[2017] NSWSC 1105
- Re Buildmat (Australia) Ltd (1983) 1 NSWLR 291
- Re Capilano Honey Ltd (No 2) (2018) 132 ACSR 332
[2018] FCA 1925
- Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) (2011) 86 ACSR 584
[2011] NSWSC 1465
- Re David Jones Ltd (No 3) (2014) 32 ACLC 14-037
Source
Original judgment source is linked above.
Catchwords
(2017) 122 ACSR 437[2017] NSWSC 1105
- Re Buildmat (Australia) Ltd (1983) 1 NSWLR 291
- Re Capilano Honey Ltd (No 2) (2018) 132 ACSR 332[2018] FCA 1925
- Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) (2011) 86 ACSR 584[2011] NSWSC 1465
- Re David Jones Ltd (No 3) (2014) 32 ACLC 14-037[2014] FCA 753
- Re Investorinfo Ltd [2005] FCA 1848
- Re NRMA Ltd (2000) 156 FLR 349(2000) 33 ACSR 595[2000] NSWSC 82
- Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20
(2009) 73 ACSR 385
[2009] FCA 813
- Re RBS Group (Australia) Pty Ltd (Unreported, 2 February 2012)
- Re Seven Network Ltd (No 3) (2010) 267 ALR 583
[2010] FCA 400
- Re Universal Liquors Pty Ltd (1990) 5 ACSR 104
- Royal Victorian Institute for the Blind Ltd v RBS.RVIB.VAF Ltd (2004) 206 ALR 581
22 ACLC 897
Judgment (11 paragraphs)
[1]
Solicitors:
Ashurst Australia (Plaintiffs)
File Number(s): 2020/323408
[2]
Nature of the application and background
The Plaintiffs, Ovato Print Pty Ltd ("Ovato Print"), Ovato Limited ("Ovato Limited"), Hannanprint NSW Pty Limited ("Hannanprint NSW"), Hannanprint Victoria Pty Limited ("Hannanprint VIC") and Inprint Pty Limited ("Inprint") are members of the Ovato group of companies ("Ovato Group"). At this hearing, they seek orders under s 411(1) of the Corporations Act 2001 (Cth) approving a creditors' scheme of arrangement proposed by the Plaintiffs ("Creditors' Scheme"). The Plaintiffs also seek orders approving member's schemes of arrangement between each of Ovato Print and its sole member, Ovato Limited; Hannanprint NSW and its sole member, The Independent Print Media Group Pty Limited ("IPMG"); Hannanprint VIC and its sole member, IPMG; and Inprint and its sole member, Woodox Pty Ltd ("Member's Schemes"). Those Member's Schemes, so far as they each involve a single member meeting, are undertaken in order to invoke the Court's jurisdiction under s 413 of the Corporations Act in respect of certain ancillary orders. The Plaintiffs also propose seeking, at a further Court hearing, orders winding up Ovato Print, Hannanprint NSW, Hannanprint VIC and Inprint in insolvency following the implementation of the Member's Schemes.
As I noted in my earlier judgment ([2020] NSWSC 1683) in respect of the first Court hearing ("First Judgment"), the Ovato Group is a large integrated print and distribution business in Australia and New Zealand, producing and distributing catalogues, magazines, newspapers, and books. It presently employs 1,187 employees across 10 sites in Australia and New Zealand. The Creditors' Scheme and Member's Schemes are steps in a broader restructure of the Ovato Group which includes, inter alia, an equity raising and the negotiation of compromises with landlords, employees, noteholders and financiers. The Plaintiffs submit that the restructure is designed to consolidate the Ovato Group's printing production and reduce its cost base to enable the Ovato Group to retain the vast majority of its staff and continue to trade and that, if the Creditors' Scheme and Member's Schemes are not implemented, the Plaintiffs would become insolvent which would lead to all entities in the Ovato Group becoming insolvent; in that case, the directors would appoint external administrators to all entities in the Ovato Group and this in turn may lead to the winding up of the Plaintiffs and the majority of the Ovato Group's employees may then be made redundant.
The effect of the Creditors' Scheme, if approved and implemented, is that creditors within the scope of that scheme ("Scheme Creditors") will receive an amount equal to 50% of their Unsecured Claim (as that term is defined in the Creditors' Scheme) and, in return, they will release the Plaintiffs and the Plaintiffs' directors and officers from any claim that they may have against them in connection with the Amount Owing (as that term is defined in the Creditor's Scheme). In addition, Ovato Limited is released from any obligation to pay any amount in respect of a Subordinate Claim (as that term is defined in the Creditor's Scheme). The effect of the Member's Schemes, if approved and implemented, is that the Transferor Companies (as defined in the Member's Schemes) will transfer their assets and liabilities (other than certain plant and equipment, Non-Transferring Employees (as defined in the Member's Schemes) and an amount of retained funds) to various Transferee Companies (as defined in the Member's Schemes). The Creditors' Scheme and Member's Schemes are inter-conditional and it is a condition precedent that Ovato Limited raise $30 million by issuing new shares, with the only condition remaining before the subscribers must buy shares being the Court's approval of the Creditors' Scheme and Member's Schemes.
On 18 November 2020, I made orders sought by the Plaintiffs at the first Court hearing convening relevant scheme meetings for the reasons noted in the First Judgment. I there noted (at [3]) that complex and possibly controversial issues would remain to be determined at this second Court hearing and, in particular, that the proposed restructure of the Ovato Group appears to come at a substantial public cost, since liabilities of redundant employees in remaining companies would be left to be met by the Fair Entitlements Guarantee Act 2012 (Cth). However, the Commonwealth of Australia did not seek to be heard in opposition to the orders sought by the Plaintiffs either at the first Court hearing or at this hearing. I return to this question below.
I also noted in the First Judgment (at [8]) that:
"It may be unlikely that the Court would approve the schemes at the second hearing unless the Ovato Group has already received the proceeds of that equity raising, as distinct from a mere contractual commitment to participate in it, but that is a question for the second hearing."
The Ovato Group had not received those funds at the time of this hearing, where they were held by underwriters of the new share issue on trust, and subject to conditions in respect of approval of the schemes. I also return to this question below.
I referred, in the First Judgment, to the evidence led at the first Court hearing including an independent expert report dated 12 November 2020 of Mr Fraser. I observed (at [12]-[13]) in respect of that report that:
"That report makes a number of assumptions as to aspects of the future financial performance of the Ovato Group. Mr Jackman points out that Mr Fraser has addressed several matters, namely the likely outcome for Creditors' Scheme companies and the expected returns for Creditors' Scheme companies in a "no restructure" scenario; the expected return to Scheme Creditors under the proposed schemes; and the solvency of transferee companies and Member's Scheme companies after the proposed restructure.
