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The Australian restructuring market was relatively quiet over the 2018–2019 period (especially compared to the 2017–2018 period). Nonetheless, during the past year there were several notable restructuring transactions, two key insolvency law-related decisions by the High Court of Australia, and the introduction of legislative reforms targeted at ‘phoenixing’ activity and the voting of related parties at creditor meetings.
Wiggins Island Coal Export Terminal
The previous year saw the long-awaited completion of Wiggins Island Coal Export Terminal’s (WICET) ‘amend and extend’ style restructuring, which was the largest restructuring by value in the Australian market during 2018.
WICET was jointly developed and owned by eight coal mining companies (ToP shippers) that contracted to use (or pay for) the terminal’s facilities to export their coal under ‘take or pay’ agreements. WICET was established on a cost-recovery basis, such that the terminal handling charges payable under the take-or-pay agreements were calculated to cover the operating and financing costs of WICET.
WICET’s financing structure involved:
- a US$2.6 billion senior syndicated loan facility (maturing in September 2018);
- US$50 million and A$450 million of junior GiLTS notes (maturing in 2020); and
- A$550 million of subordinated holdco financing that was in turn financed by WIPS preference shares issued by WICET’s holding company.
The terminal encountered difficulties when three of the ToP shippers became insolvent, leaving the terminal unable to cover its financing costs or repay or refinance the senior debt maturing in September 2018.
Appointment of receivers by the senior lenders was unlikely to result in a sale at an attractive price, given the constraints imposed by the existing project structure. Instead, it was expected that any receiver would trigger a ‘term out’ under the WICET structure, whereby the financing cost component of the terminal handling charge would be increased in respect of the remaining ToP shippers, resulting in full amortisation of the senior facilities over the following 12 and a half years and no payments being made to any of the junior financiers during that period.
This was unattractive to most of the stakeholders, and a creditors’ scheme of arrangement was eventually proposed pursuant to which the senior facilities were extended for eight years (to 2026), during which the loan would partially amortise (with the hope that the balance could be refinanced at that maturity date). The amortisation would occur at a faster rate than under the term out option but no default interest would be payable, and therefore the overall recovery of the senior lenders was expected to be slightly lower.
The senior facility scheme of arrangement was largely uncontentious, save for two issues. Certain holders of the WIPS had argued that payments due under the holdco loan had not been paid (which would be used to fund WIPS payments), and they were pursuing separate litigation in that regard. In addition, there was some uncertainty as to whether WICET and the intercreditor agent were contractually entitled to make a parallel amendment to the intercreditor agreement outside the scheme (without the consent of the GiLTS) extending the period during which the GiLTS holders were restricted from taking enforcement action (until after the revised senior maturity date). However, neither the GiLTS nor the WIPS holders appeared at either the convening or sanctioning hearing, and the court was content to approve the scheme without making any specific determinations on either matter.
Following the completion of the senior scheme, further negotiations were undertaken with a view to tidying up the position in respect of the GiLTS. While the intercreditor prevented the GiLTS from being paid or taking enforcement action, the GiLTS matured in 2020, giving rise to the accrual of additional default interest and creating challenges to any refinancing at the new senior facility maturity date.
Ultimately, a second creditors’ scheme of arrangement was approved, this time in respect of the GiLTS. This scheme extended the GiLTS maturity to a date six months after the extended senior facility maturity date. The interest rate under the GiLTS was reduced and converted into PIK amounts payable on or following maturity of the GiLTS (subject to some conditions). In exchange, WICET would undertake ‘soft soundings’ of the debt markets at the fourth and sixth anniversaries to determine whether it was possible to refinance the senior facilities and GiLTS on commercial terms at a lower cost, and if so, to use commercially reasonable endeavours to do so.
The restructuring of Quintis Limited (Quintis) was probably the most complex restructuring of the previous year, involving a deed of company arrangement (DOCA) and a creditor scheme of arrangement to extinguish legacy liabilities and effect a debt-for-equity swap.
ASX-listed Quintis and various of its subsidiaries (Quintis Group companies) operated sandalwood plantations and sold related investment products. Quintis faced several class action lawsuits and a liquidity crisis in the wake of issuance of a report by Glaucus (a short seller) outlining flaws in Quintis’ business model, leading to its appointment of administrators in January 2018.
Quintis was primarily financed through the issuance of US$250 million of senior secured notes (Original Notes). In response to the administrator appointments, the Original Noteholders appointed receivers to each Quintis Group company.
