Quintis Limited, in the matter of Quintis Limited (subject to deed of... [2018] FCA 1400 | Case summary

Federal Court of Australia|2018-09-04|Before: Mr J, Yates J

Pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Act): (a) the plaintiffs convene a meeting of the holders of the 8.75% Senior Secured Notes issued pursuant to the terms of the Indenture by the first plaintiff on or around 27 July 2016 (Scheme Creditors) for the purpose of considering and, if thought fit, agreeing (with or without modification) to the scheme of arrangement proposed to be made between the plaintiffs and the Scheme Creditors (Scheme) being a scheme substantially in the form of that contained Schedule 2 to the explanatory statement (Explanatory Statement) which forms part of Exhibit SRF-1 as amended by Exhibit A and Exhibit B in the proceeding (Scheme Meeting). (b) the Scheme Meeting be held on Thursday 27 September 2018 at 10am at the office of the solicitors for the plaintiffs, Allens, Level 28, 126 Phillip Street, Sydney NSW 2000; (c) Shaun Robert Fraser, or failing him, Jason Preston, be appointed chairman of the Scheme Meeting; (d) the chairman appointed to the Scheme Meeting have the power to adjourn the Scheme Meeting in his absolute discretion for such time as to such date as he considers appropriate; (e) the chairman may, at his absolute discretion, determine that only proxy forms and proofs of debt in relation to the Scheme Meeting received by the chairman by no later than 5pm on 25 September 2018, are valid; (f) the chairman may rely on information provided to the plaintiffs as at 5pm on 20 September 2018 by the Bank of New York Mellon in its capacity as Indenture Trustee for the purposes of admitting or rejecting a proof of debt for the purpose of voting; (g) the resolution to approve the Scheme at the Scheme Meeting be decided by way of poll; (h) the following documents, which together form the Scheme Meeting Materials, are approved for distribution in the manner provided for in Order 2 of these orders: (i) the Explanatory Statement and notice of meeting in relation to the Scheme substantially in the form of Exhibit SRF-1 as amended by Exhibit A and Exhibit B in the proceeding; (ii) a voting proof of debt form and Proxy Form substantially in the form of the pro forma contained in Schedule 10 to the Explanatory Statement, which forms part of Exhibit SRF-1 in the proceeding (Voting and Proxy Form).

Introduction 1 The plaintiffs seek orders for the convening of a meeting of secured creditors - the holders of 8.75% Senior Secured Notes issued pursuant to an Indenture dated 27 July 2016 (the scheme creditors) - to consider, and if thought fit agree to (with or without amendment), a scheme of arrangement (the scheme).