Mr Jackman points to Mr Fraser's assessment that, on the assumptions he has made, if the restructure is not implemented, the Ovato Group would be unable to pay its debts as and when they fall due at least from January 2021 and will be insolvent by at least December 2020 and trading whilst insolvent from at least that time; the likely outcome for each of the Plaintiff companies is that they would need to enter voluntary administration or liquidation leading ultimately to a winding up of the Plaintiffs; if the Creditors' Scheme and Member's Schemes are not implemented then the Ovato Group will become insolvent and be wound up and liquidator realisations will be insufficient to pay a dividend to the ordinary unsecured creditors; if the Plaintiffs were wound up within 6 months of the hearing then there will be no return for unsecured creditors, a deficit for secured creditors of between $56.5 million and $54.1 million, and priority employee creditors could expect dividends of between 5 and 13 cents with any shortfall likely to be met from the Fair Entitlements Guarantee scheme; and a liquidator appointed to the Ovato Group would need to take immediate steps to significantly reduce costs across all business units including making significant redundancies and discontinuing whole business units (Ex SF-1 [6.3], [7.4]-[7.5], [9.5]). Mr Fraser's report also assesses the position if the schemes are implemented and expresses the opinion, again on the assumptions that he has made, that the implementation of the schemes will place the Transferee Companies in a materially stronger financial position (Ex SF-1, [9.5]) and that there will be no material prejudice to the Scheme Creditors (including creditors with the benefit of retention of title provisions), non-scheme creditors or employees."
I also referred to the affidavits dated 17 November 2020 of Mr Slaven and Mr Stephenson, who are respectively the Chief Executive Officer and Chief Financial Officer of Ovato Limited, which outlined the process for developing revenue and EBITDA assumptions included in a restructured cashflow model which had provided the basis for the assumptions made and work undertaken by Mr Fraser. I also observed (at [24]-[25]) that:
"The Plaintiffs tendered, at the adjourned first hearing, a revised Explanatory Statement which, importantly, has addressed disclosure issues that were raised earlier in this hearing. Importantly, it now provides a fuller explanation of the basis on which the Explanatory Statement expresses the view that the proposal is more favourable to non-transferring employees than a liquidation of the companies, prior to any winding up of some subsidiaries and any claims of employees under the Fair Entitlements Guarantee Act. The revised Explanatory Statement also now sets out the basis on which the assumptions that underpin Mr Fraser's report have been prepared, so that creditors will have an understanding of the steps which have been taken to develop those assumptions and the opportunity to assess the process which has been adopted. I have noted above that that process and the steps involved in it are supported by evidence of Mr Slaven and Mr Stephenson which has been read at this hearing. The revised Explanatory Statement in turn draws attention to the fact that creditors will wish to assess for themselves the process which has been adopted, and the conclusions reached in Mr Fraser's report, and they may vote against the proposal at the Creditors' Scheme meeting if they are not satisfied as to that analysis, by comparison with the position which would arise in the liquidation of the companies.
It seems to me that the revised Explanatory Statement, with that disclosure, now fairly provides creditors with information which will allow them to assess that process in a general way and to assess whether they are comfortable with that process. If they wish to make further inquiry, then they can of course seek access to the affidavits which are being led in evidence in these proceedings, in redacted form, and I have noted above that the redacted material does not seem to me to be of a nature that would prevent creditors who had such access undertaking a detailed scrutiny of the analysis undertaken by the Ovato Group. The revised Explanatory Statement also sufficiently draws creditors' attention to the need to assess that process, the report of Mr Fraser, and the views which Mr Fraser expresses, in determining whether to support the scheme at a meeting of creditors."
I also noted (at [32]-[34]) correspondence which had been received from third parties in opposition to the proposed schemes, to which I return below, and the position adopted by the Australian Securities & Investments Commission ("ASIC") in respect of the first Court hearing. I summarised the conclusion I had reached (at [35]) and made orders convening the meetings for the Creditors' Scheme and Member's Schemes.
I will approve the Creditors' Scheme and Member's Schemes for the reasons set out below. I would likely not have done so had the Plaintiffs not taken steps, in the course of this second hearing, to address the difficulties that arose from the fact that they had initially sought to have the schemes take unconditional effect before the satisfaction of the conditions precedent to supporting arrangements that were necessary to restore the Ovato Group's solvency. I have drawn with gratitude upon the helpful submissions of Mr Jackman and Ms Scott who appeared for the Plaintiffs in the judgment which appears below.
[3]
Affidavit evidence lead at the second Court hearing and the Plaintiffs' proposed orders
At the second Court hearing, Ovato read an affidavit dated 17 December 2020 of Mr Slaven, which referred to the process for lodgement of proxy forms and proofs of debt in respect of the Creditors' Scheme meeting and to the conduct of that meeting. Mr Slaven exhibited a script which he used in conducting the scheme meeting. He there summarised aspects of the scheme as follows:
"The principal object and purpose of the Creditors' Scheme is to achieve a reduction in amounts payable to significant trade and statutory creditors of the printing business.
Each Scheme creditor will also release each person who was, as at the Implementation Date of the Creditors' Scheme a director or officer of the Companies who have signed a deed poll in respect of any Claims it has against that person.
The implementation of the Creditors' Scheme is subject to the satisfaction of various conditions precedent. The effect of the conditions precedent in the creditors' scheme and member's schemes is to make them inter-conditional on one another. If one fails, both fail.
One of the key conditions precedent to the Creditors' Scheme is that Ovato Limited raises a minimum amount of $30 million by way of a new equity issue to current or new members with the only remaining condition to be satisfied before the relevant members are unconditionally committed to buying the new equity being the Court making the orders approving the Schemes at the Second Court Hearing on 18 December 2020."
Mr Slaven's presentation also referred to the progress of a capital raising undertaken by Ovato Limited and noted that the equity raising was "conditional on the success of a numbering of restructuring transactions" and that the Ovato Group was currently progressing those transactions. He also there referred to clause 3 of the Creditors' Scheme which set out the remaining conditions precedent to the Creditors' Scheme. He there noted the primary outcomes of the Creditors' Scheme, namely that Scheme Creditors would receive 50 cents in the dollar in respect of their Unsecured Claims (as defined) and that Scheme Creditors would release the companies from all claims in connection with the Amount Owing (as defined) to the Scheme Creditors. He noted that the implementation date for that scheme would be 1 February 2021 or a later date in certain circumstances, not later than the sunset date of 30 June 2021.
[4]
Role of the Court at the second Court hearing
As Mr Jackman points out, the Court has a discretion to approve a scheme and is not bound to approve it merely because it has made orders for the convening of meetings or because the statutory majorities have been achieved: Re Seven Network Ltd (No 3) (2010) 267 ALR 583; [2010] FCA 400 at [31]; Re Atlas Iron Ltd (No 2) [2016] FCA 481 at [5]. The Court will usually approach the task on the basis that properly informed creditors are better judges of what is in their own commercial interest than the Court and will give substantial weight to their views, although the Court must also be satisfied that the arrangement is fair and reasonable and that the creditors have voted in good faith and for proper purposes: Re Seven Network above at [33]; Re BIS Finance Pty Ltd [2018] NSWSC 3 at [10]; Re Boart Longyear Ltd (No 2) (2017) 323 FLR 241; (2017) 122 ACSR 437; [2017] NSWSC 1105 at [60]. Mr Jackman accepts that the Court will also have regard to whether the proposed arrangement is contrary to public policy: Re Boart Longyear Limited (No 2) above at [61].
