one class to consider that question, but it represents the appropriate forum for them to do so. 64 Moreover, the rights of appointment which are conferred on Apollo and Oaktree are once-only rights. They endure to the next annual general meeting, and in any event, are subject to the entitlement of shareholders who hold five per cent of the issued capital of Nine Holdings to convene an extraordinary general meeting to change the board. 65 In those circumstances, I have come to the view that I must reject the submission of counsel for the opponents that the proposed classes are not properly constituted in accordance with established principles. However, I will direct that details be kept of the votes which are taken at the class meeting of senior beneficiaries so that that matter can be put before me at the second Court hearing.
Other issues 66 The only other issue which was referred to in the company's submissions was whether the new loan facility which will be used in part to fund the cash payments under the scheme constitutes the provision of financial assistance in contravention of s 260A of the Act. The issue arises because the new facility will be secured against the assets of the Nine Holdings Group. 67 In my opinion, the short answer to this question is that even if the grant of security does constitute financial assistance, it does not contravene s 260A because any such assistance does not materially prejudice the interests of the company within the meaning of s 260A(1)(a) since the scheme provides the opportunity for all secured creditors (including Red Earth) to consent with full disclosure of the details of the proposed transaction: see Anzon Australia Limited, in the matter of Anzon Australia Limited [2007] FCA 2079 at [34] (Lindgren J).
Conclusion and orders 68 The details of the scheme are the product of commercial negotiations between a majority of the senior and subordinated beneficiaries and representatives of the Nine Holdings Group as well as Red Earth. These are sophisticated commercial parties who were represented by experienced legal and financial advisers. 69 The compromise which is supported by all of the senior and subordinated beneficiaries other than the opponents is one which is intended to prevent the Nine Holdings Group entering insolvency administration. 70 The corporate governance provisions appear to reflect the commercial reality that Apollo and Oaktree hold an effective majority of the senior debt. Nevertheless, there is no reason why that issue cannot be the subject of further debate at the meeting of senior beneficiaries. 71 The scheme is one which is capable of approval by the Court at the second Court hearing, subject to satisfaction of the matters which are to be considered at that hearing. I endeavoured to summarise the relevant matters in my decision in Re Seven Network Limited (No 3) (2010) 267 ALR 583 at [31]ff. 72 Accordingly, I propose to make orders generally in accordance with the orders submitted by counsel for the company. I certify that the preceding seventy-two (72) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.
Australian Securities Commission
Marlborough Gold Mines Limited
(1993) 177 CLR 485
(1912) 14 CLR 193
(1992) 34 FCR 418
(2000) 156 FLR 349
(2010) 267 ALR 583