This week’s TGIF considers the case of In the matter of Boart Longyear Limited  NSWSC 537 in which the NSW Supreme Court made orders to assist with the restructuring of a group of companies to the ultimate benefit of creditors.
A group of companies in financial difficulty sought the Court’s approval of two interdependent creditors’ schemes of arrangement which would effect a restructuring of the group’s financial affairs. The group had operations both in Australia and the US.
The creditors’ schemes were largely supported by the companies’ creditors. However, one of the group’s key US creditors (a significant holder of senior secured notes) indicated that it would seek to block the restructure, as it considered it could procure more favourable terms. Accordingly, there was a risk that the US creditor would seek to bring proceedings in both Australia and the US to jeopardise the proposed schemes. Especially in circumstances where the company not paid interest on its senior secured notes.
The companies sought orders that:
Any further proceedings against them be restrained under s411(16) of the Corporations Act; and
A director of one of the companies who was resident in the US be authorised to act as a ‘foreign representative’ for the purposes of making an application to the United States Bankruptcy Court for recognition of the Australian proceeding (approval of the schemes), under Chapter 15 of the United States Bankruptcy Code.
The application for orders pursuant to s411(16) was brought prior to the application for an order to convene the scheme meetings.
The scheme class issue is currently subject to an appeal from a separate judgment (see In the matter of Boart Longyear Ltd  NSWSC 567.
RESTRAINT OF PROCEEDINGS?
S411(16) provides that where a compromise or arrangement has been proposed between a company and its creditors (or any class of them), notwithstanding that no order or resolution has been made to wind up the company, the Court may restrain any further proceedings being brought against it.
The evidence before the Court was that:
The creditors who supported the schemes comprised a significant proportion of the total debt held by secured creditors (77.9%).
It was likely that the companies would shortly become insolvent absent any moratorium with their creditors.
If approved, the schemes had the potential to result in a better return to creditors than a winding up.
In making the order under s411(16), the Court held that:
The reference to “further proceedings” in s411(16) is not limited to proceedings presently in existence, but includes those proceedings not yet commenced. This is conducive to the orderly and efficient consideration of the proposed schemes and 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 a company in financial difficulty.
For a compromise or arrangement to be ‘proposed’ for the purposes of s411(16), it does not require that all steps of the scheme be completed. It is likely to be sufficient that the substantial features of the scheme have been identified and made known to creditors.
In this case, a proposal existed because a detailed announcement was made to the ASX at an early stage which set out the substance of the proposed schemes and detailed explanatory memoranda were provided to ASIC, including draft expert reports.
In exercising its discretion under s411(16), the Court would also have regard to the risk that individual steps taken by creditors (as was present in this case) could give rise to a preference or seek to frustrate the procedure in s411(16), which could potentially force a company into voluntary administration or liquidation.
Chapter 15 of the US Bankruptcy Code broadly corresponds to the Model Law on Cross Border Insolvency of the United Nations Commission on International Trade Law (Model Law), which is set out in Schedule 1 to the Cross-Border Insolvency Act 2008 (Cth).
Article 1 of the Model Law states that it applies in circumstances where assistance is sought by a foreign court or foreign representative in connection with a foreign proceeding or in a foreign state in connection with a proceeding under Australian insolvency laws (amongst other things).
In appointing the director as a foreign representative, Black J held that:
The same reasons that support an order under s 411(16) in order to preserve the opportunity for a restructuring of the companies may well support the grant of a stay of proceedings in the US.
Although no foreign proceeding yet existed in the US, this application fell within the ambit of Article 1 because it was made in respect of potential US proceedings in connection with the Australian s411 proceeding seeking approval of the schemes.
The fact that there could be potential proceedings in the US was enough to enliven the Court’s jurisdiction to co-operate with the US Courts in order to avoid acts detrimental to creditors under Article 23 of the Model Law.
His Honour also said that had he not reached the conclusion that the Court should make the order appointing the director as a foreign representative pursuant to the Model Law, he would have concluded that the Court had an inherent jurisdiction to do so.
This case highlights the Court’s willingness to assist with the restructuring of companies to the benefit of creditors and provides a good example of how the Australian insolvency law, through the adoption of the Model Law, can work in harmony with the insolvency laws of other jurisdictions.