Mr Jackman submits, and I accept, that relevant matters for the Court to take into account in determining whether to exercise its discretion to approve a scheme at the second Court hearing include whether the orders of the Court convening the scheme meeting were complied with; whether the resolution to approve the scheme was passed by the requisite majority and whether other statutory requirements have been satisfied; whether all conditions to which the scheme is subject (other than Court approval and lodgement of the Court's orders with ASIC) have been met or waived; whether the scheme is fair and reasonable so that an intelligent and honest member of the relevant class, properly informed and acting alone, might approve it; whether the proponent has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion; whether there was full and fair disclosure to creditors of all information material to the decision whether to vote for or against the scheme; whether the scheme of arrangement has a compulsive or oppressive effect upon minority shareholders or creditors; and whether the interests of other groups who are not parties to, but are affected by the scheme are dealt with appropriately: Re David Jones Ltd (No 3) (2014) 32 ACLC 14-037; [2014] FCA 753 at [3]; Re Atlas Iron Ltd (No 2) above at [6]; Re BIS Finance Pty Ltd above at [10].
[5]
Compliance with orders convening the scheme meetings, requisite majorities and other statutory requirements
Mr Jackman submits, and I accept, that the Explanatory Statement, Scheme Creditors' Proxy Form, Notice of Meeting and Voting Proof of Debt Form ("Creditors' Scheme Meeting Materials") were despatched in accordance with the orders made at the first Court hearing to email addresses for each of the Scheme Creditors and by post to the various Commissioners and Chief Commissioners of Taxation for each of New South Wales, South Australia and Victoria (McLachlan 17.12.20, [11]). An issue as to the despatch of a special proxy form rather than a general proxy form was addressed (McLachlan 17.12.20, [42]-[59]) and would not have impacted the conduct of the Creditors' Scheme meeting. The Notice of Meeting and Proxy Form for each sole member of the First, Third, Fourth and Fifth Plaintiffs and the Explanatory Statement were also despatched in accordance with the orders made at the first Court hearing (McLachlan 17.12.20 [41]). The Creditors' Scheme meeting and the Member's Scheme meetings were held at the time and place specified in the Court's orders and Mr Slaven acted as chair of the meetings as required by those orders (Slaven 17.12.20 [9]). The receipt and collation of Proxy Forms, including the despatch of the General Proxy Form after the despatch of the Special Proxy Form, and Voting Proofs of Debt is addressed by the evidence to which I have referred above.
Twelve out of thirteen Scheme Creditors submitted a Voting Proof of Debt and Proxy Form (McLachlan 17.12.20 [64]; Slaven [25]). Of the 12 Scheme Creditors who submitted a Voting Proof of Debt and Proxy Form, two abstained; and the balance voted in favour of the Creditors' Scheme (Slaven [37]-[38]). One creditor submitted a Voting Proof of Debt Form listing four separate related entities and three Proxy Forms but had its vote counted as one (Slaven [24]). The statutory majorities under s 411(4)(a)(i) were plainly achieved in respect of the Creditors' Scheme. Each of the sole members of the First, Third, Fourth and Fifth Plaintiffs attended the Scheme Meeting and, by their proxy, Mr Clarkson, voted all of their shares in favour of the resolution put to the meeting approving the Member's Schemes (Slaven [49], [54]). The Member's Schemes were, not surprisingly in the circumstances, approved by the requisite majorities.
[6]
Satisfaction of conditions precedent to the Creditors' Scheme, other arrangements ancillary to the Creditors' Scheme and solvency issues
The Court, for good reasons, would be reluctant to approve a scheme of arrangement, that is, at the time of the final Court hearing, still subject to one or more unfulfilled conditions, other than as to Court approval and lodgement of the Court's order with ASIC: T Damian & A Rich, Schemes, Takeovers and Himalayan Peaks, 3rd ed [4.9]. That reflects the principle that a scheme should not become effective, as a result of the making of a final order of the Court, where the conditions precedent to its operation may never be satisfied. It is also well established that the Court will not generally approve a scheme if the relevant company would still be insolvent after its implementation, and a winding up would generally be a more appropriate course. In Re Buildmat (Australia) Ltd (1983) 1 NSWLR 291, Needham J considered a submission that the Court should not convene a scheme meeting where, if the scheme was approved, the Company would remain "hopelessly insolvent and thus a danger to the business community". After reviewing the authorities, his Honour concluded that the Court should not convene that meeting where, even if the creditors were to approve the scheme, the Court would not do so. In Re Universal Liquors Pty Ltd (1990) 5 ACSR 104, McLelland J summarised the principle with admirable clarity, as follows:
"The court has, on numerous occasions, indicated that as a matter of public policy, regardless of the wishes of the creditors, it will not facilitate the producing of a situation of that kind. To allow a company to go back into the commercial community with such an accumulated debt, and with no substantial assets, is grossly unfair to potential future creditors."
This issue is of greater difficulty here because, as I noted above, Mr Fraser's supplementary expert report as to solvency was prepared on instructions which did not recognise that several of the associated arrangements would not have been implemented and were subject to unsatisfied conditions precedent at the time of the second Court hearing. Having regard to the case law and in the exercise of a judicial discretion, I would likely not have approved a scheme which would have taken immediate effect, if it would not establish the Ovato Group's solvency unless and until a future date when the conditions precedent to the associated transactions which were necessary to that solvency were to be satisfied and those transactions were to be implemented. It seems to me that it would have been adverse to the interests of creditors to do so, where the effect of doing so would be to extinguish a significant part of their debts and release officers of the Ovato Group from liability, while a risk remained that the benefit sought to be obtained, namely the solvency and continuance in business of the Ovato Group, would not be achieved if those transactions were not then implemented.
[7]
Member's Schemes and revocation of the Deed of Guarantee
As I noted above, the Plaintiffs also seek approval for several Member's Schemes which each involve a single member meeting and are undertaken in order to invoke the Court's jurisdiction under s 413 of the Corporations Act in respect of certain ancillary orders. At the first Court hearing, Mr Jackman submitted that the purpose of the Member's Schemes is for the Transferor Companies (as defined) to divest themselves of onerous liabilities so as to enable the business to reduce its workforce and leasehold footprint and that that is necessary to ensure that the business can continue to trade. As I also noted above, the effect of the Member's Schemes, if approved and implemented, is that the Transferor Companies (as defined) will transfer their assets and liabilities (other than certain plant and equipment, Non-Transferring Employees (as defined) and the retained funds) to various Transferee Companies (as defined). I have addressed the relevant companies' compliance with the statutory requirements for the meeting in respect of the Member's Schemes above.
As I noted above, the Member's Schemes (and the Creditors' Scheme) are conditional on the Court making orders under s 413(1)(g) of the Act revoking the Deed of Cross Guarantee to the extent that it relates to the First, Third, Fourth and Fifth Plaintiffs. Section 413 of the Act allows the Court to make orders for the reconstruction of a company or amalgamation of two or more companies if: (1) there is a compromise or arrangement, as is the case here in respect of the Member's Schemes; (2) which has been proposed for the purposes of, or in connection with, a scheme for, relevantly, the reconstruction of a Pt 5.1 body or bodies; and (3) the whole or any part of the undertaking or property of a body concerned in the scheme is to be transferred to a company under the scheme: Re Application of AGL Sydney Ltd (1994) 13 ACSR 597; Royal Victorian Institute for the Blind Ltd v RBS.RVIB.VAF Ltd (2004) 206 ALR 581; 22 ACLC 897; [2004] FCA 735; Barrick (Australia Pacific Exploration) Pty Ltd v Barrick (PD) Australia Pty Ltd [2017] FCA 998 at [81]. A reconstruction occurs where an undertaking is transferred to persons who are not outsiders so that substantially the same business is carried on by substantially the same persons who previously conducted it: Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20; (2009) 73 ACSR 385; [2009] FCA 813 at [74]. The interests of creditors of the transferor company are relevant to whether to grant approval under this section, and the effect of the transaction on creditors and third parties will often be the most significant issue in the application: Re Opes Prime Stockbroking Ltd above.
