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[2019] FCA 482
Federal Court of Australia
2019-04-05
Mr J, Beach J
Original judgment source is linked above.
Solicitor for the Plaintiff: King & Wood Mallesons
Counsel for the Defendant: Mr J A Redwood and Mr B Renfrey
Solicitor for the Defendant: Johnson Winter & Slattery
ORDERS NSD 469 of 2015 IN THE MATTER OF ANGAS SECURITIES LIMITED (ACN 000 154 441) BETWEEN: THE TRUST COMPANY (NOMINEES) LIMITED Plaintiff
AND: ANGAS SECURITIES LIMITED Defendant
JUDGE: BEACH J DATE OF ORDER: 5 April 2019
OTHER MATTERS: A. The Court notes that the Australian Securities and Investments Commission (ASIC) was provided with at least 14 days' notice of the hearing of this application. B. The Court is satisfied that ASIC has had a reasonable opportunity to: (a) examine the terms of the proposed scheme of arrangement to which the application relates and a draft explanatory statement relating to that arrangement; and (b) to make submissions to the Court in relation to the proposed scheme of arrangement and the draft explanatory statement. C. The Court notes the contents of ASIC's letter dated 5 April 2019 to the Directors of the Defendant (Angas). D. The Court notes that Angas intends to rely on an exemption from the registration requirements of the US Securities Act of 1933 provided by Section 3(a)(10) thereof in connection with the implementation of the Scheme (if approved). THE COURT ORDERS THAT:
[The order entered is available on the Commonwealth Courts Portal, which attaches the Scheme] ANNEXURE B Advertisement
[The order entered is available on the Commonwealth Courts Portal, which attaches the Advertisement]
BEACH J: 1 Angas Securities Limited (Angas) has made an application in the principal proceedings brought against it by the plaintiff (the Trustee) for orders: (a) pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) convening a meeting of the holders of debentures issued by Angas (debenture holders) to consider a proposed scheme of arrangement; and (b) approving the issue of the explanatory statement required by s 412(1)(a) to accompany the notice convening the scheme meeting. 2 The principal proceedings were brought by the Trustee against Angas on 29 April 2015 essentially seeking the appointment of a receiver to Angas. The Trustee and Angas are parties to a document titled "Trust Deed for First Ranking Debenture Stock" dated 19 July 2000 (as amended and supplemented from time to time) (the Trust Deed). The Trust Deed was entered into pursuant to s 283AA(1) of the Act in respect of debentures issued by Angas. Further, Angas granted a first ranking floating charge dated 19 July 2000 over its undertaking and all its real and personal property in favour of the Trustee to secure the payment of moneys owing by Angas to debenture holders. In essence the Trustee, holding the position of trustee in respect of debentures issued by Angas under the Trust Deed, launched the principal proceedings seeking relief under ss 283HA, 283HB and 1337B of the Act and s 63 of the Trustee Act 1925 (NSW) by way of declarations that Angas had breached the Trust Deed, that the Trustee was entitled to enforce the said floating charge, that a receiver should be appointed and consequential orders. 3 Pursuant partly to agreements reached between the Trustee and Angas from time to time sanctioned by me, partly the resolution by me of some contested issues and partly due to various approvals given by debenture holders at various meetings convened under my orders and chaired by the Honourable Bruce Debelle AO QC, there has been a postponement of the resolution of the Trustee's principal proceedings. 4 As part of that postponement, since August 2015 Angas has been undertaking the orderly realisation of its assets to repay $219.65 million of the fixed interest debentures outstanding through a run-off ordered by me under s 283HB of the Act (run off). The run off has been varied and extended three times; see generally Trust Company (Nominees) Limited, in the matter of Angas Securities Limited v Angas Securities Limited (2015) 107 ACSR 464; [2015] FCA 772, Trust Company (Nominees) Limited, in the matter of Angas Securities Limited v Angas Securities Limited (No 2) [2015] FCA 861 and Trust Company (Nominees) Limited, in the matter of Angas Securities Limited v Angas Securities Limited (No 3) [2016] FCA 895. 5 The run off is due to be completed by 30 June 2019 pursuant to orders I made on 1 September 2017. The outstanding debt due to the debenture holders is $94,422,260 as at 2 April 2019 (debenture debt). 6 But Angas will not be able to complete the run off by 30 June 2019 and will not be able to repay the debenture debt in full, even if the run off is extended. It seems that there will be a substantial shortfall on the debenture debt when all of Angas' remaining assets are realised. Indeed, Angas' financial report and accounts for the half-year ended 31 December 2018, reviewed but not audited as such by Deloitte Touche Tohmatsu, the independent auditor of Angas, discloses a net asset deficiency of approximately $42.1 million and provision for impairment on Angas' remaining outstanding loans of approximately $55.7 million. 7 In the circumstances, Angas proposes a scheme of arrangement with its debenture holders (the Scheme). The proposed Scheme does not involve any change to the terms and conditions of arrangements with other creditors of Angas or employees of Angas. The essence of the proposed Scheme is a debt for equity swap whereby the debentures will be cancelled and the debenture holders will release Angas and others from all claims in consideration for Angas issuing to the former debenture holders new shares in Angas representing 70% of Angas' share capital and issuing to the former debenture holders 100% of the units in a new managed investment scheme called the Angas Asset Management Fund (AAMF). AAMF will be subject to the regulatory requirements of Chapter 5C of the Act, including the mandatory requirements for its constitution specified in s 601GA of the Act. 8 The purpose of the proposed Scheme is to enable Angas to continue as a going concern and to avoid any deleterious impact on the value of its assets that is likely in the event of an external administration. To that end, the proposed Scheme seeks to structurally separate the two businesses of Angas, being the negatively affected mortgage debenture business and the profitable funds-management business with funds under management of approximately $70 million. The funds management business of Angas operates independently of the mortgage debenture business. It is perceived that this separation may assist in the growth of the funds-management business in which debenture holders will have a 70% ownership interest. 