(2003) 44 ACSR 210
- Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485
(2006) 200 FLR 243
(2012) 211 FCR 439
- Re Nine Entertainment Group Ltd (No 2) [2013] FCA 40
- Re NRMA Ltd [2000] NSWSC 82
(2000) 156 FLR 349
33 ACSR 595
- Re Pheon Pty Ltd (1986) 47 SASR 427
86 FLR 289
Judgment (5 paragraphs)
[1]
Background and affidavit evidence
I will first refer to the background to the application and then to the affidavit evidence led in the proceedings before turning to the relevant legal issues. I have drawn on the helpful submissions of Mr Sheahan who appears with Ms Wong for BIS Finance and Artsonig in addressing the relevant issues below.
BIS Finance and Artsonig are part of the BIS Group, comprising BIGL and its subsidiaries. Artsonig holds all of the shares in Thornberry Finance Pty Ltd ("Thornberry") which in turn holds all of the shares in BIS Finance (Mechineau [12], Ex APRM-1, 24, 33) and BIS Finance holds all of the shares in BIS Industries, which holds the shares in operating companies in the BIS Group (Mechineau [13]). The BIS Group provides logistics services to the Australian and Indonesian resources sectors, including processing, handling and hauling materials for large Australian producers in the iron ore, coal, gold and nickel sectors, and operates across approximately 35 sites around Australia and 3 sites in Indonesia. As at 30 September 2017, the BIS Group had approximately 1,364 employees and subcontractors (Mechineau [17]).
The Senior Scheme and the PIK Scheme that are the subject of this application form part of a broader proposed recapitalisation of the BIS Group, which is expected to involve a debt-to-equity swap that will result in the Senior Scheme Creditors and certain PIK Scheme Creditors being issued shares in BIS Industries Holdings Limited ("NewCo"), a company incorporated in the Cayman Islands, which will acquire the shares in BIS Finance and, through it, ownership of the BIS Group (Mechineau [51]). Mr Sheahan points out that this is not the first occasion in which such a structure has been adopted in an Australian scheme of arrangement and that a similar structure was adopted in a debt for equity restructure of the Alinta Group in 2011. The second stage in the proposed recapitalisation is a proposed restructuring of BIS Finance's debt, which is anticipated to include a debt-to-equity swap with the result that no more than a capped amount of "restricted debt" would remain outstanding; the repayment, refinance or extension of Facility A1 owed by the BIS Group, which does not count toward the capped amount; the assignment to NewCo of the excess of the secured senior finance debt owing to the Senior Scheme Creditors over the capped amount of restricted debt; and a solvent reorganisation or winding up of Artsonig. After the proposed recapitalisation is implemented, 96% of the shares in NewCo would be held by the Senior Scheme Creditors and 4% of those shares would be held by holders of notes issued under the PIK Indenture which elect to receive shares in NewCo (Mechineau [55]).
BIS Finance and Artsonig each rely on affidavits dated 3 November 2017 of Ms Colleen Platford, a partner in the firm acting for them in these applications. Ms Platford's affidavit in the BIS Finance proceedings outlines the business of the BIS Group and the purpose of the Senior Scheme, as the first phase of a proposed restructuring of the BIS Group, namely to transfer ownership of the BIS Group to NewCo "in order to stabilise the BIS Group and facilitate a subsequent proposed debt restructuring". Ms Platford also summarises the steps involved in the Senior Scheme, including the initial transfer of all of the shares in BIS Finance to Senior Scheme Creditors and then to NewCo; an interim standstill on creditor enforcement actions under the BIS Group's senior finance documents and interim restrictions on the transfer of the BIS Group's senior finance debt; a waiver of a mandatory prepayment obligation upon a change of control of the BIS Finance under the BIS Group's senior finance documents; release of a secured guarantee of the senior finance debt provided by Thornberry; and amendments to the BIS Group's senior finance documents to facilitate the recapitalisation of BIS Finance and the BIS Group in the subsequent phase of the restructuring.
Ms Platford's affidavit in the Artsonig proceedings indicates that the PIK Scheme seeks to effect a restructure of the debt owing by Artsonig to the holders of notes issued under the PIK Indenture and that the primary purpose of that scheme and the Senior Scheme is "to facilitate a debt restructuring though the imposition of standstill arrangements and certain modifications to the BIS Group's existing senior finance documents". Ms Platford also summarises the steps involved in the PIK Scheme, including the giving of consents to the transfer by Thornberry of all of the issued share capital in BIS Finance to the Scheme Financiers (as that term is defined in the explanatory statement to be sent to PIK Scheme Creditors); the grant of releases, inter alia, by Artsonig and its related entities and the PIK Scheme Creditors; the restructuring of debt owing under the PIK Indenture by an amendment and restatement of that indenture; and the grant of an entitlement to the issue of shares in NewCo to each holder of notes under the PIK Indenture, at that noteholder's election and subject to the provision of specified information in accordance with the terms of the PIK Scheme.