[8]
Whether the schemes are otherwise fair and reasonable
I now turn to the question whether the proposed schemes are fair and reasonable, and I here address third party criticisms of the schemes which have been drawn to the Court's attention. As I noted in the First Judgment, a letter dated 17 November 2020 from Spot the Printers Pty Ltd, trading as Spot Productions, to ASIC was also drawn to the Court's attention and tendered. That letter made a number of criticisms of Mr Fraser's report, although the most substantial of those criticisms related to the question of the proof of the assumptions which he has made, which was then addressed by further affidavits of Mr Slaven and Mr Stephenson read at the first Court hearing. A memorandum dated 18 November 2020 from the solicitors for the Ovato Group responded to the substance of the criticisms. A letter dated 18 November 2020 from Tozer and Co, a bondholder, to Ovato Print and various other persons was also drawn to the Court's attention at the first Court hearing and again at this hearing, which also advanced several criticisms of aspects of the scheme. Tozer and Co contended that bondholders should be given an opportunity to be heard as to the Member's Schemes, where, Tozer and Co contends, the members of the companies no longer have an economic interest. Tozer and Co did not seek to appear at this second hearing and the amendments of the bonds have been approved by the requisite majority of bondholders. Mr Jackman also points out that the Plaintiffs have also received an email from another noteholder contending that the schemes are illegal (Clarkson [55], Ex AC-3 pp 307-308). That noteholder also did not appear at the second hearing.
In response to an argument put by Tozer and Co that the Member's Schemes do not involve any compromise or arrangement, Mr Jackman points out that the term "arrangement" in s 411 is of wide import and is not limited by the word "compromise": Re NRMA Ltd (2000) 156 FLR 349; (2000) 33 ACSR 595; [2000] NSWSC 82 at [136]. He submits, and I accept, that the Member's Schemes involve arrangements which touch upon the rights and liabilities of the relevant companies where, on their implementation, those companies will cease to hold any assets save for certain plant and equipment, the Non-Transferring Employees (as defined) and the retained funds. Mr Jackman also points out that the use of a member's scheme to transfer property undertakings and liabilities from one member of a corporate group to another is not new or "novel": Stork ICM Australia Pty Ltd v Stork Food Systems Australia Pty Ltd above at [69]; Re RBS Group (Australia) Pty Ltd above.
[9]
Other matters brought to the Court's attention
Mr Jackman noted that the Member's Schemes contained at Annexure B to the Explanatory Statement contained a schedule of property and liabilities which were to be specifically included or excluded from the transfers under the schemes. Mr Jackman pointed out that the Plaintiffs propose to amend the list of Non-Transferring Employees to reduce the number from 225 to 205; and the description of transferring funds and non-transferring funds to refer to the specific bank accounts in which such funds are held (Ex AC-3 pp 278-295). Mr Jackman submits and I accept that these changes are not material and fall comfortably within the scope of 411(6) of the Act to which I referred above; Re Investorinfo Ltd [2005] FCA 1848 at [7]; Re Boart Longyear Ltd (No 2) above. Mr Jackman also foreshadowed that the Plaintiffs will seek orders under s 459A of the Act that the First, Third, Fourth and Fifth Plaintiffs, being the Member's Schemes companies, be wound up in insolvency immediately following the implementation of the Member's Schemes and the Ovato Group Deed of Cross Guarantee is revoked in respect of those Plaintiffs. I noted that matter and the winding applications will be listed as necessary. Mr Jackman also indicated that the Plaintiffs (and, I assume, their legal representatives) are not aware of any matters other than those already raised in submissions and in the first and second court hearings which needed to be brought to the Court's attention under the Plaintiffs' and legal representatives' obligations of disclosure in an ex parte hearing.
[10]
Orders
For these reasons, I make orders in the form sought by the Plaintiffs at the adjourned second Court hearing on 21 December 2020. I will adjourn the application for the winding up orders to 2pm on 29 December 2020, noting that those orders could not be made until it is apparent that the schemes will not cease to have effect under the condition subsequent to them.
[11]
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: 21 December 2020
Mr Slaven then took questions from the floor from creditors and responded to a question concerning the future prognosis for the Ovato Group as follows:
"The Chairperson explained that there would be a recapitalisation and restructure of Ovato's balance sheet. Ovato would change their manufacturing footprint and close the Clayton location to better match supply with demand. The Chairperson explained that the forecast modelling is based on a smaller but more profitable and sustainable Ovato going forward. The Chairperson commented that the prognosis without the restructure was not positive."
Mr Clarkson, the Company Secretary and General Counsel of the Ovato Group, then noted that the Ovato Group would have a new enterprise agreement and would not have "the same cash drain as it had suffered in the past" and Mr Slaven stated that "he is entering the new year with great hope for the future of Ovato and that it will be well capitalised". There was also discussion at that presentation of the equity raising process, and the Ovato Group's solicitor there rightly noted the Court's observation at the first Court hearing that the equity raising process would likely need to be completed before this second Court hearing.
Returning now to Mr Slaven's affidavit dated 17 December 2020, he also addresses the amounts for which creditors' claims were admitted and notes that all creditors voting at the Creditors' Scheme meeting voted in favour of the scheme, including the Commissioner of Taxation who is the second largest Scheme Creditor, and that three Scheme Creditors abstained from voting, including the Commissioner of State Revenue (Vic). Mr Slaven also there refers to the conduct of the Member's Scheme meetings and to the preparation of an updated restructure forecast which had been made available to the independent expert, Mr Fraser, which appears to adopt the same assumptions as the earlier restructure model, addressed in Mr Fraser's earlier report, but also incorporates "changes to the other restructuring transactions … based on the announced equity raising and agreements or term sheets that have now been entered into with various counter-parties".
By an affidavit dated 16 December 2020, Mr Fraser exhibits a supplementary independent expert report, prepared in accordance with instructions provided by the Ovato Group's solicitors by letter dated 16 December 2020. Mr Fraser was instructed to determine the solvency of the relevant companies following the implementation of the proposed schemes. There is an unfortunate ambiguity in that approach, which did not make clear whether Mr Fraser was being asked to determine those companies' solvency after the Court had made its orders, and the schemes took effect, or on the contingency that conditions precedent for the surrounding transactions which are presently unsatisfied would ultimately be satisfied. In particular, Mr Fraser was asked to make assumptions as to matters that would not occur until after the schemes were approved, including repayment to ANZ Bank of an overdraft facility and bank guarantee facility out of the offer proceeds of the equity raising; the release of security in respect of the ANZ facilities; the release of debt, a waiver and a debt for equity conversion in respect of noteholders; a financier having agreed to provide a new $17 million secured debt facility to the Ovato Group; Commerzbank AG ("Commerzbank") having agreed "in principle" to a deferral of certain payment obligations of $12 million or more and to landlords of properties having reached certain agreements with the Ovato Group. Those assumptions meant that Mr Fraser's conclusions as to the solvency of the companies after the Court's orders for implementation of the schemes depended on the extent to which those conditions precedent were ultimately satisfied and those transactions implemented.