9 If the Scheme is implemented: (a) the debenture debt will be cancelled and Angas will have minimal "debt" as at the scheme implementation date comprising $1 million in respect of redeemable preference shares series 2; I won't dwell for the moment on the debate concerning whether redeemable preference shares should be truly treated as debt rather than equity; (b) the Trust Deed applicable to the debentures and the underlying assets will terminate and the Trustee will retire; (c) Angas' remaining assets available to repay the debenture debt, save for some limited exceptions, will be transferred to the AAMF to hold that property on a statutory trust for the benefit of unit holders under s 601FC(2); the assets that will not transfer are Angas' rights to manage and receive management fees from Angas' two existing managed investment schemes, known as Angas Prime Income Fund (Angas Prime) and Angas Contributory Mortgage Fund (Angas Direct), plus Angas' interest in a business known as Angas Financial Services; (d) the debenture holders will be issued with two separate equity instruments: (i) 100% of the units in the AAMF; and (ii) 70% of the issued capital of Angas, in proportion with their rights to the outstanding debenture debt and in accordance with the formula set out in the scheme booklet; and (e) claims against Angas, its current and former directors and the Trustee will be released by debenture holders. 10 Angas will act as responsible entity of the AAMF with no management fees payable. Following the proposed Scheme, the principal activity of the AAMF will be to complete the run off of the debenture business comprised of a mortgage loan book. In exercising its powers and duties as responsible entity, Angas and its officers will have the duties set out in ss 601FC and 601FD. I note that the importance of those duties has been recently emphasised (Australian Securities and Investments Commission v Lewski (2018) 362 ALR 286 at [70] to [78]). Moreover, the trust relationship created by s 601FC(2) involves "a layer of fiduciary protection for scheme members in addition to the express duties and protections otherwise created by the Corporations Act and the minimum statutory requirements of a scheme constitution" (Wellington Capital Limited v Australian Securities and Investments Commission (2014) 254 CLR 288 at [14] per French CJ, Crennan, Kiefel and Bell JJ). 11 In addition to the Scheme, the relevant transaction documents to implement the Scheme include the following instruments: (a) A Deed Poll - Debenture Holder Releases. This is a deed which is proposed to be executed by the debenture holders' agent on behalf of all debenture holders granting releases in favour of each of the released entities being Angas, the current and former directors of Angas, and the Trustee. (b) A Deed Poll - Settlement of Legacy Assets. This is a deed which is proposed to be executed by Angas in its own capacity and as responsible entity of AAMF in favour of the unit holders of the AAMF to effect the declaration of trust over the legacy assets being essentially the assets of Angas available to secure repayment of debenture holders as at the date the Scheme comes into effect, and the settlement of the legacy assets in AAMF. (c) A Deed Poll - Enforcement Rights by Trustee. This is a deed which is proposed to be executed by Angas in its own capacity and as responsible entity of the AAMF in favour of the Trustee. It provides that Angas will observe and perform its obligations under the Scheme and under the Deed Poll - Settlement of Legacy Assets. (d) A Deed of Release. This is a deed which is proposed to be executed by Angas and the Trustee, pursuant to which they will each grant the other mutual releases in respect of the claims (as defined), conditional on the Scheme becoming effective. 12 The board of directors of Angas believe that the proposed Scheme will result in a better outcome for the debenture holders than the alternative of Angas being placed into external administration. This is supported by the views of the independent expert. The independent expert's report of Mr Jeffrey Hall of Sumner Hall Associates Pty Ltd concludes that if the proposed Scheme is approved and implemented, the debenture holders will hold shares in Angas with a value in the range of $3.8 to 5.9 million (representing 70% of $5.4 to 8.4 million) and 100% of the units in AAMF with net assets in the range of $39.9 to 46.3 million. 13 Of course, I am not required to be satisfied that no better scheme could have been proposed or that the Scheme proposed is the best of the available alternatives. And nor is my role to consider whether what is proposed, considered against the viable alternatives, is fair. It is a matter for the debenture holders to make such an assessment based upon the necessary disclosure of all material information in the explanatory statement constituted by the scheme booklet. 14 The proposed Scheme is also subject to various conditions precedent that are set out in the scheme booklet, including, inter alia, the existing Australian Financial Services Licence (AFSL) of Angas being amended to enable Angas to act as the responsible entity of AAMF. 15 In my view the proposed Scheme should be put to debenture holders for their consideration and vote. I am satisfied as to the adequacy of the disclosure in the scheme booklet of relevant matters, subject to some matters that I will later elaborate on. Debenture holders should have the opportunity to decide whether they prefer the Scheme to external administration. 16 Further, the Trustee does not oppose the proposed Scheme being presented to debenture holders for their consideration and vote. Further, the Trustee's comments on the scheme booklet have largely been adopted. I will return to this later. 17 Further, ASIC has also been given a sufficient opportunity to consider the proposed Scheme and the scheme booklet and has identified no substantive concerns with the proposed Scheme, the disclosure in the scheme booklet or the content of the independent expert's report. 18 Further and generally, it also appears to me that appropriate alternatives to the proposed Scheme have been explored, namely: (a) the run off, which Angas and the Trustee consider is no longer the most appropriate structure for the realisation of Angas' remaining assets; and (b) external administration, which is considered in the scheme booklet and which Mr Hall considers to be likely to result in a worse financial outcome for debenture holders; his opinion is that debenture holders are likely to receive substantially more if the proposed Scheme is approved than they would in a receivership. 19 It would seem on the face of the material provided to me that: (a) the proposed Scheme is estimated to provide a better financial outcome to debenture holders than the alternative outcome, which is likely to be external administration; (b) the debenture holders will gain the ability to collectively control Angas (and AAMF) through their acquisition under the proposed Scheme of shares in Angas, with the effect that the debenture holders will hold 70% of Angas' shares on issue; (c) the debenture holders may benefit from any increase in the profitability of Angas, in that they will be entitled to participate in any dividends that may be declared and paid from time to time and any increase in the value of Angas through its growth; and (d) the proposed Scheme will likely entail lower costs including because there will be no Trustee and Angas will not charge a management fee for operating AAMF, and a more flexible process of realisation than continuation of the run-off or external administration. 20 In summary therefore, in my view there is no issue arising from the proposed Scheme which would unquestionably lead me to not approve the Scheme at the second court hearing (Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [47]. Put another way, the Scheme is not of such a nature and cast in such terms that if it receives the support of the statutory majorities at the meeting, nevertheless I would not be likely to approve it at the second court hearing.