BIS and Artsonig also rely on affidavits dated 9 November 2017 of Mr Ryan Eagle, who is a partner of Ferrier Hodgson and consents to act as one of the scheme administrators of the Senior Scheme and the PIK Scheme; indicates his intention to execute a deed poll in relation to his role as one of the scheme administrators of the schemes; and also indicates that he is willing to act as chairperson of the scheme meetings. BIS and Artsonig also rely on affidavits dated 8 November 2017 of Mr Morgan Kelly, by which he consents to act, with Mr Eagle, as scheme administrator of the Senior Scheme and the PIK Scheme and indicates that he is willing and able to act as chairperson of the scheme meetings if Mr Eagle is unwilling or unable to do so.
Artsonig also relies on the affidavit dated 9 November 2017 of Mr Sandeep Qusba, who is a partner of a leading law firm practising in the United States and the head of its bankruptcy and restructuring practice. Mr Qusba sets out the circumstances in which the United States Bankruptcy Court would recognise these proceedings under Chapter 15 of the United States Bankruptcy Code and also refers to the manner in which noteholders' economic interests in notes issued under the PIK Indenture would be permitted to vote in respect of a plan of reorganisation under Chapter 11 of the Bankruptcy Code. A similar approach is adopted in the PIK scheme and there is precedent for that approach in the earlier schemes approved by the Court in Re Boart Longyear Ltd [2017] NSWSC 567; (2017) 121 ACSR 328 and Re Boart Longyear Ltd (No 2) [2017] NSWSC 1105.
Artsonig also relies on the affidavit dated 15 November 2017 of Ms Jane Sullivan, who is an Executive Vice President in the corporate restructuring division of Epiq Systems Inc and has had substantial experience in dealing with vote solicitations in bankruptcy and restructuring assignments in the United States and in international assignments involving companies incorporated outside the United States, including other Australian schemes of arrangement. Ms Sullivan sets out the manner in which the notes issued under the PIK Indenture are held and the process ordinarily undertaken for communicating with noteholders in a transaction of this character. Ms Sullivan also indicates that she would have responsibility for overseeing the despatch of scheme meeting materials to DTC, registered participants (being the banks and brokerage firms that hold the notes issued by Artisong) and PIK noteholders in the United States and the process that would be adopted for the despatch of those materials and for voting on the PIK Scheme and for an election to receive an interest in the securities to be issued in the course of the restructuring. She also refers to the process that would be adopted to give notice to PIK noteholders of an application for recognition of these proceedings under Chapter 15 of the Bankruptcy Code. The processes described by Ms Sullivan are, it appears, those that would ordinarily be adopted in a restructuring of this kind in the United States.
BIS Finance and Artsonig also rely on several other affidavits that were in evidence in both proceedings. The affidavit dated 16 November 2017 of Mr David Clee, who is a partner in the firm of solicitors acting for the BIS Group in respect of the proceedings, refers to correspondence with the Australian Securities and Investments Commission ("ASIC") in respect of the schemes, including the provision to ASIC of draft explanatory statements for the Senior Scheme and the PIK Scheme and the draft independent expert report which is contained in the explanatory statements for both schemes. BIS Finance also relies on a further affidavit dated 17 November 2017 of Mr Clee which updates the position in respect of further correspondence with ASIC on 16 November 2017.
BIS Finance and Artsonig also rely on the affidavit dated 17 November 2017 of Mr Mechineau, who is the company secretary of BIGL and its Australian subsidiaries and the treasurer of the BIS Group, and who makes that affidavit on behalf of BIS Finance and Artsonig. Mr Mechineau sets out the structure of the BIS Group and refers to the nature of its business and also outlines the content of the explanatory statements for the PIK Scheme and the Senior Scheme. Mr Mechineau also refers to the total debt owed by the BIS Group, which exceeds A$1 billion and includes secured senior finance debt comprising amounts owed to senior lenders and amounts owed to Hedge Counterparties, as well as debt facilities and financing arrangements with ANZ and unsecured principal and accrued interest owed by Artsonig to PIK noteholders under the PIK Indenture. Mr Mechineau also refers to the relevant facilities and the hedging agreements and sets out the background to the proposed recapitalisation and the alternatives to that recapitalisation that were considered by the BIS Group. Mr Mechineau refers to the fact that the BIS Group will seek recognition of the PIK Scheme under Chapter 15 of the United States Bankruptcy Code; to the proposed constitution and board of NewCo; to the implementation steps for the Senior Scheme and the PIK Scheme, the proposed meetings and timetable for the schemes and the conditions precedent to the schemes; the manner in which information about the schemes will be provided to Senior Scheme Creditors and PIK Scheme Creditors; and the preparation and verification process adopted in respect of the explanatory statements for the schemes.