On that basis, and subject to an assumption that the Ovato Group would operate within the contractual terms for each of the debt facilities after the proposed scheme implementation, Mr Fraser expressed the view that the Transferee Companies (as defined) would be solvent for the 12 months following the implementation of the proposed schemes, but qualified that view by observing that the Ovato Group's:
"ability to continue as a going concern is dependent on:
• Its ability to perform as forecast, including operating within the contractual terms for each of the Debt Facilities;
• achieving the forecast EBITDA improvements expected from the Proposed Restructure; and
• no further adverse external impacts (including from COVID-19) leading to a material unexpected performance deterioration."
Mr Fraser also there confirmed his view that the Member's Scheme companies would be insolvent following the implementation of the proposed schemes.
The Plaintiffs also relied on an affidavit dated 17 December 2020 of Mr Clarkson who addressed some of the conditions precedent to the Creditors' Scheme, including the position as to the equity raising. He noted that the equity raising sought to raise $40 million of which $35 million had been "conditionally underwritten" by Wilsons Corporate Finance Ltd ("Wilsons") and Aitken Murray Capital Partners Pty Ltd ("AMCP"), with conditional sub-underwriting by two shareholder interests in the Ovato Group, the Hannan Family and Are Media Pty Ltd under sub-underwriting agreements (Clarkson 17.12.20 [12], [14]; Ex AC-3, pp 113-140 and 141). Mr Clarkson noted that Wilsons held $35 million in a trust account in connection with its underwriting obligations in the underwriting agreement. Mr Clarkson also addressed the position in respect of the negotiation of compromises with the note trustee in relation to notes issued under the note trust deed, which had been approved by a meeting of noteholders, but would only take effect if both the Creditors' Scheme and Member's Schemes and Court orders approving the schemes had been first filed with ASIC.
Mr Clarkson also noted that Ovato Print and Commerzbank had not been able to reach a settled compromise although Commerzbank had "signed a term sheet setting out the proposed terms of a compromise". Mr Clarkson noted that that compromise was itself subject to further conditions, including the approval of a credit insurer of the Commerzbank facilities. Mr Clarkson gave evidence, albeit based on second-hand hearsay, of his confidence that the conditions to the term sheet will be satisfied. Mr Clarkson also refers to the negotiation of a new facility agreement with Scottish Pacific Business Finance Pty Ltd ("Scottish Pacific") for the loan of $17 million for a term of 3 years, subject to conditions precedent, but did not address the likelihood that those conditions precedent will be satisfied. Mr Clarkson also addressed an amendment to the Members' Schemes to reduce the number of non-transferring employees who would be made redundant, to which I return below.
The Plaintiffs also relied on Mr Clarkson's further affidavit dated 18 December 2020, which again addressed the position in respect of the satisfaction of outstanding conditions precedent in the Underwriting Agreement. Mr Clarkson there noted that all conditions to the Underwriting Agreement other than a condition requiring the Court's approval of the Creditors' Scheme and Member's Schemes had been satisfied. That condition can be satisfied by the Court making such an order, subject to an undertaking that the Plaintiffs will not lodge that order with ASIC so as to give effect to the schemes until a substantial specified amount payable to Ovato Limited (as distinct from ANZ Bank) under the relevant arrangements is received by one of the Plaintiffs from underwriters, which is expected to occur on 21 December 2020. That course, which the Plaintiffs now propose, avoids the risk that the schemes would take effect but, for whatever reason, the Plaintiffs might then not receive the amount held by underwriters, so as to give the creditors the benefit contemplated by the Creditors' Scheme. I do not consider it necessary to extend that condition to lesser additional amounts expected to be received from underwriters and subscribers on 24 December 2020.
Mr Clarkson also referred to the condition precedent to the amendment to the notes, which requires both the Court's approval of the schemes and lodgement of the Court orders approving the schemes with ASIC. The risk that the schemes took final effect, and that difficulty then arose with the amendments to the notes which were not then completed, cannot be addressed by an undertaking of the kind noted above, because the schemes would take effect when the orders are lodged with ASIC. As I note below, that risk can be addressed by a condition subsequent, which the Plaintiffs now propose, which would cause the schemes to cease to have effect if the first tranche of the amendments to the notes did not take effect. Mr Jackman submitted, and I accept, that the risk that the second tranche did not take effect was sufficiently disclosed to creditors in the explanatory memorandum. Mr Clarkson also referred to the conditions precedent to the new Scottish Pacific facility, which would not be satisfied until the equity raising was completed, expected to be about 23 December 2020, and which also require several steps in accordance with an Amendment Deed which include the payment by the underwriters to ANZ, ANZ's release of its security and additional steps. As I note below, the risk that condition precedent is not satisfied, and the Scottish Pacific facility does not take effect, can also be addressed by a condition subsequent.
By an affidavit dated 18 December 2020, Mr Stephenson addressed the position in respect of negotiations with Commerzbank. He acknowledged that the arrangements reached with Commerzbank were not legally binding, and that any legally binding agreement with Commerzbank would not be reached without the written approval of a German Government Export Credit Agency, which was expected to take "many weeks" to obtain. While Mr Stephenson also expressed confidence that such approval would ultimately be obtained, Mr Jackman drew attention to no authority that supports the Court granting approval for a scheme of arrangement, which will have final effect and bring about significant changes to creditor rights, based on no more than a prediction of a future event that would be necessary to establish solvency. Mr Stephenson referred to a waiver letter provided by Commerzbank in respect of several payments immediately due and payable. Mr Stephenson also expressed the view, in short form, that:
"Based on my calculations and forecasting out to 31 December 2021, assuming the Creditors' scheme and Member's schemes are approved, the Ovato Group would have the necessary liquidity to meet the amortisation instalments under the Commerzbank facilities together with its other financial obligations to its creditors."
Such a short form assertion would not have provided sufficient basis for the Court to conclude that the renegotiation of that facility, which was previously an element of the proposed restructuring arrangements for the Ovato Group, was not necessary to them. I address further evidence led by the Plaintiffs to support that proposition below.