Satisfaction of formal requirements 21 In relation to satisfaction of the requirements for convening a scheme meeting I would note the following. 22 First, Angas' status as a Pt 5.1 body is uncontroversial. 23 Second, the proposed Scheme is properly described as an "arrangement" or "compromise" within the ambit of s 411, on the basis that the proposed Scheme: (a) would otherwise be a legal arrangement; and (b) will, inter alia, involve the termination of the debenture holders' rights as creditors of Angas and the creation of new rights in the form of equity (shares and units) held by the former debenture holders. 24 Third, the proposed Scheme falls within the powers of Angas and it is the opinion of Angas' board of directors that: (a) the proposed Scheme is the best structure for completing the process of realising the remaining legacy assets; (b) Angas' management remain best placed to complete this process because of their in-depth knowledge of the legacy assets and how they should be best realised for maximum value; and (c) Angas' management is also best placed to continue growing Angas Prime and Angas Direct. 25 Fourth, under the proposed Scheme no debenture holder will have their rights or claims as a debenture holder terminated or released without that debenture holder receiving an appropriate share of the consideration in the form of: (a) 100% of the Units in the AAMF; and (b) 70% of the issued capital of Angas, in proportion with their rights to the outstanding debenture debt. 26 Fifth, ASIC has had a reasonable time to examine the terms of the proposed Scheme and Angas' draft explanatory statement, and make submissions to the Court on those matters. The terms of the proposed Scheme were provided to ASIC on 14 March 2019 and ASIC consequently received at least 14 days' (in the event, 22 days') prior notice of the proposed hearing date, thereby satisfying s 411(2). I will discuss later ASIC's letter to the board of directors of Angas dated 5 April 2019 and its two letters dated 4 and 5 April 2019 to Angas' solicitors. 27 Sixth, all other procedural requirements have been met, including the requirements under the Federal Court (Corporations) Rules 2000 (Cth).
Adequacy of disclosure 28 Further, as to the adequacy of disclosure in the scheme booklet I would note the following. 29 First, there appears to be adequate disclosure in Angas' explanatory statement contained in the scheme booklet such as would enable the debenture holders to properly exercise their judgment on the proposed Scheme. In particular, the scheme booklet: (a) appears to present a fair and balanced view of the proposed Scheme, including of its advantages and disadvantages and any alternatives; (b) complies with ss 411(3) and 412(1), in that it: (i) explains the effect of the proposed arrangement both in terms of its legal operation and its economic risks and benefits; (ii) states the material interests of the directors of Angas; (iii) explains the effect on the directors' interests of the proposed Scheme; (iv) sets out the information that is prescribed by reg 5.1.01 of the Corporations Regulations 2001 (Cth) and Pt 2 Sch 8 of the Regulations, including the expected dividend that would be available to the debenture holders if Angas were wound up within six months of the application and the expected dividend that would be paid to debenture holders if the proposed Scheme were put into effect; and (v) appears to set out any other information that is material to the making of a decision by a debenture holder in relation to the proposed Scheme. 30 Second, the Trustee has considered the scheme booklet and provided comments that have for the most part been accommodated. ASIC has also had sufficient opportunity to consider the scheme booklet and raised no substantive disclosure concerns. As I say, I will discuss its various letters of 4 and 5 April 2019 later dealing with some other matters that are not directly related to disclosure concerns. Further, given that ASIC has raised no substantial concerns and does not oppose the application for convening the meeting, I have proceeded on the basis that it is likely that ASIC in due course will provide a statement in the form contemplated by s 411(17)(b). 31 Third, I raised with Angas the point that although the scheme booklet contained a clear discussion of the solvency and capitalisation of the AAMF (see section 4.5(d)), yet the discussion was a little unclear concerning the solvency and capitalisation of Angas itself if the Scheme were to be implemented (see section 7). After all, debenture holders were taking 70% of the shares in Angas and Angas was also to perform the role of the responsible entity of AAMF. Accordingly, information concerning the solvency and capitalisation of Angas after Scheme commencement could have been clearer, particularly given that its present position as disclosed in the 31 December 2018 half-yearly accounts and financial report to be included in the scheme booklet was less than rosy (i.e. negative net assets and accordingly negative equity of $42.1 million and a loss for the half year of $15.8 million). Now the report of Mr Hall set out such detail (see for example sections 8.3 and 9.2 of his report). But I did raise with Angas whether section 7 of the scheme booklet could be further improved in this respect. The order for approval of the explanatory statement made by me permits the flexibility to improve the drafting, although I have not mandated a specific change. 32 Fourth, a condition precedent to the Scheme and to be satisfied before the second court hearing is that the shareholders of Angas resolve at an extra-ordinary general meeting to make changes to the share capital structure of Angas itself. I raised with Angas whether the outcome of the shareholders' meeting would be known before the scheme meeting. Desirably it should be so that the debenture holders know when they vote what the position is. But I was told that the shareholders' meeting would be some days after the scheme meeting. This is not fully consistent with section 8.2(f) of the scheme booklet which will have to be amended. The situation is also not that desirable since usually all substantial commercial conditions precedent should be ticked off before the scheme meeting, leaving only legal and regulatory conditions precedent to be ticked off after the scheme meeting (assuming the requisite statutory majorities are achieved at the scheme meeting). But there it is. I do not propose to direct a reversal, particularly as time is now relatively short given the 30 June 2019 end date for the run off. 33 Generally, in my view the explanatory memorandum satisfies the requirements for approval in that the scheme booklet is in a form that is appropriate to be sent to the debenture holders.