Mr Mechineau's evidence is that the Senior Scheme affects Senior Scheme Lenders under the SFA and that, as at 31 October 2017, the total principal amount outstanding to the Senior Scheme Lenders under the SFA was approximately A$659,137,697.91, with loans made across Facility A2, Facility B and Facility C1, and an additional principal amount of A$32,500,000 was outstanding under Facility A1 (which is not compromised by the Senior Scheme) as at 31 October 2017. The Senior Scheme also affects Hedge Counterparties under the Intercreditor Deed dated 16 May 2007 between BIS Finance and certain of its creditors. On 7 November 2017, the "Hedge Documents" to which the Hedge Counterparties are a party were amended, including to fix the termination amount that will be payable by BIS Finance to the Hedge Counterparties upon termination of the hedging arrangements at A$5,998,393.87. As at 31 October 2017, the total amount owed by BIS Finance to the Senior Scheme Creditors was approximately A$665,136,091.78 (Mechineau [30]). Senior Scheme Creditors which hold at least 80% (by value) of the relevant senior debt have agreed to support and (if applicable) vote in favour of the Senior Scheme, by execution of a Commitment Deed Poll on 9 November 2017 in favour of BIS Finance (Mechineau [45], [59]). Those Senior Scheme Lenders have also executed a letter agreement dated 16 November 2017 by which they agreed to use their respective best endeavours to procure the proposed recapitalisation as soon as reasonably practicable (Mechineau [47(e)], Ex APRM-1, 198).
Mr Mechineau's evidence is that the PIK Scheme deals with the position of Artsonig's creditors under the PIK Indenture and, as at 31 October 2017, the total amount outstanding under the PIK Indenture was US$379,749,257.44, comprised of principal of US$375,907,564.75 and interest of US$3,841,692.69 (Mechineau [29]). The proposed recapitalisation is supported by PIK noteholders which together hold approximately 80% of the notes issued under the PIK Indenture and which confirmed their support for the recapitalisation by entry into a letter agreement dated 19 July 2017 and a supplementary letter agreement (Mechineau [47], [49]).
Mr Mechineau also recognises, and the explanatory statements disclose, that there is no guarantee that the wide restructuring will take place (Mechineau [47], [57]), although that restructuring is currently anticipated to be implemented on or before a specified sunset date of 30 June 2018 (Mechineau [58]). Mr Mechineau's evidence is that the timing and implementation of the Senior Scheme is not conditional upon the approval of the PIK Scheme, although the consent of the PIK Scheme Creditors to the transfer of the BIS Finance shares will facilitate the completion of the Senior Scheme (Mechineau [54]). Mr Mechineau's evidence is also that it is not anticipated that the schemes, if implemented, will have any effect on unsecured trade creditors or employees of the BIS Group, who will continue to be paid in the ordinary course of business (Mechineau [56]). Mr Mechineau's evidence is that the BIS Group considers that the schemes and the proposed recapitalisation represent the best opportunity available to the BIS Group to restructure its long-term debt obligations, to enable it to avoid entering into insolvency, and that the proposed recapitalisation will bring about a balance sheet restructuring of BIS Finance's and Artsonig's debt obligations, and offer the greatest recovery to PIK noteholders under the circumstances (Mechineau [61]).
BIS Finance and Artsonig also rely on the affidavits of Mr Martin Madden and Mr Richard Tucker dated 17 November 2017 which relate to the preparation of KordaMentha's expert reports and confirms, subject to the specified qualifications and limitations, that they hold the conclusions and opinions set out in the final draft of that independent expert report and that they have complied with the Expert Witness Code of Conduct. Messrs Madden and Tucker express the views, in their draft independent expert's report in relation to the schemes, that Artsonig will be solvent immediately following the implementation of the PIK Scheme, which introduces a three-year standstill with respect to the institution or prosecution against any BIS Group member of any claims under or in respect of the PIK Indenture; and BIS Finance will be solvent immediately following the Senior Scheme because it has positive operating cash flow and is profitable and there is a commitment by the relevant Senior Lenders, subject to certain conditions and limitations, to use their best endeavours to reduce the leverage of BIS Finance so that it should be able to manage its longer-term debt obligations following implementation of the debt restructure. Messrs Madden and Tucker also express the views that the enterprise value of the BIS Group is presently less than its Senior Debt; the PIK Debt does not presently have value; and, if BIS Finance and Artsonig were to be wound up within six months of the application for orders under subsection 411(1) of the Act, the estimated dividend would be between 39.9 to 57.1 cents in the dollar for Senior Scheme Creditors and nil for PIK Scheme Creditors.
Messrs Madden and Tucker also express the view that, if the schemes are implemented, the notional estimated dividend to creditors, following implementation of the schemes but prior to implementation of the proposed debt restructure would be between 66.8 to 82.3 cents in the dollar for Senior Scheme Creditors and nil for PIK Scheme Creditors; and, following implementation of the schemes and the proposed debt restructure, would be between 65.2 and 80.1 cents in the dollar for Senior Scheme Creditors and between 1.9 and 2.8 cents in the dollar for the PIK Scheme Creditors. They also express the view that, if the schemes are not implemented, and in the absence of an alternative restructure proposal, BIS Finance and/or Artsonig would likely be placed into voluntary administration or senior lenders would seek to appoint a receiver and manager to certain entities of the BIS Group.
