Damian A and Rich A, Andrew, Schemes, Takeovers and Himalayan Peaks (3rd ed., University of Sydney Faculty of Law, 2013)
Date of hearing:
31 March 2016
Registry:
New South Wales
Division:
General Division
National Practice Area:
Commercial and Corporations
Sub-area:
Corporations and Corporate Insolvency
Category:
Catchwords
Number of paragraphs:
63
Counsel for the Plaintiff:
Mr JC Sheahan QC with Mr MA Izzo
Solicitor for the Plaintiff:
Ashurst Australia
Counsel for the TLB Lenders:
Ms TL Wong
Solicitors for the TLB Lenders:
Gilbert & Tobin
ORDERS
NSD 423 of 2016
IN THE MATTER OF ATLAS IRON LIMITED (ACN 110 396 168)
BETWEEN:
ATLAS IRON LIMITED (ACN 110 396 168)
Plaintiff
JUDGE:
GLEESON J
DATE OF ORDER:
31 MARCH 2016
THE COURT ORDERS THAT:
1.The Plaintiff convene a meeting of the lenders under the Syndicated Facility Agreement dated 10 December 2012 between (among others) the Plaintiff and those lenders (TLB Lenders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between the Plaintiff, the TLB Lenders and certain holders of subordinate claims against the Plaintiff (Scheme), being a scheme substantially in the form of that contained in Annexure A to the explanatory statement in relation to the Scheme which is Exhibit 1 in the proceeding.
2.The draft explanatory statement and notice of scheme meeting which is Exhibit 1 (Scheme Booklet) is approved for distribution to the TLB Lenders.
3.The Plaintiff dispatch to each TLB Lender a document substantially in the form of the Scheme Booklet…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Re Atlas Iron Ltd [2016] FCA 366
Case
[2016] FCA 366
Decision Date
CaseChat Overview and Summary
Atlas Iron Ltd, an Australian iron ore mining company, applied to the Court for approval of a proposed scheme of arrangement. The primary dispute involves the restructuring of Atlas’ financial obligations and equity composition to alleviate immediate financial pressures and ensure continued operations. The Court was tasked with determining whether the proposed scheme met the jurisdictional requirements under the Corporations Act 2001 (Cth) and whether it was fair and reasonable to the company’s creditors and shareholders.
The legal issues before the Court included whether the proposed scheme constituted an “arrangement” under the Act, whether the scheme administrators were appropriately appointed, and if the requisite disclosure had been made to all relevant parties. Additionally, the Court had to assess whether the scheme was likely to be approved if it received the necessary statutory majority at a future hearing.
The Court found that the proposed scheme was an arrangement within the meaning of the Act and that the scheme administrators, being partners of PPB Advisory, were appropriately appointed due to their independence from Atlas and the affected creditors. Furthermore, the Court determined that Atlas had adequately disclosed the terms of the scheme to its shareholders, despite ASIC’s concerns. The Court held that the proposed scheme was of such nature and terms that it would likely be approved if it received the requisite majority at the next hearing. The Court also varied the form of the notice of hearing to include Atlas’ members, addressing ASIC’s concerns regarding shareholder disclosure.
In conclusion, the Court granted the orders sought by Atlas, with a variation to the form of the notice of hearing to ensure proper disclosure to the company’s shareholders. The Court's decision ensures that the scheme can proceed to the next stage, subject to shareholder approval.
Orders
Orders of the court
1. Order 11 of the orders made 31 March 2016 be varied as follows:
Notice of the hearing of an application pursuant to section 411(4)(b) of the Corporations Act 2001 (Cth) for orders approving the Scheme be published once in The Australian newspaper, by advertisement substantially in the form of Annexure A to these orders, such advertisement to be published on or before 21 April 2016 and the Plaintiff otherwise be exempted from compliance with r 3.4 of the Federal Court (Corporations) Rules 2000 (Cth).