Questions of dispatch 34 As far as dispatch of the scheme booklet is concerned, Angas proposes that it will be distributed electronically to those debenture holders who elect to receive it electronically, and by pre-paid post for those who have not so elected. Further, Angas proposes various other appropriate steps to ensure debenture holders are provided with sufficient notice of the scheme meeting. In my view the various modes of communication and dispatch are adequate. 35 Further, Angas has received external legal advice in relation to restrictions upon the distribution of the scheme booklet in certain foreign jurisdictions where the debenture holders have registered addresses. In essence, the scheme booklet can be distributed to the debenture holder in the United States by relying on the conventional s 3(a)(10) exemption under the Securities Act of 1933 (US) and to the debenture holder in New Zealand provided certain disclosures are made in the scheme booklet and that debenture holder certifies it is a wholesale investor. The scheme booklet contains the necessary disclosure as to Angas' reliance on the s 3(a)(10) exemption so as to invoke one of the necessary conditions for invocation of the exemption (see Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [118] and [119]); I have noted such intended reliance in the orders that I have made. 36 But in light of legal advice obtained by Angas, the position with respect to debenture holders with registered addresses in France, Germany or the United Kingdom is that it would be unlawful for them to receive the scheme booklet. This affects only six debenture holders with registered addresses located in the United Kingdom, France and Germany in an aggregate amount of approximately $1.2 million or just over 1% of the debenture debt. Angas does, however, propose to make an announcement regarding the proposed Scheme and scheme meeting on its website. 37 I raised with Angas whether a letter could be sent to these debenture holders merely telling them to look at the website for information concerning a proposed debenture holders' meeting. But I was advised that this may be problematic, although I was told that Angas would revisit its legal advice on this question. But let me be clear. If for some legal reason these debenture holders cannot be informed or fully informed, so be it. Given their very small holdings in absolute and relative terms and their own choice of foreign location, they can wear the disadvantage. Their disadvantage, which I have considered, is no impediment to my ordering the convening of the scheme meeting and nor would I see it as affecting the validity of the outcome of the scheme meeting.
Independent expert's report 38 Let me at this point say something about the independent expert's report. 39 Whilst there is no requirement for an independent expert's report for creditors' schemes of arrangement, Angas' view is that the proposed scheme is of a kind whereby debenture holders would be assisted by the views of an independent expert. 40 Mr Hall is independent of Angas and has prepared his report in accordance with the independence requirements of Regulatory Guide 112: Independence of Experts. 41 The independent expert has valued the assets of Angas, prior to the proposed Scheme and on the basis of a going concern, in the range of $59.8 to $69.8 million. The independent expert has concluded that the net realisable value of the assets of Angas would be reduced to the range of $37.8 to $46.3 million, excluding any amounts that might be received from potential claims against third parties, if there was to be an external administration. 42 The three main reasons for the difference in the net realisable value of Angas' assets in an external administration from a going concern appear to be the following: (a) first, the estimated net realisable values are based on an estimate of the range of prices that would be achieved under receivership conditions rather than fair market value; (b) second, liabilities are assumed to include the costs of a receivership; and (c) third, receivership would likely destroy any value in the funds management business. 43 Insofar as the first matter is concerned, two points may be noted. First, the high end of the estimate on the basis of a going concern assumes that all remaining legacy assets of AAMF are sold within three months of the Scheme being implemented, which is unlikely. The independent expert has therefore applied a discount factor which takes into account the likely longer length of time that will be required to sell the legacy assets. The low end of the valuation range is still appreciably higher than the estimated return on the same assets under a receivership. Second, as Mr Hall acknowledges, sales made under receivership conditions are not necessarily made at prices that are less than fair value. A receiver has a duty under s 420A to exercise reasonable care in selling property of a corporation to achieve the market price or if there is no market price, the best price reasonably obtainable. But the following observations of Mr Hall are apposite: These criteria are not the same as fair market value. Fair market value assumes the existence of a willing but not anxious buyer at any time that a seller desires to sell. By contrast, market value is dependent on the specific set of supply and demand factors that exist at a particular time. Further, the alternative criterion of the best price that is reasonably obtainable having regard to the circumstances existing when the asset is sold allows for the possibility of a distressed sale. The outcome of a receivership sale will vary depending on the nature of each asset, the perceptions of the market regarding the degree to which the receiver is anxious to sell a particular asset, the time frame in which the receiver is seeking to achieve a sale and the competition for each asset in that particular time frame. The low end of Sumner Hall's valuation range reflects (for some assets, where appropriate) distressed sale conditions. The high end of the range reflects (where appropriate) the possibility that the receiver will achieve a more favourable outcome. 44 It is also generally recognised that receivership has a depressive effect on realisable asset values. It may also reasonably be supposed that that would be the case here given the loss of the existing management's extensive knowledge of some of the unique secured properties that would accompany any receivership. A newly appointed receiver is likely to need to spend considerable time and consequent expense to become familiar with those properties. 45 Further, the independent expert has valued Angas' mortgage loan book on the basis of his assessment of recently obtained independent property valuations. In conducting that assessment the independent expert has satisfied himself that the conclusions in each of the independent property valuation reports are appropriate and consistent with ASIC guidance for valuations in Regulatory Guide 69: Debentures and notes: Improving disclosure for retail investors. Mr Hall's estimate of the net realisable value of various securities would appear to be different to the book values as audited by Deloitte Touche Tohmatsu in accordance with the provisioning and impairments for Angas' loan book required by the standard AASB 138 Intangible assets. 46 Insofar as the second matter is concerned, the independent expert has proceeded on the assumption of additional costs of external administration in the range of $3 to 4 million over 1 to 2 years. This does not appear to be an unreasonable assumption. But at the same time, external administration is likely to result in some rationalisation of overhead costs; the independent expert has opined that $1.8 to 2.2 million in capital overhead costs would likely be eliminated in a receivership. 47 As to the third matter, the funds management business has been valued in the range of $9.0 to $12.6 million on the basis of an EBITDA multiple in the range of 6 to 7 times which has been applied to the estimated sustainable EBITDA figure to arrive at an appropriate enterprise value. The EBITDA multiple is supported by the multiples of two funds management companies recently acquired and the mean for the multiples of selected funds management companies trading on the sharemarket. The selected valuation methodology appears to be consistent with the valuation methodologies considered generally appropriate by ASIC's Regulatory Guide 111: Content of expert reports. 48 The independent expert notes that although revenue for the funds management business is independent from the run-off of the assets of the mortgage debenture business, the expenses of the two businesses are intertwined and that will largely remain so if the proposed Scheme is approved and implemented. The independent expert has determined an appropriate allocation between the two businesses for the purpose of assessing the historical performance of the funds management business alone. The basis for that allocation has been explained. 49 It seems to me that receivership would to say the least substantially diminish the value in the funds management business. 50 Further and on another matter which was discussed at the hearing, the independent expert has also valued the biodiversity credits owned by Angas at $20.1 million. Given what could be described as the unusual nature of this statutorily created and dare I say it innovative asset, apparently unique to NSW, the independent expert has set out his reasoning in support of this valuation in some detail. Biodiversity credits were created as part of the NSW Government's Biodiversity Banking and Offsets Scheme that had been created following passage of the Threatened Species Conservation Act 1995 (NSW) (1995 Act). Pursuant to that scheme, property developers whose plans involved the destruction of native flora and fauna in environmentally sensitive areas could satisfy the relevant development approval conditions by purchasing biodiversity offset credits from a land owner elsewhere whereby that land owner undertook for the same type and quantity of native flora and fauna to be preserved in perpetuity at that other location. The Office of Environment and Heritage (OEH) oversees the Biodiversity Banking and Offsets Scheme and its 2016 replacement being the Biodiversity Offsets Scheme established pursuant to the Biodiversity Conservation Act 2016 (NSW). Land owners seeking to offer biodiversity credits for sale to property developers or to any other potential purchaser must have the biodiversity credits accredited by the OEH and listed on a register maintained by the OEH. Beyond the accreditation process, the biodiversity credits register serves as a trading place for potential buyers and sellers of biodiversity credits including Angas. The existence and ownership of biodiversity credits is recognised by the OEH and published in the BioBanking Public Registers on the OEH website. Angas is party to five BioBanking agreements with the OEH that were made under the 1995 Act; apparently each BioBanking agreement specifies the number and class of credits that may be created from what is known as a BioBank site. The independent expert is satisfied that the value of $20.1 million attributed to the biodiversity credits owned by Angas by an independent environmental engineering and financial consulting firm is reasonable based on the trading and price history of previous biodiversity credit sales. 51 I do not need to comment further on these biodiversity credits which seem in their operation and value to be confined within the borders of NSW. The reason that I mention them is that their value and realisability have relevance to the solvency and capitalisation of the AAMF as discussed in the scheme booklet and hence provoked my curiosity at the hearing.
