Justice Black in In the matter of Boart Longyear Limited [2017] NSWSC 537 has confirmed that section 411(16) of the Corporations Act 2011 (Cth) (the Act), can be used to provide companies proposing schemes of arrangement with appropriate protections from its creditors in a form that can be recognised under Chapter 15 of the US Bankruptcy Code.

An order under s411(16) effectively provides for a moratorium on both existing and new proceedings against the company during the course of the scheme process (noting the orders were granted before the relevant scheme meetings). The moratorium is similar to the automatic stay on litigation that arises in Part 5.3A administrations.

Background

Boart Longyear Limited (BLY) and its associated entities sought orders from the Court under section 411 of the Act to convene meetings of creditors and, if the Court sought fit, approve two interdependent creditor’s Schemes of Arrangement (Schemes). The Schemes were part of a broader restructure proposal to de-lever the company and provide it with additional funding (as announced to the Australian Stock Exchange on 3 April 2017).

BLY applied to the Court under section 411(16) for orders restraining creditors from commencing new proceedings or continuing current proceedings against it before the application for an order convening the Scheme meetings had been filed and before the Scheme documents were in final form.

First Pacific Advisors LLC (First Pacific) in its capacity as secured noteholder raised BLY’s solvency and the failure of the company to pay overdue interest pursuant to its secured notes indenture in the course of the application.

Creditors who supported the Schemes comprised a majority of the debt held by secured creditors, being 77.9% of the total debt, although this debt was associated with only three creditors.

Issues before the Court

Black J considered a number of issues regarding the application of section 411(16), namely:

  • whether the phrase ”further proceedings” in the section extends to all proceedings commenced or not;
  • whether the requirement that a compromise or arrangement be “proposed” between the company and its creditors had been met; and
  • other matters relevant to the exercise of the Court’s discretion.

Ruling

Black J considered the judgements in Re Reid Murray Acceptance Ltd [1964] VR 82, which confined the Court’s jurisdiction to restrain “further proceedings” to only proceedings which have commenced, and Re Glencore Nickel Pty Ltd [2003] WASC 18; (2003) 44 ACSR 2010, where McLure J ruled that the Court’s power extends to proceedings that have not been commenced. Black J agreed with the wider view in Re Glencore, which his Honour thought was consistent with the language and the purpose of the section, to promote an orderly and efficient consideration of schemes. His Honour also noted that the wider view is consistent with the trend in modern international insolvency practice, to recognise the risks of multiple proceedings which do not involve any form of collective resolution of claims against the company that is in financial difficulty.

His Honour made clear that section 411(16) does not require all steps of the scheme to have been completed for relief to be granted. It was not necessary for Black J to determine at what point a “proposal” existed, as the announcement to the ASX of 3 April 2017 set out the substance of the proposed schemes, thereby informing creditors.

There were a number of other factors Black J considered when deciding to grant the relief:

  • the risk that individual steps taken by creditors could give rise to a preference or frustrate the procedure to bring about a compromise of creditors’ claims;
  • First Pacific’s allegations of insolvency could prejudice the capacity of creditors to consider the Schemes;
  • evidence of a substantial degree of creditor support for the proposed Schemes; and
  • the Schemes’ potential for a better return than a winding up and to restore the company to solvency.

As BLY had significant assets and operations in the United States, his Honour determined that it was necessary for cross border recognition of the relief to be obtained in order to make the relief effective in the United States.

Black J ordered that the General Counsel and Company Secretary of BLY be authorised as a “foreign representative” of the proceedings pursuant to the Cross Border Insolvency Act 2008 (Cth), therefore allowing BLY to make an application under Chapter 15 of the US Bankruptcy Code to recognise the relief provided in Australia and to extend it to US based subsidiaries of BLY.

Conclusions

It is common in large restructures involving a scheme to have an implementation deed or similar in place binding majority creditors who support the scheme. Such a deed typically provides for a moratorium on adverse actions against the scheme process until a trigger event (such as insolvency) and generally binds a security trustee or equivalent (if one exists) from exercising rights on behalf of secured creditors (indirectly locking up minority secured creditors).

The use of a scheme in conjunction with an order under s411(16) will provide further certainty for the company beyond the use of an implementation deed as it prevents all minority or recalcitrant creditors from agitating through the courts. Another clear benefit of obtaining an order under s411(16) is that it will reduce the scope for ‘greenmail’ by creditors opposed to the scheme as they can no longer threaten litigation proceedings prior to implementation in an effort to be bought out.

It should be noted that the orders do not of themselves impact the solvency position of the company. The moratorium is against instituting proceedings and does not directly impact on whether a debt is due and payable. As such, the directors of companies proposing a scheme will still need to be conscious of their ongoing duties during the scheme process.

The moratorium provided by s411(16) may increase the appeal of schemes over the Part 5.3A administration regime. Despite the cost associated with schemes a clear benefit is the avoidance of formal insolvency proceedings and the sanction provided by the court at the second hearing in favour of the scheme.

Finally, the moratorium will make Australian schemes more recognisable under the US Chapter 15 regime and allow large multinationals with a strong US presence to seek to restructure through the Australian courts with more certainty.

Appeal

We understand that as at the date of this publication an urgent appeal application has been lodged by an interested party. We will provide a further update following the outcome of the appeal.