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
After the hearing, I made the orders sought by Atlas. These are my reasons for making those orders, and for the order, varying the orders in one respect, made today.BACKGROUND Atlas is an Australian iron ore mining company listed on the Australian Stock Exchange (“ASX”). As at 21 March 2016, Atlas has 2,669,787,052 ordinary shares on issue to a large number of institutional and retail investors. Twenty shareholders hold approximately 44% of the total issued shares. As at the close of trade on 22 March 2016, the price of each share as quoted on the ASX was $0.03.Financial position of Atlas Atlas mines and ships iron ore from Port Hedland in the Pilbara region of Western Australia. It has three key production projects (in addition to other projects in varying stages of development in the Pilbara region), being Abydos Mine, Mt Webber Mine and Wodgina Mine. The evidence of David Nathan Flanagan, Atlas’ managing director, was that Atlas engages mining contractors to extract iron ore from the mines and process it through processing plants. The processed iron ore is hauled from the mines to Port Hedland by contractors, before port and handling contractors then ship it. Consequently, Atlas is heavily reliant on its contractors for the operation of its business. Mr Flanagan stated that Atlas derives almost all of its revenue from the sale of iron ore, so that its business is affected by fluctuations in the iron ore prices from time to time. According to Mr Flanagan, iron ore prices have been volatile for a significant period. Atlas’ income from its business operations is also affected by fluctuations in the exchange rates for US and Australian dollars.Syndicated Facility Agreement Pursuant to the Syndicated Facility Agreement, Atlas obtained a “Term Loan B” facility in the sum of US$275,000,000 secured by a general security deed and featherweight floating charge. The principal obligations under the facility are guaranteed by certain subsidiary companies of Atlas. The debt, which now stands at approximately $259,300,000, is due for repayment in December 2017 (“TLB debt”). Proposed scheme The proposed scheme was summarised by counsel for Atlas as follows:(a)Atlas will make a cash payment to the TLB lenders equal to all accrued and unpaid interest owing to them as at the implementation date together with a further cash payment of US$2,500,000 (scheme, cl 7.5(d));(b)Atlas will issue to the TLB lenders:(i)ordinary shares so that, following the share issue, the TLB lenders will hold 70% of the total ordinary shares in Atlas; and(ii)options to acquire ordinary shares such that, following the option issue, the TLB lenders will hold 70% of all quoted options to acquire ordinary shares in Atlas (scheme, cl 7.5(f));(c)in consideration for the payments referred to in (a) above and the issue of equity referred to in (b) above, the TLB lenders will release Atlas and its guarantors from the obligation to pay so much of the principal amount owing under the Term Loan B Facility as exceeds US$135,000,000 (scheme, cl 7.5(h));(d)the remaining TLB debt will be held on the terms of an amended Syndicated Facility Agreement, pursuant to which the TLB debt will become due for repayment five years from the implementation date and certain financial covenants will be varied (scheme, cl 7.5(j) and Sch 2);(e)the TLB lenders will appoint three directors to the board of Atlas and two of the four existing directors (excluding the managing director, Mr Flanagan) will resign (scheme, cll 7.5(e) and (k));(f)there will be mutual releases as between the TLB lenders and past and present directors, officers and employees of Atlas and its subsidiaries which have guaranteed Atlas’ debt (scheme, cl 7.5(g)); and(g)any existing subordinate claims within the meaning of s 563A of the Act will be released, except to the extent of the net proceeds of any policy of insurance that responds to any subordinate claim (scheme, cl 7.5(1)).
Evidence
Evidence Before The Court
Atlas identified the following two reasons for the scheme:(1)There is a requirement in cl 7.13 of the Syndicated Facility Agreement to the effect that Atlas will not permit the Total Assets to Total Secured Debt Ratio, as determined as of the last day of each semi-annual period, to be less than 2:1 (“Asset Coverage Ratio”). This covenant is tested as at 30 June and 31 December of each year. Atlas is concerned that there is a high risk that it will fail to satisfy the Asset Coverage Ratio when it is next tested as at 30 June 2016.Failure to satisfy the Asset Coverage Ratio constitutes an Event of Default under cl 8.l(c) of the Syndicated Facility Agreement, which in turn entitles the TLB lenders to demand immediate repayment of the TLB debt and appoint a receiver. Atlas is concerned that if that were to occur, it is unlikely it or its subsidiaries would have sufficient liquidity or be able to raise sufficient capital or external finance to repay the TLB debt immediately. Mr Flanagan’s evidence was that, in those circumstances the directors would have no choice but to appoint a voluntary administrator. The scheme avoids these consequences by providing for an amended Syndicated Facility Agreement which removes the covenant to comply with the Asset Coverage Ratio;(2)As matters stand, Atlas must repay the TLB debt in December 2017. Based on present cash flow forecasts (and assuming the scheme is not implemented), Atlas will be unable to repay the TLB debt on maturity from its forecast available cash flows. The TLB debt will become a current liability in December 2016. Despite extensive efforts to explore other debt and equity financing options, the Atlas board has no current basis for forming a view that any of these options or the company’s future anticipated operating performance will permit the full repayment or refinance of the TLB debt in December 2017. The scheme avoids this scenario by extending the maturity date of the TLB debt.EVIDENCE The plaintiff read the following affidavits in support of the application:(1)affidavit of Marcus William Ayres, chartered accountant and partner of PPB Advisory (“PPB Advisory”), sworn 30 March 2016;(2)affidavit of Philip Patrick Carter, chartered accountant and partner of PPB Advisory, sworn 30 March 2016;(3)affidavit of Camilla Clemente, solicitor employed by Ashurst Australia, Atlas’ Australian lawyers (“Ashurst”), sworn 24 March 2016;(4)affidavit of Ms Clemente sworn 31 March 2016;(5)affidavit of Mr Flanagan sworn 24 March 2016;(6)affidavit of Mr Flanagan sworn 30 March 2016;(7)affidavit of Campbell Jaski, valuer and partner of PPB Advisory, sworn 31 March 2016;(8)affidavit of Bronwyn Rachel Kerr, legal manager of Atlas, sworn 23 March 2016;(9)affidavit of Ms Kerr sworn 30 March 2016;(10)affidavit of Simon Theobold, chartered accountant and managing partner, Western Australia of PPB Advisory, sworn 30 March 2016;(11)affidavit of Anthony Michael Walsh, company secretary of Atlas, sworn 24 March 2016; and(12)affidavit of Mr Walsh sworn 30 March 2016.