By an affidavit dated 17 December 2020, Mr McLachlan, a solicitor employed by the firm of solicitors acting for the Plaintiffs, referred to registration of the explanatory statement for the schemes with ASIC; despatch of the documents referable to the Creditors' Scheme and Member's Schemes to creditors and sole members of the companies respectively, and collation of the completed voting proof of debt forms and proxy forms. Mr McLachlan also referred to publication of an advertisement of this second Court hearing in a national newspaper. By an affidavit dated 18 December 2020, Mr Cross, a solicitor acting for the Plaintiffs, noted that no notice of appearance had been served on the Plaintiffs in connection with the proceedings. No party appeared at the hearing to oppose the orders sought by the Plaintiffs. By letter dated 18 December 2020 (Ex A1), ASIC advised the solicitors for the Plaintiffs that it did not intend to appear or make any submissions at the hearing. It noted the documents which had been provided to the Court at the first hearing, opposing the scheme and expressed the view that:
"ASIC notes that a relevant consideration for the Court is the fairness of the schemes, and the impact they may have on third parties' interests. In relation to the member's schemes, ASIC understands from the independent expert's report and Ovato's submissions to the Court that, while the circumstances are novel, affected third parties, namely certain employees of the scheme companies, are not necessarily worse off under the proposed schemes compared to the situation where the schemes are not approved."
The Plaintiffs also relied on a further affidavit dated 20 December 2020 of Mr Slaven which addressed the assumptions which had been provided to Mr Stephenson to support an updated restructure forecast model, if no binding agreement was reached with Commerzbank and there was a specified increase in the amortisation payments due to Scottish Pacific for the period to December 2021. Mr Slaven there noted that other assumptions made in earlier models had been maintained in that model and he continued to consider that those assumptions were reasonable and nothing had occurred in the intervening period that would cause him to depart from his views in that respect. He also expressed the view that the forecast contained in the updated model, dealing with the position if no binding agreement was ultimately reached with Commerzbank, was reasonable and appropriately reflected the relevant assumptions.
The Plaintiffs also relied on a further affidavit of Mr Stephenson dated 20 December 2020 which elaborated on the process and calculations he had undertaken to reach the view expressed in his affidavit dated 18 December 2020 that the Ovato Group would have the necessary liquidity to meet amortisation instalments due under the Commerzbank facilities and other financial obligations to creditors, based on his calculations and forecasting to 31 December 2021. I have had regard to the detail of that affidavit, which I do not set out in this judgment where part of it was the subject of an order under s 7 of the Court Suppression and Non-Publication Orders Act 2010 (NSW). I accept that, on the basis of the analysis undertaken by Mr Stephenson, there is a reasonable basis to consider that the Ovato Group should be able to pay its debt as and when they fall due at least in that period.
A further affidavit dated 20 December 2020 of Mr Cross noted that the entitlement offer which is ancillary to the schemes had been taken up by various non-underwriting investors, resulting in a reduction in the sub-underwriters' commitment, and he there recalculates the amounts payable by sub-underwriters to Ovato Limited on 21 December 2020. Mr Cross' affidavit also outlined the basis for the claim for an order under the Court Suppression and Non-Publication Orders Act in respect of parts of Mr Stephenson's affidavit dated 20 December 2020, to which I referred above.
The Plaintiffs' proposed orders provided to the Court on 20 December 2020 provide for the Court to approve the Creditors' Scheme under s 411(4)(b) of the Act; approve the Member's Schemes under s 411(4)(b) and 411(6) of the Act and exempt them, as is commonly done, from compliance from s 411(11) of the Act, pursuant to s 411(12) of the Act. The Plaintiffs also sought orders under s 413(1) of the Act in respect of the transfer of funds, contracts, employees and shares held by the First and Fifth Plaintiffs, and of intellectual property, inventory and leases, and of the interests of the First, Third, Fourth and Fifth Plaintiffs in Transferring Plant and Equipment (as defined). Those orders also provide that the Transferring Litigation (as defined) by or against the First, Third, Fourth and Fifth Plaintiffs be continued by or against the Second Plaintiff, and for the revocation of the Ovato Group Deed of Cross-Guarantee so far as it relates to the First, Third, Fourth and Fifth Plaintiffs.
The Plaintiffs proposed orders also included a condition subsequent such that the orders in respect of the Creditors' Scheme, the Member's Schemes and the transfers contemplated by s 413(1) of the Act and the revocation of the Ovato Group Deed of Cross-Guarantee in respect of the relevant Plaintiffs would not take effect if certain steps did not occur on or before a specified date, now 29 December 2020. The specified steps related to the implementation of the arrangements in respect of noteholders and the advance of funds by Scottish Pacific. It seems to me that those steps would need to have been completed, so that the condition subsequent would not apply, before the Court could make the contemplated orders winding up the several Plaintiffs, since it would be too difficult to unravel those steps if the relevant Plaintiffs had been wound up, their employees were made redundant and claims were made under the Fair Entitlements Guarantee Act prior to the completion of the ancillary transactions.
The Plaintiffs' proposed orders also provide for the Court to note an undertaking that they will not lodge the Court's orders with ASIC under s 411(10) of the Act until they had received evidence of payment by Wilsons or another person on its behalf of a specified amount (or more) into a bank account held in the name of a Plaintiff. As I will note below, that undertaking avoids the risk that the schemes could become effective, on lodgement of the Court's orders with ASIC without the Plaintiffs having first received the funds due to them (as distinct from ANZ Bank) under the equity offering, so as to improve their financial position and their solvency.
Mr Jackman submits, and I accept, that the other statutory requirements in respect of the schemes are also satisfied. On 19 November 2020, ASIC was provided with a copy of the scheme booklet as approved by the Court (McLachlan [6]-[10]) and ASIC had a reasonable opportunity to examine the explanatory statement and make submissions to the Court in relation to it. No issue arises under s 411(17) in the Creditors' Scheme or Member's Schemes because there is no question of the avoidance of Ch 6 of the Act. On 11 December 2020 the Plaintiffs published a notice of the present hearing in The Australian albeit a notice that was not strictly compliant with Supreme Court (Corporations) Rules 1999 (NSW) r 3.4(3). Mr Jackman submits and I accept that, as a matter of substance, that advertisement communicates all that the Court rule requires to be conveyed (McLachlan [65]). The orders of the Court made at the first Court hearing were sealed and lodged with ASIC as required by r 3.5 of the of the Supreme Court (Corporations) Rules 1999 (McLachlan [9]-[10]).
Mr Jackman recognises that the Creditors' Scheme is conditional upon the satisfaction of several conditions precedent including cl 3.1(a) which requires that:
"Ovato Limited raises a minimum amount of $30 million by way of a new equity issue to current or new members with the only remaining condition to be satisfied before the relevant members are unconditionally committed to buying the new equity being the Court making the Second Court Orders and making the Member's schemes Second Court Orders."
Mr Jackman in turn referred to Ovato Limited's conditional and partially underwritten pro rata renounceable entitlement offer to existing shareholders seeking to raise $40 million, the conditional underwriting of that offer by Wilsons and AMCP and the sub-underwriting up to $35 million by the Hannan Family and Are Media Pty Ltd, to which I referred above. That underwriting agreement in turn contains various conditions precedent (Ex AC-3, cl 3.1) which have been satisfied or waived, other than for cl 3.1(e) which provides for Court approval of the Creditors' Scheme (Clarkson 18.12.20 [7]). Mr Jackman in turn points out that the sub-underwriting agreements are conditional upon the satisfaction of various conditions set out in cl 2(a) and (b) (Ex AC-3 pp 114-118, 142-144) which have been satisfied or waived. Mr Jackman points out that the $35 million which is the subject of the underwriting agreement and sub-underwriting agreements has been deposited into a trust account operated by Wilsons (Clarkson 17.12.20 [24]; Ex AC-3 pp 193-194) and submits that, on the Court granting approval of the schemes, $17 million of that $35 million will be released to ANZ in accordance with an irrevocable Direction, Consent and Release Deed (AC-3 pp 198-213).