Other questions relating to likely approval 52 Let me now deal with some other matters that are relevant to the question of whether if the Scheme achieves the requisite statutory majorities I would be likely to approve it. 53 First, what is the proposed capitalisation of Angas and AAMF if the Scheme is adopted and implemented? The proposed Scheme has proceeded on the basis that the net tangible assets requirement for AAMF will be the same as for the other funds, that is, 0.5% of scheme assets. Further, a working capital buffer of $1 million for Angas has also been assumed. 54 The independent expert's opinion is that the key question regarding the solvency for Angas is whether the cash flows from the funds management business, together with cash at hand of $1 million, will be sufficient to fund the annual operating expenses of Angas, including the costs of managing the AAMF as responsible entity for no management fee in return. Angas will have no debt, putting to one side the question of the proper characterisation of the redeemable preference shares series 2 that I touched on at the outset. The independent expert is satisfied that provided there is no significant adverse change in the income and cash generated from the funds management business going forward, Angas should generate sufficient cash flows to pay its creditors in the ordinary course of business and any additional costs associated with acting as the responsible entity of AAMF. 55 Further, AAMF will have no long-term debt and assets of approximately $40 million. The independent expert's opinion is that for AAMF to remain solvent it must raise cash in the order of $2 to $3 million over the next 3 to 6 months. There is evidence before me that this should not be an issue. Angas received $2,447,673 from a biodiversity credit sale this last week which alone should address the funding issue, but further cash is expected to be raised from settlement of the Quinnco proceeding and further biodiversity credit sales. 56 Now Angas submitted that the size of the Trustee's claims for costs and expenses as described in the scheme booklet had the potential to impact the solvency of the proposed Scheme. But so as to facilitate the proposed Scheme, the agreed debt to the Trustee of approximately $3.4 million will not become due and payable until 30 June 2020 and payments in reduction of the debt will only be made from 25% of the net proceeds from sales of the legacy assets. 57 Second, various terms of the proposed Scheme include the releases of any potential claims against Angas, the directors and the Trustee arising out of or in connection with the affairs of Angas including the implementation of the Scheme. Now it may reasonably be expected that if a court-appointed receiver were appointed to Angas, the court-appointed receiver would investigate whether there were viable claims against the directors and the Trustee. 58 Now the release of any claims against Angas by debenture holders are plainly an aspect of the "arrangement" between Angas and debenture holders. But the proposed releases of claims against the directors and the Trustee extend to releases of parties other than Angas and therefore engage those authorities addressing when a scheme of arrangement may provide for releases of third parties and whether a scheme of arrangement can compromise or release claims of a creditor of the scheme company qua creditor of the scheme company only, or can also release claims of a creditor qua creditor of a third party. As Mr Jonathon Redwood for Angas submitted, two related requirements appear to have emerged from the authorities. The first requirement is that there is a sufficient nexus between a release by the creditor of the claims against the third party and the relationship between the creditor and the scheme company; see Fowler v Lindholm (2009) 178 FCR 563 at [68] to [73] per Emmett, Gordon and Jagot JJ and Re Lehman Brothers International (Europe) (in administration) [2009] EWCA Civ 1161 at [63] and [65] per Patten LJ. The second requirement is that there is some element of give and take such that the creditors receive something in return for the benefit conferred on the third party; see Fowler v Lindholm at [69], Lift Capital Partners Pty Limited (In Liquidation), in the matter of Lift Capital Partners Pty Limited (In Liquidation) [2009] FCA 1523 at [35] per Emmett J and Bacnet Pty Ltd v Lift Capital Partners Pty Ltd (in liq) (2010) 183 FCR 384 at [145] per Keane CJ and Jacobson J. 59 Now I do not doubt that a scheme of arrangement can involve creditors releasing claims against a third party. 60 The starting point is that the words "compromise" or "arrangement" are to be construed as broadly and as flexibly as their commercial setting within the boundaries of the text and context of s 411 permit. On their face they say nothing against the company requiring the creditor, as part of the arrangement involving the creditor's claims against the company, to release associated claims against, say, officers or employees of the company, related companies of the company, co-venturers of the company etc. Otherwise if the arrangement were not to embrace such a release, then it would be self-defeating. The creditor could pursue the third party. The third party could seek indemnity back against the company, with the consequence that the very purpose for the arrangement would be undermined. Nothing in the text and context of s 411 requires or justifies such a result. 61 Further, the concept of "arrangement" connotes that the creditors are receiving something of value to them, in this case, inter-alia, for the release. But nothing need flow from the released party to the creditor as such, as long as the creditor is receiving something from the arrangement or the company itself for the release. 62 But undoubtedly the release must at the least be reasonably connected to the restructuring of the company. As the authorities make plain, there must be some nexus between the release and the creditors' position qua creditor of the company itself in relation to the scheme as Fowler v Lindholm at [73] makes plain. 63 For completeness I would note that doubts have been raised concerning Fowler v Lindholm by a later Full Court in City of Swan v Lehman Brothers Australia (2009) 179 FCR 243 at [108] to [111] per Rares J and [142] to [144] per Perram J, but in respects that do not trouble me. First, that case concerned Pt 5.3A and the narrower textual and contextual questions involving ss 436A, 439C, 444A, 444B and 444D. Second, the concept and flexibility of "arrangement" under s 411 or Pt 5.1 does not automatically carry over to the phrase "deed of company arrangement" under Pt 5.3A. In other words any analogies between Pt 5.1 and Pt 5.3A are inapposite. Third, although Rares J and Perram J relied significantly upon Re Glendale Land Development Ltd (in liq) [1982] 2 NSWLR 563 at 567 (in terms of its implications) per McLelland J and earlier and later authority, for my part I am unable to identify compelling reasons which cast significant doubt on the reasoning of the Full Court in Fowler v Lindholm, the reasoning of the primary judge, Finkelstein J in that case (Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20 at [28] to [55]), and the reasoning of Patten LJ in Re Lehman Brothers International (Europe). 