[2]
The applicable legal principles
Mr Sheahan submits, uncontroversially, that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411; the scheme booklet will provide proper disclosure to creditors; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re NRMA Ltd [2000] NSWSC 82; (2000) 156 FLR 349; 33 ACSR 595 ("NRMA") at [14]-[26]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 ("Atlas Iron") at [30]; Re DUET Finance Ltd [2017] NSWSC 415 ("DUET Finance") at [15]. Mr Sheahan also refers to the often-cited observation in F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504, that:
"the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed".
Mr Sheahan also draws attention to Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval by the Full Federal Court in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358; 77 ACSR 592 at [58]) where French J observed that:
"It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). …
The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
[3]
Other relevant matters
As I noted above, the Court will ordinarily not convene scheme meetings unless it is satisfied that there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved. I have addressed many of the matters relevant to that question above, but should also address a number of specific matters to which Mr Sheahan drew attention.
Mr Sheahan points out that the Senior Scheme provides for execution of a Finance Document Amendment Deed, attached to the Senior Scheme as Annexure 19, which introduces the concept of a "Relevant Beneficiary" under the Security Trust Deed. The Relevant Beneficiaries will be the Senior Scheme Creditors, namely the Facility A2 Lenders, Facility B Lenders and Facility C1 Lenders under the SFA and the Hedge Counterparties under the Senior Scheme in respect of their "Relevant Exposures", being their exposures in connection with Facility A2, Facility B and Facility C1 under the SFA and any early termination amount in respect of a hedge document. Mr Sheahan points out that the amendments to be made by the Finance Document Amendment Deed will lower the consent threshold for certain actions under, or future amendments to, the finance documents affecting the Senior Scheme Creditors that are necessary to facilitate the recapitalisation of the BIS Group and, in particular, allow future amendments to be made to the finance documents in furtherance of the recapitalisation with the consent of Relevant Beneficiaries holding 80% of the Relevant Exposures ("Super Majority Beneficiaries"), rather than 100% of Senior Scheme Creditors as would be required under the current terms of the finance documents.
These matters are also addressed by Mr Mechineau's affidavit. Mr Mechineau's evidence is that the Senior Scheme will provide for amendments to the Security Trust Deed to facilitate, with the consent of the Super Majority Beneficiaries, extension of the date of payment of the debt, reduction of the interest rate and introduction of new facilities ranking in priority to the debt but subordinated to Facility A1 (Mechineau [46]), and the amendments to the Security Trust Deed will also facilitate the proposed debt restructure by allowing assignment of the Senior Debt to NewCo to be undertaken on the instructions of the Super Majority Beneficiaries and that, absent the Senior Scheme and the amendments to the Security Trust Deed, this assignment could only occur if unanimously approved by all Senior Scheme Creditors (Mechineau [95]). The power of the Security Trustee to undertake that assignment will be subject to specified conditions.
[4]
Orders
Having regard to the matters to which I have referred above and the matters otherwise addressed in BIS Finance's and Artsonig's submissions, I made the orders initialled by me and placed in the file in both proceedings in respect of the relevant meetings and ancillary matters.
[5]
Amendments
14 December 2017 - Typographical corrections.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 14 December 2017
4; (2012) 211 FCR 439
- Re Nine Entertainment Group Ltd (No 2) [2013] FCA 40
- Re NRMA Ltd [2000] NSWSC 82; (2000) 156 FLR 349; 33 ACSR 595
- Re Pheon Pty Ltd (1986) 47 SASR 427; 86 FLR 289; 11 ACLR 142
- Re Recall Holdings Ltd (No 2) [2016] FCA 419
- Re Simavita Holdings Ltd [2013] FCA 1274
- Re Sylvastate Ltd [2011] FCA 211
- Re Veda Group Ltd [2015] FCA 1506
- Sovereign Life Assurance Co v Dodd [1892] 2 QB 573
Category: Procedural and other rulings
Parties: Proceedings 2017/333466
BIS Finance Pty Limited (Plaintiff)
Mr Sheahan also submits, and I accept, that the Court is not required to be satisfied that no better scheme could have been proposed; the question is instead whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members or creditors;, and the Court's function is to consider the scheme put forward in the relevant application and not to speculate whether any other compromise or arrangement might have been devised: Nicron Resources Ltd v Catto (1992) 8 ACSR 219 at 236; Centro Properties Ltd v PricewaterhouseCoopers [2011] NSWSC 1465; (2011) 86 ACSR 584 at [28]-[31]; DUET Finance at [14]; Re Boart Longyear Ltd above at [28].