Background 2 The Quintis Group is the owner, manager and grower of Indian Sandalwood plantations. As at 30 June 2018, the group owned or managed sustainable plantations of 12,702 ha in northern Australia that contain an estimated 5.6 million Indian Sandalwood trees. The first plaintiff, Quintis Group Limited (subject to deed of company arrangement) (receivers and managers appointed) (QL) is the holding company of the group. It is listed on the Australian Securities Exchange but its shares were suspended from trading on 17 May 2017. QL and seven of its subsidiaries are the scheme companies. One of the subsidiaries is Sandalwood Properties Ltd (subject to deed of company arrangement) (receivers and managers appointed) (SPL). 3 The Quintis Group offers three products which involve its Indian Sandalwood plantations: (a) Managed Investment Schemes. There are 16 managed investment schemes. SPL is the responsible entity. (b) A Sophisticated Investment Offer (SIO). The Quintis Group acquires and prepares land suitable for Indian Sandalwood cultivation and leases that land to SIO investors. The investors engage QL to manage the plantations. (c) The Beyond Carbon (BC) product. This product is offered to global institutional investors. The Quintis Group acquires and prepares land suitable for Indian Sandalwood cultivation and typically sells the land to BC investors. QL is retained as the investment manager to cultivate, maintain and eventually harvest the trees. 4 The Quintis Group has the following debt structure: (a) Senior Secured Notes. As I have noted, these notes were issued pursuant to the Indenture and, for convenience, are referred to as the Original Notes. The Original Notes have a face value of USD250 million and are currently due and payable. The interest accrued on the notes as at 31 August 2018 is USD36,310,221. (b) Tranche 1 Super Senior Notes. These notes were issued pursuant to a Note Agreement and Guaranty dated 13 November 2017. They have a face value of USD15 million and are currently due and payable. The interest accrued on the notes as at 31 August 2018 is USD1,723,972. (c) Tranche 2 Super Senior Notes. These notes were issued pursuant to a Second Note Agreement and Guaranty dated 29 May 2018. They also have a face value of USD15 million and are due for repayment on 30 September 2018. The interest accrued on the notes as at 31 August 2018 is USD552,320. 5 QL is the borrower of the debt. QL and the other scheme companies, together with two other subsidiary companies referred to as the Santalis Entities, have provided security for repayment of the debt. 6 Following a period of financial distress and unsuccessful restructuring efforts in 2017, the scheme companies entered into external voluntary administration on 20 January 2018. Richard Tucker, Scott Langdon and John Bumbak were appointed as administrators (the Administrators). On 23 January 2018, Jason Preston, Robert Conry Brauer and Shaun Robert Fraser were appointed as joint and several receivers and managers of the scheme companies (the Receivers). 7 The Receivers have explored various alternatives for the future of the Quintis Group, including a potential sale of the group and/or its assets. They have also engaged in discussions with key secured creditors about a recapitalisation. 8 As to those discussions, the Receivers are now able to put forward a recapitalisation plan to be implemented by a deed of company arrangement (DOCA) and the creditors' scheme of arrangement the subject of the present application. 9 If the proposed scheme is approved by the requisite majorities and the Court: (a) The Quintis Group will be privately owned. (b) An entity owned by the holders of the Original Notes will acquire ownership of QL's subsidiaries and assume responsibility for the secured debt, with QL being released from its secured debt obligations. (c) The existing level of secured debt will be reduced and new secured debt funding will be raised from the scheme creditors, providing a substantial injection of new capital for the Quintis Group which will enable the scheme companies to exit external administration and permit the group to carry on its business on a going concern basis. 10 At meetings convened pursuant to s 439A of the Corporations Act 2001 (Cth) (the Act) held on 8 June 2018, it was resolved that each of the scheme companies execute a DOCA under which: (a) unsecured creditor claims (subject to conditions precedent) are transferred to a creditors' trust fund from which distributions will be made from a distribution pool of AUD2.5 million made available by the scheme creditors upon completion; and (b) the funds will be distributed from the creditors' trust to unsecured creditors based on classes/pools of unsecured claims, with employee creditors retaining their statutory priority. 11 The Administrators have been appointed as Deed Administrators. 12 At completion of the DOCA (which will occur when the Receivers certify that the scheme is ready to be implemented in accordance with its terms), the funds for the creditors' trust will be paid and distributed. After this occurs, the DOCA will: (a) effectuate and terminate other than in respect of QL, with claims (other than excluded claims) replaced by a right to distribution from the creditors' trust; and (b) in respect of QL, remain in place while the Deed Administrators seek to realise value from the listed shell for the benefit of unsecured creditors. 13 The DOCA will terminate in respect of QL on the later of: (a) 12 months from the DOCA completion date (or such earlier date notified by the Receivers or the secured creditors to the Deed Administrators); or (b) the Deed Administrators having formed the view either that the DOCA is fully effectuated in respect of QL and that the realisation of its remaining assets has been completed, or that, as a commercial matter, the DOCA should not be pursued. 14 It is anticipated that the upshot of the DOCA for the unsecured creditors will be that employees will receive a dividend of 100 cents in the dollar, that trade creditors will receive 14.4 to 21.8 cents in the dollar (compared to nil in a liquidation) and that other creditors will receive 0.6 to 1.0 cents in the dollar (compared to nil in a liquidation).

The Scheme 15 The purpose of the scheme is set out in clause 2 thereof. In broad terms, the following outcomes are to be achieved: (a) The Original Notes plus accrued interest will be replaced with Second Lien Notes with a face value of USD185 million. This is a reduction in the amount currently owing to the scheme creditors. (b) QL will be released from its secured debt obligations and the security it has granted over its assets. It will transfer its assets and the shares held in its subsidiaries to a new company, Quintis (Australia) Pty Limited (NewCo). (c) The secured debt formerly held by QL will be assumed by NewCo. (d) NewCo will raise new funds by issuing First Lien Notes in an amount of at least USD141 million to the scheme creditors, exclusive of USD10 million in respect of the Original Notes which will be "rolled" into USD10 million of First Lien Notes. (e) NewCo will be a wholly-owned subsidiary of another new company, Quintis Holdco Pty Limited (Holdco), which will in turn be owned by those scheme creditors who enter into a Shareholders Agreement. (f) The new funding will be used in part to repay the USD30 million of interim funding raised through the Tranche 1 Super Senior Notes and the Tranche 2 Super Senior Notes. (g) The balance of the new funding will be applied to recapitalise the Quintis Group's future working capital requirements. 16 The scheme is conditional on USD141 million being raised through the First Lien Notes (that is, in addition to the USD10 million that will be "rolled" in). 17 The scheme involves nine steps, which have been summarised in the following table provided in the plaintiffs' submissions: 18 The scheme is subject to a number of conditions precedent, which are set out in clause 4.1 thereof. These include obtaining various regulatory approvals and obtaining subscriptions for the minimum amount required in respect of the First Lien Notes. The conditions precedent also require the execution of certain financing documents and a number of deeds poll. The conditions precedent cannot be waived. I have expressed my expectation that appropriate evidence of the fulfilment of the conditions precedent be provided at any second court hearing.