64 Further, as to the enforcement of these third party releases, assuming that I approve the Scheme and it comes into force, if a debenture holder sued the third party the third party could plead them in bar. Alternatively, Angas being the subject of the Scheme could seek an injunction against the debenture holder from acting inconsistently with the terms of the Scheme. Neither option would necessarily require the third party to execute a separate instrument so as to be able to take the benefit of the release but be bound by the burden of the Scheme. Perhaps a third party might insist on this to protect its interests. But not to so insist could hardly prejudice the debenture holder at least in terms of the third party release. But obviously if the third party was providing a monetary or other substantial benefit to the Scheme, then that is a different question. From the debenture holders' perspective they would want the third party to also execute, say, a separate deed poll to fortify the requirement of the third party to provide the benefit. 65 Finally, to the extent that the releases raise any issues of fairness, that is a matter to be addressed at the second court hearing with the benefit also of the views of debenture holders from the scheme meeting (In the matter of BIS Finance Pty Limited; In the matter of Artsonig Pty Limited [2017] NSWSC 1713 at [44] per Black J). But for the purposes of the first court hearing it is sufficient to observe the following matters. 66 First, the proposed releases have been disclosed prominently and in sufficient detail in the scheme booklet so that if debenture holders have any concerns with the proposed releases they can be raised at or before the scheme meeting with Angas and the Trustee. 67 Second, the releases contain the standard carve-outs for fraud, wilful misconduct, recklessness or gross negligence. 68 Third, the releases are to be seen as reasonably connected to the proposed restructuring effected by the proposed Scheme in the sense that they can logically be seen as important for the viability and structural integrity of the proposed Scheme. 69 Fourth, in relation to the releases of the directors, if claims could be brought against the directors it could imperil Angas' ability to obtain the necessary professional indemnity insurance required by Regulatory Guide 126: Compensation and insurance arrangements for AFS as a Chapter 7 licensee in future years and would inevitably distract Angas from successfully managing the restructured business in the interests of debenture holders as the new owners of the restructured business. 70 Fifth, in relation to the release of the Trustee, if claims could continue to be brought against the Trustee, then the Trustee would presumably wish to preserve its right to an indemnity from the assets of Angas which may adversely affect the viability of the proposed Scheme.
Questions relating to voting 71 Let me now turn to three matters in relation to voting by the debenture holders at the scheme meeting to which my attention has been drawn. 72 First, unlike at previous debenture holder meetings for the run-off, debenture holders who are owed less than $10,000 in outstanding debentures will be entitled to vote at the scheme meeting. The reason for the difference is that the voting at meetings for the run-off were determined by the requirements of Angas' Trust Deed whereas the voting at the scheme meeting is to be determined by the requirements of the Act for schemes of arrangements. 73 Second, the debenture holders have substantially identical interests, the proposed Scheme treats them all equally and any differences in its practical effects for the debenture holders are likely to be negligible. It is therefore appropriate for the debenture holders to vote on the proposed Scheme as a single class. But let me say something further about debenture holders who also hold either ordinary or redeemable preference shares. 74 A number of changes have occurred in relation to Angas' redeemable preference shares. The remaining Series 1 (RPS 1) and Series 3 (RPS 3) redeemable preference shares have been converted into ordinary shares. And subject to the Scheme's approval, the Series 2 redeemable preference shares (RPS 2), with a face value of $5 million, will be restructured with a face value of $1 million that may be repaid, at the discretion of Angas, in 40 quarterly instalments of $25,000 each commencing in September 2019 and concluding in June 2029 (with any unpaid balance to be paid in full at that date). The unpaid balance of the RPS 2 will carry an annual interest rate that commences at 2.0% in 2019 and increases on a sliding scale to 4.25% by 2029. 75 The result of these changes, together with the proposed Scheme, will be that the holders of ordinary shares in Angas, other than debenture holders but including the holders of the converted RPS1 and RPS 3, will be diluted to a combined shareholding of 30% of the ordinary shares in Angas. The debenture holders' entitlement to 70% of the shareholding of Angas is unaffected by the RPS conversions. 76 But some of the debenture holders also held RPS1 and RPS3 and as such are now holders of ordinary shares of Angas by reason of the conversion. The holder of RPS2 is also a substantial holder of debentures. But in my view, neither of these matters results in any class issues. If the proposed Scheme is not adopted, the ordinary shares and RPS2 are worthless on that scenario. Their holders will have no economic interest in the assets of Angas. In the case of all debenture holders, their overwhelming economic interest is in the value to be attributed to their debentures on the different scenarios before them for consideration. The fact that some debenture holders are also holders of ordinary shares does not make their situation so dissimilar that it is impossible for them to consult together with a view to their community and commonality of interest. Nor does the fact those debenture holders in separate meeting as shareholders will also need to separately approve the issue of further shares as part of the proposed Scheme. 77 Third, even though the European (including for the moment the UK) debenture-holders cannot be sent the scheme booklet, Angas is satisfied based on the advice it has received that it would not be unlawful to issue the Scheme consideration to those debenture holders. But in respect of the sole New Zealand debenture holder the position is that the scheme consideration could not be distributed without that debenture holder providing the requisite certificate as to being a wholesale investor. If that certification is not provided, Angas proposes the following for the New Zealand debenture holder: (a) if the proposed Scheme is approved, on the implementation date Angas and AAMF will issue to a nominee appointed by Angas the share consideration and unit consideration to which the New Zealand debenture holder would have otherwise been entitled; and (b) the nominee will offer to sell the new shares and units issued to it within a reasonable period of time after the implementation date and Angas will account to the New Zealand debenture holder for the net proceeds of the sale. Since it is recognised that there will be no liquid trading market for the shares and the units, Angas proposes that if a sale has not been achieved by 31 December 2019: (i) Angas will undertake to buy back the shares at the mid-range of the value of the shares expressed in the independent expert's report; and (ii) AAMF will undertake to redeem the units based on the quarterly valuation of the units to be issued by AAMF. 78 In my view this differential treatment in respect of a very small percentage of debenture holders does not give rise to a separate class issue for the EU debenture holders or the New Zealand debenture-holder. It does not destroy the commonality of interest between them and other debenture holders or prevent them from consulting together in relation to the proposed Scheme (see, by analogy, Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [41] to [44]).
