[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
HEADNOTE
[This headnote is not to be read as part of the judgment]
The applicant, First Pacific Advisors LLC, sought leave to appeal against an order made under s 411 of the Corporations Act 2001 (Cth) convening meetings of creditors of the respondents, Boart Longyear Limited (BLY) and several associated companies, to consider and if thought fit, agree to two schemes of arrangement proposed for the respondents.
BLY defaulted on certain loans and was likely to become insolvent absent some form of debt restructuring. BLY entered into a Restructuring Support Agreement with several of its creditors. BLY then proposed two interdependent schemes of arrangement. The Unsecured Creditors Scheme related to unsecured debt to the value of US$294 million and provided for a debt-for-equity swap and for that debt to be partly reinstated under subordinated notes. The Secured Creditors Scheme related to over US$204 million in senior secured notes and over US$250 million owed to affiliates of Centerbridge Partners LP ("Centerbridge") under two term loans.
The applicant held 29.07% of the secured notes and opposed an order to convene a meeting of creditors to consider the Secured Creditors Scheme. The applicant submitted that separate class meetings of secured creditors should be ordered, namely, secured note holders in one class and Centerbridge as the term loan holder in the other class.
The applicant contended that aspects of the Secured Creditors Scheme amounted to differences in the treatment of the secured notes debt and the term loan debt. This included an amendment to the secured notes debt to permit payment of interest in kind for a period, in place of the existing obligation to pay interest in cash, where no such amendment was made to the term loan debt which already provided for interest in kind and a waiver in change of control rights, where the waiver was for the benefit of Centerbridge.
The applicant also pointed to several associated transactions which were conditions precedent to the schemes including the provision of a new US$75 million lending facility by Centerbridge and two other creditors, Ares Management LP ("Ares") and Ascribe II Investments LLC ("Ascribe") to BLY; a reduction of the interest rate payable under the term loan debts in consideration of the issue of shares to Centerbridge so that it will hold 56% of shares in BLY (before the issue of warrants to certain unsecured creditors); allocations of shares to Ares and Ascribe; and the grant of new rights to nominate directors for election to the BLY board to Centerbridge, Ares and Ascribe.
The primary judge did not accept the respondents' submission that aspects of the associated transactions were not relevant to whether separate classes of creditors were required because they were not implemented by the schemes, where they were closely connected with the schemes and Centerbridge's participation in them. However, the primary judge held that the differences were not so great as to give rise to an inability of the secured note holders and Centerbridge to consult together with a view to their common interest. The primary judge accepted that the amendment effected by the scheme which permitted payment of interest in kind gave rise to a difference in legal rights but was not satisfied that this matter, alone or combined with other matters, would give rise to an inability of the secured note holders and Centerbridge as the term loan holder to consult with a view to their common interest.
The applicants sought leave to appeal against the decision. The respondents filed a notice of contention arguing that the primary judge erred in holding that the rights conferred on Centerbridge by associated transactions were relevant to class composition as they were conditions precedent to the schemes, and it rather should have been held those rights were not class-creating as they were not created by the schemes.
The issues on appeal were:
- Whether the primary judge misapplied the test for the composition of separate classes; and
- Whether the primary judge erred in failing to hold that the differences in rights between the secured note holders and the term loan holders made it impossible for these creditors to consult together with a view to their common interest; and
- Whether the primary judge erred in holding that the rights conferred by associated transactions were relevant to the question of class composition.
The Court held (Bathurst CJ; Beazley P and Leeming JA agreeing), granting the applicant leave to appeal but dismissing the appeal:
Leave to Appeal
(i) The position reached on class constitution upon the hearing of the initial application under s 411 will not preclude debate at the approval hearing. This is because in most cases creditors or members affected by the schemes would not have the opportunity to make submissions at the first court hearing as they would have no notification of that hearing: [40] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
Re MAC Services Group Ltd (2010) 80 ACSR 390; [2010] NSWSC 1316; Re Orica Ltd [2010] VSC 231; F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15; Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813; Re United Medical Protection Ltd [2007] FCA 631; Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch) applied.
(ii) The fact that the decision of the primary judge may be reviewed by him or another judge who hears the application under s 411(4)(b), either at the insistence of the present applicant or another creditor, would normally provide a powerful case for refusing leave to appeal. However in the present case the matter was fully argued before the primary judge. Further, the effect of refusing leave on both the applicant and other creditors would be that the applicant would need to seek a stay or injunction at the price of an undertaking as to damages in an indeterminate amount, and other creditors entitled to vote at the meeting would also be left in a state of uncertainty as to a matter critical to the jurisdiction of the Court to approve the scheme. In these circumstances leave to appeal should be granted: [42]-[43], [47] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
Class composition
(iii) The test in determining class composition involves 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: [80] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
Sovereign Life Assurance Company v Dodd [1892] 2 QB 573; Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20; [2009] FCA 813; UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634; Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 followed.
(iv) In considering whether any difference in rights or different treatment of rights would make it impossible for creditors to consult together as a class, the context in which the scheme is propounded is of importance. The relevant rights of creditors to be compared against the terms of the scheme are those which arise in an insolvent liquidation: [82]-[86] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
Re Telewest Communications PLC [2004] BCC 342; [2004] EWHC 924 (Ch); Re T & N Ltd (No 4) [2007] 1 All ER 851; [2006] EWHC 1447 (Ch); Re APCOA Parking Holdings GmbH and others (No 2) [2015] 4 All ER 572; [2014] EWHC 3849 (Ch) followed.
(v) What is to be considered is not a single right but a bundle of rights held by each creditor either under the existing loan agreements or under the proposed scheme. It is necessary to ask in the context of the time of the comparison what the bundle effectively contains: [85] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
Re Cortefiel SA [2012] EWHC 2998 (Ch) followed.
(vi) The question of whether the associated transactions form part of the scheme does not have any particular significance in the present case where it was accepted that the waiver of the change of control clause formed part of the scheme. The purpose and effect of the waiver was to give effect to the grant of additional equity to Centerbridge and needs to be considered in that context: [91] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
(vii) The fact that the change of control clause is in both the secured note facility and the term loan agreements is not determinative of the issue. Although the rights in each agreement are the same, it is appropriate to have regard to the differential effect the waiver has on both groups of creditors. However, the difference does not result in the two groups of creditors being unable to consult together with a view to their common interest. The right to call up loans is of limited benefit having regard to the fact that the respondents would be unable to repay and would in all probability be placed into liquidation, in which case both groups of creditors would receive a significantly less amount than on the implementation of the scheme. The grant of additional equity to Centerbridge does not affect the position: [92]-[94] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
It is correct that the respective creditors' right to payment of interest are different and are treated differently by the scheme. However in the context of imminent liquidation as the only alternative, the adjustments made, whether more favourable to the term loan creditors or otherwise, is not such as to prevent the two groups of creditors consulting together on the scheme: [99] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
In the context of the present case taking into account the company's financial position, the real rights of the creditors and the rights provided for by the scheme are not so dissimilar as to require separate class meetings: [101] (Bathurst CJ); [106] (Beazley P); [107] (Leeming JA).
Re Cortefiel SA [2012] EWHC 2998 (Ch) applied.