The Mirabela case confirms that section 444GA of the Corporations Act is a realistic option for restructuring a large listed company's share capital.
Administrators of a deed of company arrangement have previously used section 444GA of the Corporations Act 2001 (Cth) to obtain a court order for the transfer of shares in private companies, but the provision had not, until Mirabela, been used in respect of a listed company.
Any uncertainty regarding section 444GA's application to listed companies has been dispelled by a recent decision in the NSW Supreme Court, In the matter of Mirabela Nickel Ltd (subject to deed of company arrangement)  NSWSC 836, which could open the door to restructuring share capital in certain circumstances without the need for a scheme of arrangement.
A default triggers a DOCA and recapitalisation plan
Mirabela and its related entities had several debt facilities, including US$395 million of senior unsecured notes issued by Mirabela under an Indenture guaranteed by Mirabela Investments Pty Ltd (subject to a deed of company arrangement) and Mirabela Mineracao do Brasil Ltda, a wholly owned Brazilian registered subsidiary of Mirabela.
On 15 October 2013 and 15 April 2014, Mirabela failed to make interest repayments under the Indenture, triggering an event of default.
In November 2013, Mirabela entered into a standstill agreement with its financiers, including the unsecured noteholders, in order for a recapitalisation plan to be developed.
On 25 February 2014, Mirabela went into administration pursuant to section 436A of the Corporations Act.
On 13 May 2014, at the second creditors' meeting, a majority of creditors from Mirabela and Mirabela Investments resolved that the companies execute deeds of company arrangement that would implement the proposed recapitalisation plan.
Thereafter, the administrators of Mirabela applied for leave under section 444GA to transfer 98.2% of all existing shares in Mirabela.
Section 444GA of the Corporations Act
Under section 444GA, an administrator of a deed of company arrangement may transfer shares in a company if shareholders provide written consent or if the court grants leave.
An application for leave can be opposed by a member of the company, a creditor, an interested party or the Australian Securities and Investment Commission.
The threshold question for the court when granting leave under section 444GA of the Act is if the transfer of shares will unfairly prejudice the interests of the members of the company.
Would the shareholders be better off – or worse?
Justice Black of the NSW Supreme Court compared the position of the shareholders if leave were to be granted against the position if Mirabela were to be wound up to determine whether the members would be unfairly prejudiced. This meant considering the administrators' section 439A report, an explanatory statement by Mirabela (prepared by the administrators), an independent experts' report and the views of shareholders.
Administrators' section 439A report
According to the Report:
- If Mirabela and Mirabela Investments were placed in liquidation, employees of Mirabela would be paid in full, secured creditors would receive 7.08 cents in the dollar and unsecured creditors and shareholders would receive no return.
- The transfer of shares under the Proposed Recapitalisation Plan was the only available option to Mirabela and Mirabela Investments to reduce their debt to an appropriate level.
- Shareholders were in no worse position under the Proposed Recapitalisation Plan than if Mirabela and Mirabela Investments went into liquidation.
The Explanatory Statement noted that:
- An advantage to shareholders was the potential to recover value through the shares in comparison with the loss that would occur for some or all of the shareholders on the winding up of Mirabela.
- Mirabela's existing shareholders, however, would continue to hold low percentages of the shares in Mirabela following implementation of the Proposed Recapitalisation Plan (1.8%).
- The shareholders would retain minimal equity in Mirabela which may potentially hold some economic value, which is more favourable to shareholders (although perhaps only slightly) than the loss of all their equity in a winding up.
Independent Experts' Report
According to the Independent Experts:
- Mirabela Group's liabilities of US$526.8 million materially exceeded the enterprise value of its assets.
- The shares of Mirabela were of no value, and if Mirabela and Mirabela Investments were placed into liquidation shareholders would not receive any return.
Views of shareholders
One holder of a substantial number of shares in Mirabela objected to the transfer of shares on the basis that Mirabela was possibly solvent, nickel prices were rising and that Mirabela could avoid insolvency by raising capital through a public offering.
The administrators responded by highlighting that Mirabela was likely to become insolvent and unable to operate beyond December 2013 other than on the basis of standstill agreements with its creditors. The administrators also highlighted that Mirabela would likely be placed in liquidation if the Proposed Recapitalisation Plan was not adopted. The shareholder made a further objection by reinforcing the possibility of a public capital raising. Justice Black, however, dispensed with the shareholder's objection on the basis that the administrators adequately assessed the prospect of a public capital raising.
Other shareholders raised objections which included dissatisfaction with the reduction of their share value, the significant effect on the capital invested in Mirabela and that majority noteholders would determine the fate of their shares. Justice Black, however, also dispensed with their objections on the basis that they simply reflect the understandable disappointment of shareholders.
Why the transfer of shares was allowed to go ahead
Justice Black followed Chief Justice Martin's approach in Weaver v Noble Resources Ltd  WASC 182:
"[t]he notion of unfairness only arises if prejudice is established. If the shares have no value, if the company has no residual value to the members and if the members would be unlikely to receive any distribution in the event of a liquidation, and if liquidation is the only alternative to the transfer proposed, then it is difficult to see how members could in those circumstances suffer any prejudice, let alone prejudice that could be described as unfair."
Justice Black also noted that the question of unfair prejudice must be determined in the context of the objects of Pt 5.3A of the Act: the business, property and affairs of an insolventcompany should be administered in a way that results in a better return for the company's creditors and members than winding up would. Justice Black ultimately held that the Proposed Recapitalisation Plan preserves Mirabela's business, allows for the retention of Mirabela employees and allows trade creditors to be paid in full.
Despite shareholders losing the vast majority of their shares, the transfer allows shareholders to retain a very small shareholding and hence some possible economic value, rather than receiving no return upon liquidation. Therefore, after considering all the evidence before him and the respective positions of the shareholders, Justice Black concluded that he was satisfied that there was no unfair prejudice to the shareholders in relation to the proposed transfer of their shares.
How will the Mirabela decision affect future administrations?
The Mirabela case was closely watched, and the decision will bring some comfort and clarity. Given that section 444GA offers a quicker route to restructuring share capital than a scheme of arrangement, we would expect to see this being utilised more by administrators seeking to implement a recapitalisation.
- demonstrates the usefulness of section 444GA in effecting a restructure of a company's share capital for large listed companies, and not just private companies;
- confirms that if shareholders are to receive no distribution in a winding up, they will suffer no prejudice if their shares are transferred (noting that, in the case of Mirabella, shareholders retained 1.8% of the share capital in the company.
Accordingly, where the transfer of shares in fact provides shareholders with a better result than if the company were to be placed into liquidation, there appears to be no impediment to a court granting the relevant orders under section 444GA.