ASIC's position 79 It is now necessary to note the following matters raised by ASIC. First, let me deal with its letter to the board of directors of Angas dated 5 April 2019, which was tendered at the hearing and also raised in prior communications. 80 ASIC maintains that Sumner Hall Associates Pty Ltd does not have the requisite authorisation under its AFSL to provide general financial product advice to retail clients and that the inclusion of the independent expert's report in the materials provided to debenture holders does constitute the provision of such general advice to retail clients. 81 ASIC notes that the independent expert's report is to be included in the scheme booklet which is to be sent to debenture holders in order to enable them to decide whether or not to vote in favour of the Scheme. As the expert has consented to the inclusion of the report in the scheme booklet it constitutes general advice to retail clients because it is a statement of opinion and a report that could reasonably be regarded as being intended to have such an influence on whether a debenture holder votes in favour of the Scheme. I agree that this is consistent with the meaning of financial product advice under s 766B of the Act. Further, I also agree that as the report does not take into account the personal circumstances of each debenture holder (s 766B(4)) it would constitute general advice. This position is also consistent with the underlying view on which the ASIC Corporations (Financial Services Guides) Instrument 2015/541 is premised. 82 ASIC's policy in respect of the AFSL requirements for the provision financial services to retail clients is set out in Regulatory Guide 2: AFS Licensing Kit: Part 2 - Preparing your AFS licence or variation application (RG 2). RG 2.218 states that: If you have applied to provide financial services to retail clients, you must have a dispute resolution system in place: see s912A(1)(g) and s912A(2). Your dispute resolution system must consist of both: (a) an internal dispute resolution procedure (IDR) that satisfies the requirements set out in Regulatory Guide 165 Licensing: Internal and external dispute resolution (RG 165); and (b) membership of an ASIC-approved external dispute resolution (EDR) scheme or schemes that cover complaints about all of the financial services to be provided under your AFS licence. 83 RG 2.233 further states that: If you have applied to provide financial services to retail clients, you will need to have arrangements in place for compensating those clients for loss they suffer if you breach your obligations under the Corporations Act. The primary way to comply with this obligation is to have professional indemnity insurance cover: see s912B, reg 7.6.02AAA, condition 29 of PF 209 (for responsible entities and IDPS operators) and ASIC Corporations (Managed Discretionary Account Services) Instrument 2016/968 (for MDA operators). Our policy on compensation and insurance arrangements is set out in Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126). 84 Accordingly, ASIC notes that additional protections exist for retail clients under the AFSL regime for provision of financial services to retail clients, as opposed to the licensing requirements regarding wholesale clients, which additional protections are as follows: (a) a dispute resolution system, consisting of both an internal process and membership of an ASIC-approved external scheme; and (b) adequate professional indemnity insurance. 85 Now ASIC has resolved not to object to the provision of the independent expert's report accompanying the scheme booklet to debenture holders having considered the specific circumstances pertaining to the Scheme and on the following basis: (a) On 29 March 2019 the expert lodged an application with ASIC to vary the terms of its AFSL such that it would be extended to authorise the licensee to provide general financial product advice to retail clients. But in order to satisfy ASIC's policy of RG 2, the expert had to demonstrate that it met both the dispute resolution system condition and the PI condition that I have described in the preceding paragraph. The application disclosed that the expert currently satisfies the dispute resolution system condition, but did not disclose whether the expert currently satisfies the PI condition. (b) But the expert has confirmed that he will by the time of despatch of the scheme booklet and the independent expert's report satisfy the PI condition. (c) Further, the expert has undertaken that he will continue to satisfy both the dispute resolution system and PI conditions until such time as the AFSL variation application has been approved, such that the expert's AFSL is varied to include the provision of general financial product advice to retail clients. 86 In those circumstances, ASIC's concerns as set out in its letter to the board of directors of Angas dated 5 April 2019 appear to have been adequately addressed and provide no impediment to my ordering the convening of the scheme meeting. 87 Let me deal with the other two letters sent by ASIC to Angas' solicitors on 4 and 5 April 2019. 88 ASIC's letter of 4 April 2019 addresses in vague terms the expected timeline for ASIC to process Angas' application to vary its AFSL. It is necessary that this variation be done in order for the Scheme to take effect, considering that Angas will be the responsible entity for the AAMF. I would hope and expect that this is attended to before the second court hearing. 89 ASIC's letter of 5 April 2019 addresses in similarly vague terms the expected timeline for ASIC to process Angas' application seeking relief under s 926A(2)(c) of the Act from the requirement to appoint a custodian in relation to the legacy assets (see ASIC Class Order [CO 13/760]). Desirably this application should be processed before the Scheme takes effect, although it does not have the same necessity. If by the time of the second court hearing no relief has been given, then the Scheme, if approved, will be put into effect with a custodian appointed.