On balance, but with considerable hesitation, I accept Mr Jackman's submission that the requisite funds have been "raised" by Ovato Limited where although they are held by Wilsons in a trust account and Ovato Limited can only access them after the scheme is approved. Notwithstanding the somewhat relaxed approach taken to a financing condition which was only satisfied upon the Court approving a scheme in Xceed Resources Ltd [2014] FCA 170, in a case which does not appear to have involved the acute solvency concerns that arise in this case, I would have been reluctant to exercise the Court's discretion so as to allow the Creditors' Scheme to take irrevocable effect (including releasing officers of Ovato Group from liabilities) where neither Ovato Limited nor ANZ had yet received the relevant funds and it was exposed to the possibility that Wilsons would not remit them on demand. That issue has been addressed, so far as the payment to Ovato Limited is concerned, by an undertaking now offered by the Plaintiffs that they will not lodge orders made by the Court with ASIC to allow them to take effect before the funds to which it is entitled are received, and I am satisfied that the position as to ANZ Bank is sufficiently addressed by the irrevocable Direction, Consent and Release Deed.
The Creditors' Scheme is also conditional upon the statutory majority of Scheme Creditors approving the Scheme and the Scheme Administrators executing a Deed Poll. Mr Jackman points out and I accept that the statutory majorities have been achieved and the Scheme Administrators have executed a Deed Poll (Clarkson [10]). The Creditors' Scheme is conditional on the Court making the second Court orders; the Member's Schemes second Court orders becoming effective; and the Court making an order under s 413(1)(g) of the Act revoking a deed of cross guarantee between the Second Plaintiff and its subsidiaries dated 27 June 2008 as amended from time to time ("Deed of Cross Guarantee") (Clarkson [31]; Ex AC-1 pp 117-209), to the extent that it relates to the First, Third, Fourth and Fifth Plaintiffs. The Member's Schemes are conditional upon the Court's approval of the Creditors' and each of the other Member's Schemes, the Court making the order sought under s 413(1)(g) of the Act and satisfaction of the conditions precedent in cl 3.1 of the Creditors' Scheme. Those conditions will be satisfied by the orders made at this hearing.
Turning now to ancillary arrangements, which are not conditions precedent to the scheme but are necessary to support the companies' solvency, Mr Jackman points out that the Plaintiffs have reached a compromise with the noteholders who have approved a circular resolution to amend the conditions of the notes including a debt for equity swap that provides for a write down of the principal outstanding from A$40,000,000 to A$15,000,000; and an amendment to the conditions of the Notes to allow the A$15,000,000 written down amount to be converted into equity (Clarkson [32]). Mr Jackman points out that the noteholders were provided with a Consent Solicitation Memorandum which asked them to consider and, if thought fit, approve the proposal being certain amendments, waivers and authorisations with respect to the conditions of the notes by means of a special resolution ("Consent Solicitation"), which informed noteholders that implementation of the Special Resolution was conditional on the Court approval of the scheme being granted on or about 18 December 2020 and that, once the Court order was filed with ASIC on or about 22 December 2020, the Issuer and the Note Trustee was directed to give effect to the waivers and amendments (Clarkson 18.12.20 [10]-[11]). I am satisfied that there is little practical risk that, provided that the schemes are approved, the compromise with noteholders will not also take effect.
Mr Jackman points out that Scottish Pacific has signed a binding Chattel Mortgage Facility to provide Ovato Limited with a new $17 million facility ("Facility Agreement") (Ex AC-3 pp 237-277). That Facility Agreement is also subject to several conditions precedent, some of which have already been satisfied; others of which will only be satisfied by the provision of verification certificate at or around the time of the settlement of the equity raising (Clarkson 18.12.20 14(a)); and one of which (condition (i)) will only be satisfied once the funds are advanced (Clarkson 18.12.20 [14(c)]). A further condition to this facility (condition (h)) requires Ovato Limited to satisfy all the conditions precedent to a Deed of Amendment and Restatement (Clarkson 18.12.20 14(d)) these include conditions as to the Schemes becoming effective, the payment of a restructure fee, the entry into a Security Trust Transfer Deed with ANZ and the discharge of security interests in favour of ANZ.
I am satisfied that the risk that the Creditors' Scheme would take irrevocable effect, but these conditions might subsequently not be satisfied and the facility then not take effect, are addressed by the condition subsequent now proposed by the Plaintiffs. I am also satisfied that that condition subsequent is within the scope of the Court's amendment power under s 411(6) of the Corporations Act, which provides that the Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just, where it will plainly give effect to the intent of creditors in approving the Creditors' Scheme: Re Boart Longyear Ltd (No 2) above.
Mr Jackman also points out that Commerzbank has signed a non-binding term sheet which sets out the terms of a compromise with Ovato Print in respect of an equipment facility including the deferral of payments to 31 December 2021 and 31 December 2023 (Ex AC-3 pp 226-229). However, before Commerzbank will enter into a binding agreement, it requires the approval of Euler Hermes, which is a German Government Export Credit Agency, which provided Commerzbank with credit insurance on the Commerzbank Facilities (Stephenson 18.12.20). I can give little weight to that terms sheet in supporting the Plaintiffs' solvency, notwithstanding Mr Stephenson's evidence expressing confidence that the arrangements will eventually be agreed in binding form. However, I accept the evidence now led by Mr Slaven and Mr Stephenson, that the Ovato Group should be able to meet its payments under the equipment facility with Commerzbank, if that agreement is not concluded, if the schemes are approved and the associated arrangements are completed as noted above.
Section 413(1)(g) of the Act in turn provides that, where an application is made to the Court falling within the scope of s 413, then the Court may provide for such incidental, consequential and supplemental matters as are necessary to ensure that, relevantly, the reconstruction is fully and effectively carried out. Mr Jackman points out that the scope of the Court's power to make orders extinguishing a guarantee under s 413(1)(g) of the Act was considered in Re RBS Group (Australia) Pty Ltd (Unreported, 2 February 2012), where Ward J (as the Chief Judge in Equity then was) considered the operation of that section in the context of a scheme of arrangement that involved transferring part of the plaintiff's assets, undertakings and liabilities referable to its warrants business to a newly formed single-purpose entity. Mr Jackman notes the submission in RBS Group that it was necessary to extinguish the relevant guarantees to ensure that the reconstruction was fully and effectively carried out (RBS Group at [51]) and submits that, similarly, it is necessary in this case to extinguish the Deed of Cross Guarantee so far as it affects the First, Third, Fourth and Fifth Plaintiffs in order to effect the reconstruction.