The evidence establishes that each of BIS Finance and Artsonig is a Part 5.1 body (Platford 3.11.17, Ex CAP1-BIS; Platford 3.11.17, Ex CAP1-Artsoning). I am also satisfied on a prima facie basis, on the basis of the proposed explanatory statements and the terms of the schemes that are attached to them, that both schemes are "arrangements" within s 411 of the Act. Mr Sheahan points out that the term "arrangement" is a word of wide import and is not limited by its proximity to the word "compromise" in s 411(1) of the Act, and will include an "arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors": Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672; NRMA above at 628; Re AWB Ltd [2010] VSC 456 at [4]; Re Sylvastate Ltd [2011] FCA 211 at [25]; Atlas Iron at [38]-[39], [48]. Mr Sheahan points out, and I accept, that the Senior Scheme falls within that concept at least so far as it provides for a transfer of the ownership and control of BIS Finance and its subsidiaries from Thornberry to the Senior Scheme Creditors, in exchange for the release of the guarantee and security provided by Thornberry, and the standstill arrangements and amendments to the SFA also touch and concern the rights and obligations of BIS Finance and its creditors so as to fall within this concept.
Mr Sheahan also submits, and I also accept, that the PIK Scheme concerns an "arrangement" within the scope of s 411 of the Act, so far as it provides for Artsonig to facilitate the transfer of ownership of BIS Finance to the Senior Scheme Creditors and the PIK Scheme Creditors to consent to that transfer in exchange for an entitlement to elect to receive shares in NewCo. Mr Sheahan also submits, and I also accept, that other features of the PIK Scheme, including the proposed three year standstill period and the relinquishment of unanimous consent rights and change of control rights under the PIK Indenture, involves sufficient "give and take" to constitute an arrangement for the purposes of s 411 of the Act.
Mr Sheahan points out that the English courts have also approved creditors' schemes of arrangements for the purposes of imposing a standstill to further a recapitalisation. In Re Apcoa Parking (UK) Ltd [2014] EWHC 997; 2 All ER (Comm) 1074; 2 BCLC 285, Hildyard J convened scheme meetings in respect of schemes that he noted (at [19]) provided:
"… for the termination date in respect of the Facilities to be extended to 25 July 2014 or further off than that until an end date of 25 October 2014 if the requisite majority of creditors so agrees. None is a scheme which otherwise alters the rights of any creditors. None is a scheme of reconstruction. Each is simply concerned with extending the termination date in order to enable or facilitate a more substantial reconstruction of the Scheme Companies' borrowings."
At the second court hearing in Re Apcoa Parking Holdings GmBH [2014] EWHC 1867, Hildyard J approved the schemes although he again noted (at [4]) that:
"The only overriding point that I should perhaps emphasise, which I did draw attention to on the previous occasion, is that each of these schemes is of limited scope, devoted only to dealing with the imminent threat to the companies concerned, constituted by the fact that a termination date in respect of the facilities on which the group relies is fast approaching. I am informed, and have no reason to think otherwise, that if an extension is not sanctioned, the board of the ultimate parent company (which is incorporated in Germany) would be required to file German insolvency proceedings in respect of the main holding company, and this would precipitate further insolvency proceedings along the line. All this would be ultimately destructive of value when compared to what might be achieved by a consensual reconstruction, or some other form of reconstruction, if time is made available for that purpose by an extension of the termination date."
In Re Metinvest BV [2016] EWHC 372, Asplin J also approved a scheme of arrangement, at the second hearing, where her Honour found (at [11]-[12]) that the scheme was intended to provide a moratorium in order to enable the possible repayment of the entirety of the value of loan notes, where a lesser amount would be paid on insolvency, the moratorium was for a relatively short period and a fee was payable in relation to it. I can see no reason why a standstill or moratorium cannot be implemented by a scheme of arrangement in a proper case, although it is not necessary to express a final view as to that matter where Mr Sheahan submits and I accept that the present schemes extend beyond implementing a standstill arrangement in any event.
I am satisfied that that the draft explanatory statements comply with the disclosure requirements under ss 411(3) and 412(1) of the Act, by explaining the effects of the schemes as well as providing information material to a creditor's decision whether or not to agree to them. The explanatory statement for a scheme must contain "all the main facts as will enable [scheme participants] to exercise their judgment on the proposed scheme" and should fairly disclose any matter "which, if known and appreciated, has the capacity to influence a creditor's decision and judgment whether to vote one way rather than the other (and, indeed, whether to participate at all)" and whether creditors voting on a creditors' scheme have as much or more to gain from the scheme than a winding up: Re Dorman Long & Co Ltd; In re South Durham Steel & Iron Company Ltd [1934] Ch 635 at 665-6; [1933] All ER Rep 460; Re Pheon Pty Ltd (1986) 47 SASR 427; 86 FLR 289; 11 ACLR 142 at 156; Re Capel Finance Ltd [2005] NSWSC 286; (2005) 52 ACSR 601; 23 ACLC 527; Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; (2006) 200 FLR 243; 57 ACSR 791 at [81].
