- Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd

Judgment - ex tempore (Revised 30 November 2020)

By Interlocutory Process filed on 27 November 2020, the Applicants, Ovato Print Pty Limited and others (together, "Ovato Companies"), seek orders for leave to file and serve subpoenas addressed to FIIG Securities Pty Limited ("FIIG") and to Tozer & Co Pty Limited ("Tozer") and for abridgement of the time of service of those subpoenas.
The subpoena to FIIG seeks the production of documents, between 1 November 2020 and 27 November 2020, relating to the transfer of certain notes on issue by Ovato Finance Pty Ltd ("OFPL"), and in particular, the identity, the address or contact details of persons who acquired the notes in the relevant period, and the custodial arrangement in place in connection with those notes. That subpoena is directed, as the evidence makes clear, at least to investigating a particular transaction in respect of the notes in that period. The subpoena to Tozer, a noteholder which corresponded with the Australian Securities and Investments Commission in respect of its opposition to the scheme, is directed to seeking evidence of Tozer's holding of the relevant notes and the number of notes which it holds.
It is plain that the Ovato Companies have a strong commercial purpose for wishing to access these documents, although it does not follow that it has any basis to request the Court to issue subpoenas in the scheme proceedings, which relate to creditors' and member's schemes of arrangement, in order to advance that commercial purpose. I am satisfied of the urgency of the application and, had I been satisfied that I should grant leave to issue the subpoenas, then it would have been straightforward to grant short service of them. Although the application has failed, it was well-put by Mr Krochmalik, who did all that could possibly be done to establish its basis.