Receivers' recommendation 19 The Receivers have recommended that, absent a superior proposal, the scheme creditors vote in favour of the scheme. They are of the view that the scheme provides the scheme creditors with the best opportunity to realise the value of their investment in the Quintis Group.

The attitude of the main secured creditors 20 The main secured creditors of the Quintis Group are: (a) a group of funds advised or sub-advised by BlackRock Advisors, LLC or its affiliates which hold just under 75% of the secured debt; (b) a group of funds advised by BlueBay Asset Management LLP which hold approximately 13% of the secured debt; and (c) Tor Asiatic Credit Master Fund LP which holds approximately 11.2% of the secured debt. 21 These creditors together hold in excess of 99% of the Original Notes and have provided the additional funding under the Tranche 1 Superior Senior Notes and the Tranche 2 Superior Senior Notes. Although they have not entered into any binding arrangements to support the scheme or to provide the new funding contemplated, Mr Fraser holds the view that there are strong prospects that they will vote in favour of the scheme and agree to provide the requisite additional funding.

Expert opinion 22 KordaMentha has been retained to prepare an expert report in relation to the scheme. The opinions expressed in the report have been verified by Jennifer Nettleton. Ms Nettleton is an Executive Director of KordaMentha and is one of the signatories of the report. The other signatory is Scott Kershaw. Mr Kershaw is a partner in KordaMentha. 23 KordaMentha has expressed the opinion that the expected dividend that would be available to scheme creditors on a liquidation of the scheme companies would be 56.7 cents in the dollar. However, if the scheme is implemented, the scheme companies will be solvent and the implied value of the scheme creditors' interest will be 88.6 cents in the dollar.

Eligibility 24 In order to receive the First Lien Notes and/or the Second Lien Notes (both of which are governed by New York law) and/or shares in Holdco, a scheme creditor must provide the US Securities Representation by the Effective Date (each defined in the scheme). In substance, the US Securities Representation is a certification that the creditor is either a "qualified institutional buyer" or an institutional "accredited investor" under the Securities Act of 1933 (US) (the Securities Act), or that the transaction is an offshore transaction within the meaning of Regulation S under the Securities Act, or that the creditor is acquiring the First Lien Notes, the Second Lien Notes or shares in Holdco pursuant to another available exemption from the registration provided by Rule 144 under the Securities Act. If the US Securities Representation is not provided by the Effective Date, a secured creditor may be eligible, instead, to receive a cash payment equivalent to 30 cents in the dollar of the face value of the First Lien Notes and/or Second Lien Notes that it would otherwise have acquired under the scheme had the US Securities Representation been given.

Scheme Administrators 25 If the scheme is implemented, it is proposed that Ms Nettleton, Mr Tucker and Mr Langdon will be appointed as Scheme Administrators. Each has consented to her or his appointment. Ms Nettleton has deposed that she does not fall within the relationships listed in s 411(7)(a)-(f) of the Act. Each of Mr Tucker and Mr Langdon has deposed that he does not fall within the relationships listed in s 411(7)(a)-(e) of the Act. The Australian Securities and Investments Commission (ASIC) has directed that s 411(7)(f) of the Act does not apply to Mr Tucker and Mr Langdon. 26 The scheme provides that, following the second court hearing, the Scheme Administrators will seek an order (which has not been stayed or vacated) recognising and enforcing the scheme within the territorial jurisdiction of the United States of America from a United States bankruptcy court of competent jurisdiction under Chapter 15 of Title 11 of the United States Code. However, neither the implementation of the scheme nor its effectiveness is dependent on the outcome of this application: see clause 4.7(b) of the scheme. 27 The plaintiffs seek an order that Ms Nettleton and Messrs Tucker and Langdon each be authorised as a "foreign representative" of the plaintiffs for the purposes of making an application to the United States Bankruptcy Court for recognition of the scheme and ancillary relief under Chapter 15 of the United States Code, 11 U.S.C. ss 101-1532. I note that a similar order was made in Emeco Holdings Ltd, in the matter of Emeco Holdings Ltd NSD1899/2016 on 2 November 2016.