Broadly, the explanatory statement for the Senior Scheme contains an explanation of the current secured senior finance debt owed by BIS Finance and of the alternatives to the Senior Scheme that were considered and the reasons for that scheme; a description of the outcomes of the scheme; an explanation, which seems to me to be a balanced one, of the reasons why Senior Scheme Creditors may vote in favour of or against the scheme; details of the BIS Group's business and information about NewCo; key risks associated with the Senior Scheme, the BIS Group and ownership of NewCo shares; a summary of KordaMentha's independent expert report; and attaches that independent expert report, the financial statements of BIGL, Artsonig and BIS Finance, a copy of the scheme of arrangement for the Senior Scheme and the PIK Scheme and other information. The explanatory statement for the PIK Scheme sets out the background to that scheme, including the current debt owed to PIK Scheme Creditors; the alternatives that were considered other than the scheme and the reasons for the scheme; the outcomes of the schemes and the proposed recapitalisation; an explanation, which seems to me to be given in balanced terms, of reasons why PIK Scheme Creditors may vote in favour of or against the PIK Scheme; and details of the BIS Group's business, information about NewCo, key risks associated with the implementation of the PIK Scheme, the BIS Group and ownership of shares in NewCo, and a summary of an independent expert report prepared by KordaMentha. Attachments to that explanatory statement include that independent expert report, financial statements of BIGL, Artsonig and BIS Finance, the scheme of arrangement for the PIK Scheme, the proposed amended and restated indenture for the PIK notes, and the scheme of arrangement for the Senior Scheme.
The expert opinions contained in the independent expert report are confirmed by the affidavits of Messrs Madden and Tucker to which I have referred above and the verification process for factual information contained in the explanatory statements is established by Mr Mechineau's evidence (Mechineau [106]-[116]). The necessary consents to act as chairman and alternative chairman of the scheme meetings are evidenced by Mr Eagle's and Mr Kelly's affidavits which also establish that the requirements of s 411(7) of the Act are satisfied in respect of the scheme administrators.
I am satisfied that the BIS Group has committed itself to propounding the schemes and I am also satisfied, at least on a prima facie basis, that the schemes have been proposed properly and in good faith, on the basis of the information regarding the BIS Group, its financial position and the background to and explanation of the proposed schemes and the proposed recapitalisation and the letter agreement noted above (Mechineau [8]-[61], Ex APRM-1).
As I noted above, the Court must also be satisfied before convening a scheme meeting that ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date. By letters dated 16 November 2017 in respect of the Senior Scheme and the PIK Scheme, ASIC has confirmed that it considers it has had that opportunity and does not propose to appear or intervene to oppose the schemes at the first court hearing (Ex DC-4, tabs 4-5).
The Court must be satisfied, at the first court hearing, that the procedural requirements of the Supreme Court (Corporations) Rules have been met. The requirements of r 3.2 of the Supreme Court (Corporations Rules) in respect of consents to act as chairman and alternate chairman and as to the appointment of the scheme administrators are satisfied and there is evidence of verification of factual information contained in the explanatory statements for the schemes.
Mr Sheahan also points out that the PIK Scheme provides for the amendment and restatement of the PIK Indenture, which will allow amendments, supplements or waivers to be made with the consent of noteholders holding 75% of the principal amount instead of 100% of noteholders (Amended PIK Indenture, sections 513, 902; Ex APRM-2, 355). Mr Sheahan submits, and I accept, that although the PIK Indenture is governed by the laws of the State of New York, the court has jurisdiction under s 411 to vary the parties' contractual rights under the PIK Indenture, because that section is a law relating to insolvency of corporations that will govern the rights, obligations and property of the insolvent debtor wherever situated: Re Bulong Nickel Pty Ltd [2002] WASC 226; (2002) 26 WAR 466 at [13]-[15]; Re Glencore Nickel Pty Ltd [2003] WASC 18; (2003) 44 ACSR 210 at [39].
Mr Sheahan submits, and I accept, that there are several examples of amendments to the terms of finance documents having been effected by a scheme of arrangement agreed to by the requisite statutory majorities of creditors and approved by the Court: Atlas Iron at [13] (syndicated facility agreement amended pursuant to scheme); Re Cortefiel, SA [2012] EWHC 2998 at [7]-[9] (facility documents amended pursuant to scheme including to extend maturity dates, reset financial covenants and adjust interest payment provisions); Re Boart Longyear Ltd (No 2) above at [11], [86] (terms of debt facilities amended pursuant to schemes including to extend maturity dates, waive change of control rights and adjust interest payment provisions). Mr Sheahan also recognises that the courts have been reluctant to approve schemes that contain machinery that would allow variation of the terms of the schemes themselves: Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263 at 265; NRMA at 647. However, he rightly points out that difficulty does not arise in these schemes. The amendments to the finance documents that will be effected by the schemes do not provide for variation of the terms of the schemes, as distinct from allowing a different mechanism for amendments of the financial documents that are effected by the schemes.