Affidavit evidence

The Ovato Companies rely on the affidavit dated 17 November 2020 of their chief financial officer, Mr Geoffrey Stephenson, previously read at the first scheme hearing, which outlines the structure in which notes issued by OFPL are held. The noteholders are not creditors who participate in the creditors' scheme, but it is a condition precedent to the creditors' scheme, or at least to an equity raising that is in turn a condition precedent to the creditors' scheme, that OFPL achieve a compromise with the noteholders, to which reference is made in Mr Stephenson's first affidavit and in a second affidavit to which I will refer below. In particular, the Ovato Companies will be seeking noteholders' consent to release an amount between $25 and $30 million in respect of their noteholdings of $40 million, and convert the balance of the debt owed to them to shares.
The Ovato Companies also rely on Mr Stephenson's second affidavit dated 27 November 2020 which also refers to the structure of holdings of the notes, and to the fact that a register of noteholders is maintained, to which OFPL has access, but which provides OFPL with little useful information as to the ultimate beneficial holders of notes, because the register will disclose certain sub-participants in the notes, which in turn hold those notes on behalf of other persons, being the ultimate beneficiaries. While OFPL has a contractual right, under the note agreement, to access to the register, that access will not assist it in identifying who are the beneficial holders of particular categories of notes. Presumably, this structure exists, and noteholders hold their notes within this structure, because they or wish to hold their notes indirectly through custodians rather than directly. Mr Stephenson in turn refers to the role of FIIG as manager and underwriter of the notes, at the time of their issue, and as continuing to function as a broker and intermediary between OFPL, the note trustee, the custodians and noteholders. Mr Stephenson also refers to the fact that, perhaps unsurprisingly, he has been informed by an officer of FIIG that, because of its role as broker and intermediary, it often knows the identity of the ultimate beneficial holder of the notes.
Mr Stephenson also refers to the fact that the Ovato Companies are undertaking a major restructuring and that they seek to achieve a compromise with the noteholders as an element of that restructuring although, I again emphasise, not as an element of the scheme that is before the Court for approval, because noteholders are not participating creditors within the creditors' scheme. Mr Stephenson describes the nature of the compromise which will be sought with noteholders, and notes that that compromise will require a special resolution, involving a two-thirds majority of noteholders, which is likely to be voted upon in the near future as a circulating resolution. Mr Stephenson notes, likely correctly, that a failure to achieve a compromise with noteholders would have the result that the scheme would fail, whether directly or because of its impact on the proposed equity raising which is a condition precedent to the scheme.
Mr Stephenson in turn refers to a meeting which was to take place with representatives of a noteholder, which held a significant number of notes, and to the fact that it has emerged that that noteholder has sold its notes to a third party, presently unidentified, which now holds 22.5% of the total principal amount owing under the notes. Mr Stephenson also refers to having been informed, by two sources, that that third party is seeking to acquire additional notes. Mr Stephenson refers to having made enquiries with FIIG to seek to obtain the identity of the third party purchaser of the notes, and to the fact that FIIG has declined to identify the purchaser of the notes, referring to confidentiality obligations which it contends it owes to that purchaser and other noteholders. At one level, of course, FIIG's reference to confidentiality obligations is superfluous because FIIG is not, absent any statutory or contractual obligation, obliged to respond to OFPL's request for information as to those matters.
Mr Stephenson in turn points to his concern that a noteholder which acquires one-third or more of the total notes on issue may have a veto over the restructure of the scheme. Mr Stephenson observes that it is not apparent to him why a person would seek to acquire a blocking stake and he is concerned that the person who is acquiring the notes may be doing so for a purpose unrelated to the interests of creditors and members to the Ovato Group. Obviously enough, a party which acquires a blocking stake, in respect of notes or shares in the context of a restructuring, would ordinarily do so in order to block the restructuring, unless it can negotiate a restructuring on terms that are acceptable to it. The case law has generally recognised that the holder of securities, whether shares or notes, may ordinarily act in its own interests in respect of those securities, and has no obligation to act in the interests of creditors or members of a company generally. Mr Stephenson also refers to a possibility, which is plausible but not established by any evidence, that a competitor of the Ovato Group may have acquired the relevant notes, because it may perceive an advantage in the restructuring not proceeding. That matter has also been raised in correspondence between Ovato and FIIG, to which I have been fairly taken in the course of Mr Krochmalik's submissions.
Mr Stephenson also refers to the correspondence received from Tozer in relation to the first hearing of the scheme, and to the Ovato Group's wish to have further information as to the number of notes held by Tozer, because it may wish to engage directly with Tozer as to the restructuring proposal. Again, that wish is an entirely rational one, from a commercial perspective, but provides no real explanation of why Court's subpoena power should be deployed to advance the Ovato Group's commercial interest in negotiating with Tozer in respect of an aspect of the restructuring proposal that stands outside the scheme.
In my view, the Court should not grant leave to issue the subpoenas unless it can be satisfied they have a proper forensic purpose. The principles applicable to the issue of a subpoena are well established and were recently reviewed by Gleeson JA in Re Force Corp Pty Ltd (recs & mgrs apptd) (in liq) [2018] NSWSC 896, where his Honour directed attention to the question whether the documents sought to be produced had apparent relevance to the matters in issue in the particular proceedings. That concept has occasionally been described by reference to whether it is "on the cards" that the documents will assist with determining an identified issue, or could throw light on that issue. In Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2020] NSWSC 620 at [36]ff, Ward CJ in Eq in turn described a legitimate forensic purpose for a subpoena as requiring that it have a "sufficient apparent connection to the issues in the case to justify their production."
It seems to me that, having regard to the nature of the Court's jurisdiction in respect of the creditors' scheme and member's schemes, these subpoenas do not have a legitimate forensic purpose so far as the schemes are concerned. The Court, at a second hearing of the schemes, will review the process which has been adopted to permit creditors and the sole members of several companies to vote on the creditors' scheme and member's schemes, at the meeting of creditors and member's meetings, and also exercise a discretion as to whether to make orders in respect of the transfer arrangements that are ancillary to the proposed schemes. In doing so, there is no legal issue as to the identity of individual creditors participating in the scheme meeting, once the requisite majorities are reached still less in the identity of non-participating creditors who are engaged in steps that constitute conditions precedent to, but are not part of, the scheme. No doubt, that is a matter which a scheme proponent may wish to know, and would be assisted by knowing, but an investigation of that matter prior to the second hearing does not have a proper connection with the Court's role in determining whether to approve the scheme at the second Court hearing.
Here, it is open to the Ovato Group to make commercial enquiries, as it has already done, to seek to identify noteholders. If, as the Ovato Group suggested in correspondence with FIIG, an acquisition of a blocking stake by a competitor might amount to a contravention of the Competition and Consumer Act 2010 (Cth), and if it has sufficient basis to alleged that is what has occurred, then it is open to it to seek to bring an application for pre-action discovery in respect of any cause of action that may exist in that respect. That, however, is an action that exists outside the scheme, and anterior to the scheme so far as it involves a vote by noteholders of a transaction that is simply a condition precedent to the scheme.
For all these reasons, the Court should not grant leave to issue the subpoenas. The question of abridging the time for service of the subpoenas therefore does not arise. I thank Mr Krochmalik for his able submissions in respect of the application.

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Judgment (4 paragraphs)

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