This week’s TGIF considers whether, in a voluntary administration, a report to creditors constituted sufficient disclosure and whether the proponent of a DOCA should be allowed to vote as a creditor in favour of that DOCA.
The Ten Group of companies (Ten) went into voluntary administration on 14 June 2017. During the administration, the receivers and administrators of Ten (the Receivers and the Administrators) invited recapitalisation or acquisition proposals for Ten. Two options were initially proposed to the Receivers:
One proposed deed of company arrangement (DOCA) was from Birketu and Illyria, companies respectively associated with Bruce Gordon and Lachlan Murdoch, which were substantial shareholder guarantors of Ten before it went into administration (the B&I DOCA). A revised version was submitted on 25 August 2017 and was due to expire at the close of business that day.
The other proposal was from CBS International Television Australia Pty Ltd and associated entities (CBS) (the CBS DOCA). CBS was a major creditor of Ten in its role as a primary supplier of content to Ten. CBS had lodged a proof of debt with the Administrators for a claim in excess of $800 million.
The Receivers and the Administrators preferred the CBS DOCA, which involved the acquisition of Ten by CBS. This decision was announced on 28 August 2017. On 4 September 2017, the Administrators issued their report pursuant to section 439A of the Corporations Act 2001 (Cth) (the Report) and convened a second meeting of creditors for 12 September to vote on the CBS DOCA.
Birketu, along with two other creditors, brought a challenge in the New South Wales Supreme Court regarding the sufficiency of the administrators’ report. They sought orders, among others, that the meeting be restrained until certain information deficiencies in the report were fixed.
They did so on the basis that the Report was allegedly deficient in its disclosure of critical information about the respective virtues of the competing DOCAs – for example, failing to explain or mischaracterising their respective execution risks. This was relevant in case the creditors wanted to vote down the CBS DOCA and instruct the Administrators to go back and negotiate over the B&I DOCA, which had since expired.
Birketu also sought orders to deny CBS an entitlement to vote in favour of the CBS DOCA or to limit that entitlement to a vote worth a nominal $1. Birketu argued it was therefore contrary to commercial fairness to permit CBS to vote. They also sought orders to allow shareholder creditors of Ten to vote. In doing so they alleged that s 600H of the Corporations Act did not prohibit shareholder creditors from voting in a voluntary administration.
The second creditors meeting was adjourned for a week to allow the hearing to take place, and during that time, the Administrators released a second supplementary report, which explained why they had chosen to put the CBS DOCA to creditors.
The Court found that there were not deficiencies in the Report that warranted orders requiring more information be provided to creditors or restraining the meeting. The Court noted that the level of information to be provided under s 439A is to be determined in the context of the administration.
In this case, the Report was intended to provide for a relatively prompt process of administration and the amount of information would generally be less than that as in a scheme of arrangement. Also relevant was the fact that the DOCA, if adopted at the second creditors’ meeting, could be challenged under s 445D on similar grounds if the report was materially misleading or omitted material information that affected the voting at the meeting. That factor tended against the granting of such relief.
The Court went on to find that there was no basis to prevent CBS from voting as a creditor, and that any such order would be inconsistent with the policy of Pt 5.3A of the Corporations Act, which is to ensure creditor control of the process of voluntary administration. The Court noted that there was no reason in principle that a creditor, otherwise entitled to a vote, should have that entitlement affected because it proposes a DOCA that may assist the survival of the company. Again, s 445D also enabled a similar form of relief that could take place after the second creditors’ meeting.
Finally, the Court found that shareholders were not entitled to vote, as they were prevented by s 600H, which on its proper construction applies to voluntary administrations, and that in any case leave to allow shareholders to vote should not be granted in the absence of evidence beyond media speculation that any shareholders were intending on bringing claims against Ten.
As a result, the Court dismissed the originating process and the meeting went ahead as rescheduled.