Mr Sheahan submits that no issue of fairness of the amendments as between groups of creditors arises, where the proposed amendments to the Security Trust Deed and the PIK Indenture affect the rights of all Senior and PIK Scheme Creditors equally, since the varied powers of amendment will apply across all debt exposures, and the effect of the proposed amendments to the Security Trust Deed and PIK Indenture is disclosed in the explanatory statements. I recognise that the creditors which have committed to support the scheme would, on the face of it, also satisfy the proposed super majority requirement under the amended provisions in the Security Trust Deed. I do not consider it necessary or appropriate to go further than to observe that it seems to me that creditors acting in their own interests could reasonably approve the proposed amendments, as an aspect of the schemes. This matter does not indicate that the schemes could not, in due course, receive the Court's approval if the necessary majority of votes is achieved. The question of the substantive fairness of the alteration of those provisions is otherwise best deferred to the second hearing, if challenged by any Senior Scheme Creditors.
Mr Sheahan also points out that there are three levels of ownership of the notes issued under the PIK Indenture, since the legal owner of those notes is Cede & Co, as nominee of DTC, which will not take any active step in relation to the notes (Sullivan [23], [32]); second, DTC registered participants, which are generally sophisticated organisations such as banks and brokerage firms, hold interests in the notes either on their own account or on behalf of their clients and hold records identifying the individual beneficial owners and other holders of the notes (Sullivan [28]-[29], [32], [34], [36]); and, third, the ultimate beneficial holders of interests in the notes, being investors which are clients of a DTC registered participant or an intermediary that is a client of a DTC registered participant (Sullivan [36]). As Mr Sheahan points out, there is authority that the beneficial owners of notes of this kind, that are issued in "global" form, are contingent creditors of the issuer, where there is a provision in the indenture or trust deed that, upon the occurrence of an event of default, the note is to be transferred to the ultimate beneficial holders in the form of definitive securities upon the request by the owner of a book entry interest: Re Castle Holdco 4 Ltd [2009] EWHC 3919 at [22]-[24]; Re Boart Longyear Ltd above at [29]. That approach is consistent with the approach adopted, by somewhat different reasoning, by McLure J in Re Glencore Nickel Pty Ltd above. The beneficial holders of the PIK notes would similarly be entitled to vote in their own right in a restructuring in the United States (Qusba [20]-[21]). Mr Sheahan submits, and I accept, that the terms of the PIK Indenture are such that the ultimate beneficial holders of the PIK notes are contingent creditors of Artsonig on that basis. I am satisfied that the ultimate beneficial owners of the notes are therefore properly treated as the scheme creditors for the purposes of the schemes.
Mr Sheahan also submits that only a single class of creditor is affected in each scheme. He refers to Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583, where Bowen LJ set out the well-established formulation of when separate classes of creditors were required for a scheme of arrangement as follows:
"It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest."
Mr Sheahan also points out that that test was recently considered by the Court of Appeal in First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116; (2017) 121 ACSR 136 at [80], where Bathurst CJ (with whom Beazley P and Leeming JA agreed) observed that that formulation involved three questions:
"First, what are the rights which existing creditors (or members) have against the company and to what extent are they different. Second, to what extent are those rights differently affected by the scheme. Third, does the difference in rights or different treatment of rights make it impossible for the creditors (or members) in question to consider the scheme as one class."
Mr Sheahan submits that the Senior Scheme and the PIK Scheme do not, on their face, treat any group of creditors differently from another; the proposed allotment of shares in NewCo is to be on a pro rata basis in the same proportions as amounts owing to the creditors affected by the schemes; and the standstills on enforcement and the amendments to the Security Trust Deed and the PIK Indenture will, on their face, affect creditors equally. Mr Sheahan recognises that NewCo's proposed articles will provide board appointment rights to persons that hold, or are able to control the exercise of rights in respect of, at least 17% of the NewCo shares, and that each such shareholder will be entitled to appoint one NewCo director in respect of every 17% of the NewCo shares held. He submits, and I accept that, prima facie, those rights are not of such a magnitude or sufficiently different to create a class composition issue: Re Nine Entertainment Group Ltd (No 1) [2012] FCA 1464; (2012) 211 FCR 439 at [61]-[65]; Re Boart Longyear Ltd above at [63], aff'd on this issue on appeal in First Pacific Advisors LLC v Boart Longyear Ltd above at [98].
Mr Sheahan also notes that the Senior Scheme provides for releases by BIS Finance and the Senior Scheme Creditors in favour of third parties, namely a release of the Thornberry Guarantee and Thornberry Security (Mechineau 54(ii)) and releases of persons who were, at any time between 1 December 2014 and the implementation date of the Senior Scheme, a director, officer or employee of BIS Finance, or any entity that is a related body corporate, or subsidiary, of BIS Finance, and have executed a deed poll. The PIK Scheme also provides for releases by Artsonig and the PIK Scheme Creditors in favour of related bodies corporate and subsidiaries of Artsonig) and "Released Individuals" (as defined).