Decision
Reasons for decision
The proposed scheme administrators are Messrs Ayres, Carter and Theobold, partners of PPB Advisory. I accept Atlas’ submission that this is a relatively minor future engagement which does not materially compromise the independence of the expert reports. The focus for this purpose is on independence from the company and the creditors affected by the scheme. The proposal to use PPB partners as scheme administrators is efficient for Atlas and has been fully disclosed in the scheme booklet. Atlas’ counsel noted that the same sequence of appointments seems to have occurred in the Nine/PBL scheme: Re Nine Entertainment Group Ltd (No 1) [2012] FCA 1464; (2012) 211 FCR 439 at [30].CONCLUSION I am satisfied that the jurisdictional requirements for the orders sought were met. The appropriate course is to make the orders sought on the basis that the proposed scheme is of such a nature and is cast in such terms that, if it were to receive the expected requisite statutory majority, the Court would be likely to approve the scheme on the hearing of an unopposed application. Variation to form of notice of hearing to approve compromise or arrangement The form of the notice, required to be published in The Australian newspaper, was originally addressed only to the TLB lenders and the subordinate claim holders. Having regard to the matters raised by ASIC, and acknowledging the disclosure obligations of Atlas to its shareholders, I consider that it is prudent to address the notice to the members of Atlas. Atlas consented to an order varying order 11 made on 31 March 2016 accordingly.
Ratio Decidendi
Legal Principle Established
The significance of subordinate claimants’ financial interest in the company is highlighted in the Supplementary Explanatory Memorandum by clause [1.15] which states that, in determining whether to exercise its discretion under s 600H, a court might be expected to have regard to whether the person might reasonably be considered to possess “a real financial interest in the external administration”.CONSIDERATIONPart 5.1 body The evidence proves that Atlas, being a registered Australian public company, is a Part 5.1 body.Proposed scheme is an “arrangement” The text of the scheme (annexed to the scheme booklet) provides prima facie evidence that the proposed scheme is an “arrangement”. The text of the scheme identifies the parties to the scheme as Atlas, the TLB lenders and the subordinate claim holders. The shareholders of Atlas are not parties to the proposed scheme. As to the subordinate claim holders, the independent expert report states that they would receive a nil return on an external administration winding up. On that basis, at this stage of the application, there appears to be no objection to Atlas’ proposed use of s 411(5A) to propound a scheme that has the effect of releasing subordinate claimants’ claims against the company (except to the extent of any net insurance proceeds which might be available). Further, as Atlas observed, there is a risk for the TLB lenders if they are not able to take the benefit of s 411(5A) because, if subordinate claims could be brought after the scheme is implemented in respect of matters which occurred before the implementation date, such claim holders would achieve a degree of priority over the TLB lenders (to the extent that secured debt is swapped for equity). ASIC did not address the position of the subordinate claim holders in its 30 March 2016 letter. In the absence of any appearance from ASIC to explain the submissions contained in its 30 March 2016 letter, I am not satisfied that the Court has power to assess for itself, at the first court hearing, whether shareholders should be permitted express their view on the scheme to which they are not party because, for example, they are so materially and adversely prejudiced by the scheme that there should be a separate members’ scheme: cf Damian A and Rich A, Andrew, Schemes, Takeovers and Himalayan Peaks (3rd ed., University of Sydney Faculty of Law, 2013) [9.11.1]. If ASIC were of the view that the proposed scheme is so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further (to use the language of French J in Foundation Healthcare), then I would have expected ASIC to attend Court to say so. I infer that ASIC is not presently of this view. I should record that, on the materials presented to me, and bearing in mind that the Court’s task did not require me to give close consideration to the effects of the scheme upon the shareholders, I did not form the view that shareholders would be prejudiced by the scheme. However, as Mr Sheahan SC for Atlas acknowledged, that is a matter which may be agitated at the second court hearing (after the shareholders meeting) as a matter relevant to the discretion whether to approve the scheme. ASIC also has other options which it may choose to pursue if it continues to be of the view that shareholders have not been provided with sufficient information for the shareholders meeting.Scheme booklet will provide proper disclosure to TLB lenders