Change of control provisions 28 The Santalis Entities were acquired in 2015. They are not subject to external administration. On acquisition, QL agreed with the vendors that they (the vendors) would have certain earn-out rights. It was also agreed that, in the event of a change of control of one or more of the entities, they would be entitled to a payment equivalent to a specified portion of the consideration received by QL. It was further agreed that their consent would be required for the change of control. I accept the plaintiffs' submission that the existence of these provisions does not constitute a reason why the scheme meeting should not be convened. I also note that the monetary claims of the vendors have been replaced with a right to distribution from the creditors' trust established under the DOCA. It is not clear to me how, in those circumstances, any requirement for their consent to the change of control would have any practically effective operation. However, it is not necessary for me to reach a concluded view on that matter at the present time (if at all).

Chairperson of the scheme meeting 29 Mr Fraser has been nominated to act, and has consented to act, as chairperson of the scheme meeting. He has made an affidavit which has been filed in compliance with r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth). In the event that Mr Fraser is unable to act as chairperson, Mr Preston has been nominated to act, and has consented to act, in Mr Fraser's place. Mr Preston has also made an affidavit which has been filed in compliance with r 3.2.

Verification of the Explanatory Statement 30 Mr Fraser has made an affidavit which sets out the process that has been undertaken to verify the information in the explanatory statement required under s 412(1)(a) of the Act (the Explanatory Statement). Mr Fraser has deposed that, so far as he is aware, the Explanatory Statement contains all information material to a decision by a scheme creditor as to whether to vote in favour of the scheme. He has also deposed that, to the best of his knowledge and belief, nothing has come to his attention which has led him to believe that the Explanatory Statement contains information that is misleading or deceptive or likely to mislead or deceive in any material respect, or that there is any omission of relevant information. 31 Subject to the matter I have noted at [34] below, and subject further to any matter that might be raised at a second court hearing, I am satisfied that the Explanatory Statement is in accordance with the requirements of s 412(1)(a) of the Act and is in a form that is appropriate to be sent to the scheme creditors.

Dispatch of the Explanatory Statement 32 The three major scheme creditors have agreed to receive an electronic copy of the Explanatory Statement. As to the remaining scheme creditors, it is proposed that the Explanatory Statement be sent electronically to The Bank of New York Mellon (BNY), for dispatch to creditors through the Depositary Trust Company (DTC) system. I am satisfied that this course is appropriate. Clause 13.1 of the Amended and Restated Indenture dated 20 July 2017 in respect of the Original Notes (which amends, restates and replaces in its entirety the Indenture dated 27 July 2016) provides that notice to the holders of the Original Notes of events under the Amended and Restated Indenture can be given in accordance with "the applicable rules and processes" of DTC. Mr Fraser has deposed that, on his review of the Quintis Group's records, it was QL's practice, prior to its external administration, to provide information to BNY with a view to BNY sending the information to the note holders through DTC. I note, further, that the Quintis Group does not itself have a complete list of all note holders. I have expressed my expectation that appropriate evidence of the DTC system, and the dispatch of the Explanatory Statement in accordance with that system, be provided at any second court hearing.

ASIC 33 ASIC has confirmed that it has had 14 days' notice of the hearing of this application: see s 411(2)(a) of the Act. It has also confirmed that it has had a reasonable opportunity to examine the terms of the scheme: see s 411(2)(b) of the Act. 34 Further, ASIC has waived the requirements of para 8203(b) of Pt 2 of Sch 8 to the Corporations Regulations 2001 (Cth) on condition that the Explanatory Statement attaches a certified copy of QL's most recent financial statements lodged with ASIC in respect of the Quintis Group, together with a copy of every document required by law to be annexed to those statements.

Disposition 35 I am satisfied that each scheme company is a Part 5.1 body and that the proposed scheme is an arrangement within the meaning of s 411(1) of the Act. I am satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the requisite majorities, it is likely to be approved at a second court hearing. I am satisfied that all other statutory pre-conditions for convening the scheme meeting have been satisfied. 36 Orders for convening the scheme meeting and approving the Explanatory Statement, as well as providing for certain machinery matters (as sought by the plaintiffs), should be made. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

SCHEDULE OF PARTIES NSD 1533 of 2018 Plaintiffs First plaintiff: QUINTIS LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 092 200 854) Second plaintiff: SANDALWOOD PROPERTIES LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 093 330 977) Third plaintiff: QUINTIS FORESTRY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 080 139 966) Fourth plaintiff: QUINTIS LEASING PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 080 978 721) Fifth plaintiff: ARWON FINANCE PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 072 486 643) Sixth plaintiff: MT ROMANCE HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 115 659 606) Seventh plaintiff: MT ROMANCE AUSTRALIA PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 060 122 698) Eighth plaintiff: AUSTRALIAN SANDALWOOD OIL CO. PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) (ACN 088 257 498)

Quintis Limited, in the matter of Quintis Limited (subject to deed of company arrangement) (receivers and managers appointed) [2018] FCA 1400

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