Mr Sheahan submits that a term affecting the rights of a creditor against a third party can be part of a scheme of arrangement in an appropriate case, where the requisite "give and take" is established. I accept that, in principle, a scheme of arrangement can provide for releases of third parties, where creditors receive something in return for the benefit conferred on the third party: Fowler v Lindholm [2009] FACFC 125; (2009) 178 FCR 563; 74 ACSR 124 at [69]; Bacnet Pty Ltd v Lift Capital Partners Pty Ltd (in liq) [2010] FCAFC 36; (2010) 183 FCR 384; 78 ACSR 57 at [136]ff; Re Boart Longyear Ltd above at [90]. I am satisfied, on a prima facie basis, that the necessary element of "give and take" is present in the schemes where, as Mr Sheahan points out, Thornberry agrees to the transfer of its shares in BIS Finance to the Senior Scheme Creditors in exchange for the release of the Thornberry Guarantee and Thornberry Security under the Senior Scheme and the "Relevant Entities" and "Released Individuals" (as defined) give reciprocal releases to Senior Scheme Creditors and agree to be bound and perform their obligations under the schemes. The releases under the Senior Scheme do not extend to any fraud, wilful misconduct, recklessness, gross negligence or dishonesty of a Released Individual. It is, of course, not necessary for the Court to assess the commercial merits of giving such releases, which is a matter for the participants in the Senior Scheme, and any issue as to fairness can be addressed at the second hearing.
Mr Sheahan also points out that it is common practice in schemes to bind any relevant third parties by deed poll to perform any relevant obligations in respect of a scheme, and there is authority that, where a third party is a foreign company, the scheme proponent should lead evidence to establish that the foreign company had duly executed the deed poll under the law of the place of incorporation: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]. Mr Sheahan points out that, in Re Veda Group Ltd [2015] FCA 1506 at [33], Yates J observed that such evidence was not necessary where the parties had agreed to submit to the exclusive jurisdiction of an Australian court or courts and had agreed that Australian law would apply as the proper law of the contract in proceedings arising out of, or in connection with, the deed poll. I consider that I should follow the approach taken in Re Veda Group Ltd above where the deeds poll to be executed by third parties incorporated outside Australia, in respect of the Senior Scheme and the PIK Scheme, are governed by the laws in force in New South Wales and provide for the relevant party irrevocably to submit to the non-exclusive jurisdiction of courts exercising jurisdiction in New South Wales and courts of appeal from them in respect of any proceedings arising out of or in connection with that deed poll, and irrevocably to waive any objection to the hearing of proceedings in the courts of New South Wales on the basis that the process has been brought in an inconvenient forum.
Artsonig also proposes to seek recognition of the PIK Scheme from the United States Bankruptcy Court, and will seek orders that recognise and give full force and effect to the PIK Scheme and all the transactions and agreements required to effect and implement the PIK Scheme, including orders permanently enjoining PIK Scheme Creditors from taking any action inconsistent with the PIK Scheme (Mechineau [62]-[66]; Qusba [7]). An application for such recognition would ordinarily be brought by a duly appointed "foreign representative" of Artsonig filing a petition in the United States Bankruptcy Court seeking "recognition" of a "foreign proceeding", and the term "foreign representative" is defined in the United States Bankruptcy Code as a "person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganisation or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding" (Qusba [9]). Artsonig has authorised Mr Mechineau as its foreign representative (Mechineau [66]; Ex APRM-1, 612) and also seeks an order from the Court that Mr Mechineau be appointed as its representative for the purposes of the relevant application in the United States Bankruptcy Court. I am satisfied that such an order should be made, and I note that such an order was made to facilitate a somewhat similar application in Re Boart Longyear Ltd [2017] NSWSC 537; (2017) 318 FLR 226.
Finally, BIS Finance and Artsonig have foreshadowed that, if the Senior Scheme and the PIK Scheme are approved by creditors and by the Court, they and NewCo propose to rely on that approval to qualify for the exemption, under s 3(a)(10) of the Securities Act 1933 (US), from the registration requirements of that Act in respect of the Senior Scheme and the PIK Scheme. A condition of that exemption is that notice is given to the Court that that exemption will be relied on by the issuer, as has occurred here. It is common practice for the Australian Court to note the plaintiff's reliance on the Court's approval of the scheme for this purpose: Re Nine Entertainment Group Ltd (No 2) [2013] FCA 40 at [10]-[12]; Re iProperty Group Ltd [2015] FCA 1507; Re Recall Holdings Ltd (No 2) [2016] FCA 419; Re National Australia Bank Ltd [2016] VSC 62 at [64]-[67]. I will note this matter in accordance with the orders proposed by Artsonig and BIS Finance.