In the matter of Australian Energy Ltd [2006] FCA 155

Federal Court of Australia|2006-02-23|Before: Lindgren J

Introduction 1 On 23 February 2006 I made orders in this proceeding for the following reasons. 2 The hearing was the first court hearing in respect of an application by the plaintiff, Australian Energy Ltd ('AEN'), under s 411 of the Corporations Act 2001 ('the Act'). At the hearing, I was asked to make orders under subs 411(1) of the Act for the holding of meetings of AEN's members and creditors on 30 March 2006. 3 The application relates to two proposed schemes of arrangement, the first between AEN and the holders of all the ordinary shares issued in AEN ('AEN Shares' and 'Share Scheme'), and the second between AEN and the holders of all options to subscribe for shares in AEN ('AEN Options' and 'Option Scheme'). 4 The objective of the two Schemes is that the AEN shares be transferred to Ergon Energy Pty Ltd ('Ergon') and that the AEN Options be cancelled, with the result that AEN will be a wholly owned subsidiary of Ergon, with no AEN Options outstanding. 5 Ergon appears through its solicitor to consent to the making of the orders.

AEN and Ergon 6 According to an affidavit of Andrew Bonwick, Managing Director and Chief Executive of AEN, sworn 20 February 2006, AEN was incorporated in Victoria in 1997 (although there are other documents in evidence which may suggest a different date, nothing turns on this). AEN is a listed public company and is involved in the retail sale of electricity to the small to medium sized business market. 7 There are 50,759,100 AEN Shares, all fully paid, and 1,885,600 AEN Options. The AEN Options are held by directors and employees of AEN. 8 Ergon is a Queensland Government owned electricity company. On 23 December 2005, the Board of Directors of AEN announced that it had entered into an agreement with Ergon for acquisition by Ergon of the AEN Shares and the cancellation of the AEN Options.

Commitment to implement the Share Scheme and the Option Scheme 9 There is in evidence an 'Amended and Restated Implementation Deed' dated 7 February 2006 between AEN and Ergon, demonstrating that they have committed themselves to implementation of the proposal, subject, of course, to the Court's approval.

Are the holders of the AEN options to be treated as contingent creditors or contingent members? 10 Subject to one exception, the consistent course of first instance authority has been to treat option holders as contingent creditors rather than as contingent members, for the purposes of s 411: see Re Sonic Healthcare Ltd (2002) 43 ACSR 353 (Conti J); Re Cranswick Premium Wines Ltd (2002) 44 ACSR 113 (Conti J); Re McConnell Dowell Corporation Ltd [2003] FCA 646 (Gyles J); Re Challenger International Ltd [2003] FCA 553 (Gyles J); Re Challenger Group Holdings Ltd (2003) 48 ACSR 498 (Conti J); Re Kaz Group Ltd [2004] FCA 738 (Gyles J); Re MIA Group Ltd (2004) 50 ACSR 29 (Barrett J). The exception is Re Niagara Mining Ltd (2002) 132 FCR 266 (Lee J). Senior counsel for the plaintiff in the present matter raised the Niagara case with Gyles J in Re Kaz Group Ltd and with Barrett J in Re MIA Group Ltd. While referring to reservations which have been expressed on the issue, their Honours decided to follow the mainstream of authority. I will do likewise, also with some reservations.

Verification of facts stated in the Scheme Booklet 11 I have read the Scheme Booklet which will be distributed to the holders of the AEN Shares and of the AEN Options. There is evidence verifying the factual information contained in it: see the affidavit of Keith Graham Hilless sworn 20 February 2006 and paras 24-38 of Mr Bonwick's affidavit, as to the work of AEN's 'due diligence committee'.

Expert opinion 12 I have read the two affidavits of Steven Sorbello sworn 21 February 2006. Mr Sorbello is director of BDO Kendalls Securities Ltd, 'a company wholly owned by BDO Kendalls Chartered Accountants, specialising in valuations and other corporate finance projects', and his report dated 20 February 2006 entitled 'Independent Expert's Report and Financial Services Guide'. Mr Sorbello's report is, in summary, to the effect that the Share Scheme is fair and reasonable to the shareholders and that the Option Scheme is fair and reasonable to the option holders. Mr Sorbello expresses the opinion that, for these reasons, the Schemes are in the best interests of the shareholders and the option holders respectively. Of course, the report sets out Mr Sorbello's reasons for his conclusions, and, in particular, for his view that the consideration of $1.95 offered by Ergon for each of the AEN Shares falls within the range of his estimate of its current fair market value. He gives a 'Low Valuation' of $1.87 per share and a High Valuation of $2.01 per share. 13 There is also affidavit evidence of Dixon Hearder, a partner of AEN's solicitors, Corrs Chambers Westgarth, to the effect that a tax opinion in an appendix to the Scheme Booklet was prepared by him and that he holds the opinions expressed in that report.

Chairing of meetings 14 Alan Castleman, a director and the current Chairman of the Board of Directors of AEN, has consented to chair the two meetings, and Robert Rollinson, a director of AEN, is willing to chair them if Mr Castleman is unable to do so. Both have disclosed their interests - Mr Castleman as a holder of 505,618 AEN Shares, and Mr Rollinson as the holder of 275,000 AEN Options. Affidavit evidence of the kind described is required by r 3.2 of the Federal Court (Corporations) Rules 2000.

ASIC 15 I have before me two letters dated 20 February 2006 and one letter dated 21 February 2006 from Australian Securities & Investments Commission ('ASIC'). By the first two letters, ASIC, under subreg 5.1.01(1) of the Corporations Regulations, allows AEN to send out an explanatory statement under subs 412(1) of the Act as proposed, notwithstanding certain specified non-compliances with Schedule 8 of those Regulations. 16 By the letter dated 21 February 2006, ASIC confirms its policy in relation to statements under subpara 411(17)(b) of the Act. That provision is to the effect that the Court must not approve a compromise or arrangement under s 411 unless there is produced to the Court a statement in writing by ASIC to the effect that ASIC has no objection to the compromise or arrangement. ASIC's policy, however, referred to in its letter, is that it does not provide such a statement until the second, or confirmation, court hearing, because it is not until then that ASIC is in a position to advise the Court properly. ASIC's policy is consistent with the statutory provision itself which addresses the stage at which a court is called upon to consider approval of a compromise or arrangement. ASIC's letter indicated, however, that it did not intend to appear at the first court hearing to make submissions, or to intervene, to oppose the proposed schemes of arrangement.

ASX 17 There is in evidence a letter dated 1 February 2006 from the Australian Stock Exchange ('ASX') by which ASX gives a waiver, on conditions stated in the letter, from Listing Rule 6.23.2, to the extent necessary to permit AEN to cancel the AEN Options for consideration and without shareholder approval.

Conclusion 18 In my opinion, the two schemes should be allowed to go forward to members and option holders respectively for consideration at the proposed meetings. Accordingly, there will be orders as sought.

I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate: Dated: 2 March 2006 Counsel for the Plaintiff: Mr M B Oakes SC

Solicitors for the Plaintiff: Corrs Chambers Westgarth

Date of Hearing: 23 February 2006

Date of Judgment: 23 February 2006

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