The Trustee's position 90 Finally, let me note some matters concerning the Trustee. The Trustee has reviewed various versions of the scheme booklet. Ultimately it would seem that many of its comments and suggestions have been taken into account. 91 At the hearing before me the Trustee also provided a form of draft letter from the Trustee to debenture holders for inclusion in the scheme booklet setting out the Trustee's position on the proposed Scheme. I was content with the inclusion of such a letter. One matter raised with me by the Trustee's counsel, Mr Ross Foreman was whether it was appropriate to include in the scheme booklet an appendix which had been prepared by Angas setting out a description of purportedly comparative external administrations of other debenture issuer companies and the expenses involved. Angas had sought to include this so that debenture holders were aware of information relevant to the downside risks if the Scheme was not approved. I was content with the inclusion of that appendix, but equally was content with the Trustee in its letter to debenture holders pointing out the potential inutility in such a comparative exercise. To include both in my view gave the debenture holders a balanced view. 92 Let me explain another matter concerning the Trustee. In order to progress the convening of a meeting of debenture holders and ultimately to approve the Scheme, it is necessary to give various directions to the Trustee inter-alia under s 283HA of the Act and s 63 of the Trustee Act 1925 (NSW). Ultimately I may also need to make orders under s 283HB and may also need to vary and then terminate the Trust Deed. 93 Sections 283HA and 283HB of the Act provide: 283HA General Court power to give directions and determine questions If the trustee applies to the Court for any direction in relation to the performance of the trustee's functions or to determine any question in relation to the interests of the debenture holders, the Court may give any direction and make any declaration or determination in relation to the matter that the Court considers appropriate. The Court may also make ancillary or consequential orders. Note: Under this section, the Court may order a meeting of debenture holders to be held, see section 283EC. 283HB Specific Court powers (1) If the trustee or ASIC applies to the Court, the Court may make any or all of the following orders: (a) an order staying an action or other civil proceedings before a court by or against the borrower or a guarantor body; (b) an order restraining the borrower from paying any money to the debenture holders or any holders of any other class of debentures; (c) an order that any security for the debentures be enforceable immediately or at the time the Court directs (even if the debentures are irredeemable or redeemable only on the happening of a contingency); (d) an order appointing a receiver of any property constituting security for the debentures; (e) an order restricting advertising by the borrower for deposits or loans; (f) an order restricting borrowing by the borrower; (g) any other order that the Court considers appropriate to protect the interests of existing or prospective debenture holders. (2) In deciding whether to make an order under subsection (1), the Court must have regard to: (a) the ability of the borrower and each guarantor to repay the amount deposited or lent as and when it becomes due; and (b) any contravention of section 283GA by the borrower; and (c) the interests of the borrower's members and creditors; and (d) the interests of the members of each of the guarantors. 94 I have previously observed the following matters concerning the above provisions' construction and operation. 95 First, the scope and exercise of any power under either provision must be considered in the context of Chapter 2L generally and its purpose and object. 96 Second, s 283HB confers on the Court a broad remedial and protective jurisdiction and associated powers, with the debenture holders as the principal beneficiaries thereof. Nevertheless, the powers are confined by those enumerated in s 283HB, albeit that s 283HB(1)(g) from one perspective may be seen to be a plenary power. 97 Third, the Court's powers under s 283HB are intended, inter alia, to supplement the armoury of relief available to the Trustee under the general law and under the specific terms of the Trust Deed. 98 Fourth, although s 283HB(1) contains a broad discretionary power, the Court must have regard to the enumerated matters in s 283HB(2). As to such enumerated matters: (a) The fact that various factors must be considered does not entail that other factors not mentioned may not be considered. (b) Further, the structure of s 283HB indicates that the mandatory factors and their weight take priority over any non-mandatory factors. (c) Further, in terms of the priority or weight to be given to the matters referred to in s 283HB(2) inter se, strictly no weighting or priority is expressed. Nevertheless, the structure, context and purpose of the provisions would tend to suggest that the consideration referred to in s 283HB(2)(a) should be accorded greater weight than, say, s 283HB(2)(c) or (d), assuming, in relation to (c), that one is dealing with creditors other than debenture holders. But overall, the structure and purpose of Chapter 2L is to protect debenture holders. Moreover, this is reflected in the text of s 283HB(1)(g). 99 Fifth, once the Court has considered the matters in s 283HB(2), it is open to the Court to make any order under s 283HB(1) that is calculated to protect the interests of debenture holders. So much may also be said concerning the making of ancillary or consequential orders under s 283HA. 100 Sixth, s 283HB(1)(g) confers power on the Court to order the convening of a meeting of debenture holders and to regulate the procedure as to the conduct of such a meeting including the form and propounding of any resolution, who can vote and the manner of voting including any poll to be conducted, providing that such an order is appropriate to protect the interests of debenture holders. Indeed, this is confirmed in one sense by s 283EC. But I should note that for present purposes I have not exercised that power, but rather the power under s 411. 101 Seventh, in addition to the power under s 283HB that can be exercised concerning the convening and conduct of any meeting of debenture holders, s 1319 is also of assistance. Section 1319 provides: Where, under this Act, the Court orders a meeting to be convened, the Court may, subject to this Act, give such directions with respect to the convening, holding or conduct of the meeting, and such ancillary or consequential directions in relation to the meeting, as it thinks fit. 102 But again I would note that it has not been necessary to exercise that power for present purposes. 103 For the purposes of this first court hearing I consider it appropriate and in the debenture holders' interests to direct under s 283HA and s 63 that the Trustee is justified in not opposing the orders to convene the scheme meeting and, if the relevant circumstances eventuate, to execute the various Deeds to facilitate the Scheme. Putting it another way, the Trustee is justified for the moment in not pressing ahead with seeking the enforcement orders identified at the outset of these reasons. I will revisit at the second court hearing, if the requisite statutory majorities are achieved at the scheme meeting, any other orders necessary to be made under ss 283HA and 283HB of the Act and under the said s 63. I should also say that if the requisite statutory majorities are not achieved I am most likely to quickly bring on and dispose of the Trustee's principal claims rather than to entertain any further significant extension to the run off.
Conclusion 104 For the reasons outlined above I made the necessary orders last Friday afternoon for the convening of the scheme meeting of debenture holders. I certify that the preceding one hundred and four (104) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.
Trust Company (Nominees) Limited, in the matter of Angas Securities Limited
Angas Securities Limited
(2018) 362 ALR 286
(2010) 183 FCR 384
(2009) 179 FCR 243
(2009) 178 FCR 563
(2009) 179 FCR 20
(2014) 254 CLR 288