Mr Jackman points out that, even after the implementation of the schemes, the First, Third, Fourth and Fifth Plaintiffs will not be able to meet their liabilities to Non-Transferring Employees (as defined), with the unfortunate result that they will likely be wound up and the shortfall in these liabilities will be left to be met under the Fair Entitlements Guarantee Act 2012 (Cth). Mr Jackman point out that, if an order under s 413(1)(g) of the Act is not made in respect of the Deed of Cross-Guarantee, those liabilities would be recoverable as against all other members of the Ovato Group. While, in principle, that might seem to be an appropriate result, it has the fundamental practical difficulty that it would defeat the purpose of the restructure and likely result in all employees of the Ovato Group losing their employment and potentially increase the claims which would fall within the scope of the Fair Entitlements Guarantee Act. Mr Jackman submits that the orders sought under s 413(1)(g) of the Act should be made where the schemes and restructuring, which could not otherwise be implemented, will allow trade creditors who are not within the scope of the Creditors' Scheme to be paid in full; the Creditors' Scheme has the unanimous support of all of those creditors within its scope who were present and voted in respect of it; and Non-Transferring Employees (as defined) will have their leave entitlements protected by operation of the Fair Entitlements Guarantee Act. Conversely, without such an order, the Plaintiffs will not satisfy the conditions precedent for the schemes and the Ovato Group will fail with consequent job losses and no return to unsecured trade creditors.
Mr Jackman fairly recognises that a question also arises, which I had noted in the First Judgment, as to whether the schemes should not be approved for reasons of public policy because they leave substantial employee liabilities to be met under the Fair Entitlements Guarantee Act. Mr Jackman draws attention to the consideration of the relevance of public policy issues in Re CSR Limited [2010] FCAFC 34 at [82]-[84], followed in in Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) (2011) 86 ACSR 584; [2011] NSWSC 1465 at [43] and in Re Capilano Honey Ltd (No 2) (2018) 132 ACSR 332; [2018] FCA 1925 at [6] and submits that there is no public policy reason for not approving the proposed schemes. He submits that the proposed transactions do not offend any identified public policy where, under s 3 of the Fair Entitlements Guarantee Act, its main objects are to provide for the Commonwealth to pay unpaid employee entitlements in cases where the employers are insolvent, the end of employment was connected with the insolvency and the employees cannot get payment of their entitlements from other sources.
It does not seem to me that the Court should refuse to approve the schemes on public policy grounds. In reaching that result, I bear in mind that the evidence suggests that the relevant companies would at least have been placed in administration, and potentially in liquidation, absent the restructuring and the schemes, potentially leading to the loss of more employees' jobs and a larger claim under the Fair Entitlements Guarantee Act, so this is not a case where the transactions create a claim which would not otherwise have arisen or increase the amount of that claim. I also recognise that, possibly for that reason, the Commonwealth of Australia did not seek, at the first hearing or at this hearing, to be heard in opposition to the orders sought, although it (and ultimately taxpayers) will bear the liabilities arising under the Fair Entitlements Guarantee Act. The question whether approval of other schemes of this kind should be declined on public policy grounds will remain open to be determined in a future case, if the Commonwealth of Australia seeks to oppose such a scheme on that basis.
I therefore accept that I should here follow the approach adopted by Ward J in RBS Group (Australia) Pty Ltd above and make the orders sought by the Plaintiffs under 413(1)(g) of the Act to relieve the Transferee Companies (as defined) of the obligations arising out of the Deed of Cross Guarantee in relation to the First, Third, Fourth and Fifth Plaintiffs.
Mr Jackman also submits, and I recognise, that the Creditors' Scheme and Member's Schemes do not effect changes to Note Trust Deed and noteholders and are not participating creditors within the schemes. As I noted above, Ovato Group has reached a compromise with noteholders as an element of the overall restructure (Clarkson [29]-[32]). Mr Jackman also submits, and I accept, that these criticisms are weakened by the fact that the position if the schemes are approved need to be compared with the alternative, which appears to be that Ovato Limited and each of the Plaintiffs will become insolvent and will be wound and that realisations in a liquidation will not be sufficient to pay a dividend to ordinary unsecured creditors. In that situation, it appears that noteholders would not receive a return, because their security ranks behind the securities of ANZ and Scottish Pacific and employees would receive a dividend of less than 13 cents and left to claim any shortfall under the Fair Entitlements Guarantee Act. It is understandable that noteholders (and other creditors and taxpayers) may not be impressed by the outcome of the schemes, but that assessment needs to be tempered by a recognition of the alternative. Mr Jackman submits, and I accept, that the Court will not withhold its approval on fairness grounds where noteholders and employees are no worse off by reason of the scheme: Centro Properties Ltd v PricewaterhouseCoopers above at [104]-[113].
Mr Jackman also rightly points out that the question which the Court must here address is whether the proposed schemes are fair; not whether some different scheme could be propounded which the Court or third parties would have preferred: Centro Properties Ltd v PricewaterhouseCoopers above at [28]ff. Mr Jackman refers to my observations in that regard in Re Boart Longyear Ltd (No 2) (2017) 122 ACSR 437 at [281]:
"… the Court should not approach the question of approval of a scheme by postulating some other scheme that could have but does not exist: Re Application of NRMA Ltd (No 1) above at [29]; Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust)above at [28]ff. It seems to me that the Court particularly should not take that approach at the invitation of persons who are not party to and not bound by such a scheme. … I have observed above that I accept that the Court may have regard to other affected interests, but it does not seem to me that that can extend to, for example, not approving a creditors' scheme that is supported by substantially all creditors and is not intrinsically unfair because another constituency would prefer a different scheme. I also have regard to the fact that the case law establishes that less weight should be given to the interests of a party affected by a scheme which would have no real economic interest in an insolvency: Re City of Melbourne Bank Ltd (1897) 19 ALT 80; Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) above at [112]. That proposition has particular weight here where I have held that an external insolvency administration is the likely alternative to the approval of the schemes."
Mr Jackman submits that several considerations support the conclusion that the schemes are fair and reasonable, at least as between the Plaintiffs, the creditors bound by them and members bound by the Member's Schemes. First, Mr Jackman points out that the Creditors' Scheme received overwhelming support of creditors entitled to vote on it and no creditor voted against it. He submits, and I accept, that proof that the statutory majority of creditors have agreed to the Creditors' Scheme is a matter supporting its fairness: Re Boart Longyear Ltd (No 2) above at [62]. No creditor of the Plaintiffs indicated that it will appear to object to the scheme (Clarkson 18.12.20, [56]) and no creditor appeared at the second hearing to object to the Creditors Scheme. Third, Mr Jackman relies on Mr Fraser's updated independent expert's report, to which I referred above, which again expressed the view that there will be no prejudice to interests of the creditors of each of the Member's Scheme companies. I bear in mind, in considering that view, that Mr Fraser was instructed to assume, and appears to have assumed the completion of steps which have not yet occurred and are subject to the conditions precedent which I have addressed above. Fourth, Mr Jackman submits, and I accept, that the Explanatory Statement was detailed and comprehensive and provided full disclosure to creditors of information material to their decision to approve or reject the Creditors' Scheme. Sixth, Mr Jackman submits, and I accept, that there is no oppression to creditors who are owed smaller debs by the Plaintiffs because the scheme only binds certain major trade creditors of the Ovato Group; debts of trade creditors who are not Scheme Creditors are not affected; and all trade creditors have their retention of title rights preserved. The fact that the Creditors' Scheme is directed to the position of larger creditors reinforces the weight that can be given to their assessment of its commercial merit, where there is no reason to think they could not reach an informed assessment of that matter.