After a period of exploring the alternatives available, the receivers (with support from the Original Noteholders) proposed a restructuring to be implemented by way of a DOCA in respect of each Quintis Group company and a creditors’ scheme of arrangement in respect of the Original Notes. The key terms of the restructuring were as follows:
- the claims of unsecured creditors of the Quintis Group companies were pooled and transferred to a creditors’ trust (on the basis that the Quintis deed of cross guarantee meant each entity was responsible for the debts of the others in a liquidation), effectively relieving the Quintis Group companies of all of those claims;
- the receivers contributed A$2.5 million to the creditors’ trust to meet costs and expenses, and for distributions to the unsecured creditors. The employees (as priority creditors) were to be paid in full. The remaining unsecured creditors were divided into two pools: trade creditors with an ongoing relationship with the business; and other creditors (such as claims under financial products and litigation disputes). The former were to receive a significantly higher dividend given the importance of the ongoing trade relationship (although in both cases this exceeded the estimated nil return on liquidation);
- a newly formed private company owned by the Original Noteholders acquired ownership of Quintis’ subsidiaries in exchange for an assumption of Quintis’ liabilities under the Original Notes;
- the Original Notes were exchanged for new second lien notes (issued by newco) with a reduced face value of US$185 million; and
- newco would also issue new first lien notes of approximately US$150 million to the participating Noteholders to pay down interim funding, to recapitalise the Quintis Group’s working capital going forward and to roll up US$10 million of the Original Notes.
All of the Original Noteholders who participated in the meetings voted in favour of the scheme, resulting in it being passed by 98.5 per cent of the Original Noteholders by value, and no objections were received from scheme creditors.
The Quintis restructuring is a good example of the complementary role that DOCAs and schemes of arrangement can play in a restructuring, by dealing with the claims of unsecured and secured creditors, respectively.
Uranium miner Paladin undertook a restructuring, including a debt-for-equity swap, pursuant to a DOCA following its administration in July 2017.
Paladin Energy Limited (PEL), the head company of the group, was Australian incorporated and its shares were listed on the Australian Securities Exchange (ASX). It was primarily financed by (unsecured) convertible bonds issued on the Singapore Stock Exchange. Approximately US$360 million of convertible bonds were outstanding at the time of the administration.
Paladin struggled following the Fukushima nuclear disaster in 2011, which caused uranium prices to fall significantly. Paladin had little in the way of offtake agreements or hedging and was therefore heavily exposed to these declines. Furthermore, Paladin owed a A$277 million prepayment to Electricité de France (EDF), which fell due in July 2017 when Paladin failed to provide the requisite additional security to support this obligation.
Following their appointment, the administrators obtained a US$60 million secured loan from Deutsche Bank, which provided the group with the necessary working capital to keep trading in administration. Given the state of the global uranium market there was little buyer interest, and it was necessary for the existing stakeholders to agree to a restructuring.
Ultimately, an ad hoc group of the convertible noteholders proposed a restructuring pursuant to a deed of company arrangement involving the following key terms:
- all bondholders and EDF (whose claim was later acquired by Deutsche Bank) (participating creditors) would receive a pro rata share of 70 per cent of the shares in PEL, in exchange for their debt;
- the participating creditors would also be entitled to subscribe for a pro rata share of US$115 million of new secured notes. Those that subscribed for such notes were entitled to receive an additional pro rata share allocation representing 25 per cent of the PEL shares;
- the remaining 5 per cent of PEL shares would be allocated to the underwriters of the new notes (3 per cent) and existing shareholders (2 per cent);
- Deutsche Bank would be repaid in full in cash in respect of its US$60 million funding (plus interest and costs); and
- other creditors (including trade creditors, employees and any other secured creditors) would remain unaffected and continue to be entitled to be paid on their existing terms.
The allocation of shares was to be effected by way of a compulsory transfer from the existing shareholders of 98 per cent of their shares (to reflect the allocation set out above). This was achieved by way of a court order under section 444GA of the Corporations Act 2001 (Cth) (Corporations Act), which may be granted where the court is satisfied the transfer would not unfairly prejudice the interests of the existing shareholders. Following previous decisions, the court held that shareholders were not unfairly prejudiced where the shares held no residual value (and the shareholders would not receive any return on a winding up).
Several shareholders raised objections at the section 444GA court hearing indicating that for various reasons they considered that the shares of PEL did have value. These arguments were all rejected by the judge, who accepted on the independent expert’s evidence that the shares had no residual value on a going concern basis, on a ‘distressed’ going concern basis or in a liquidation (which he accepted would likely follow should the DOCA fail). Accordingly, the court made the order approving the transfer of the shares.
The restructuring completed in February 2018 and PEL subsequently relisted on the ASX in February 2019.
Recent noteworthy cases
Holding DOCAs: Mighty River
In September 2018, the High Court of Australia delivered its reasons for dismissing the Mighty River appeal.
As discussed in the 2019 Asia-Pacific Restructuring Review, the Mighty River litigation was significant in that it upheld the use of ‘holding DOCAs’ in Australia. A holding DOCA is the colloquial name for a deed of company arrangement that essentially provides for the relevant company to be put into a holding pattern, with a moratorium on claims by its creditors, while its administrators pursue investigations or other means of reconstructing the company.
In the Mighty River case, the DOCA of Mesa Minerals Limited (Mesa) was challenged by Mighty River on the basis that:
- the Mesa DOCA was inconsistent with the objectives of Part 5.3A of the Corporations Act (including because it impermissibly ‘sidestepped’ the court process to extend an administration);
- the Mesa DOCA was invalid because it did not specify any property of Mesa that would be used to pay creditor claims; and
- the administrators failed to form the requisite opinions as to whether the administration should end, Mesa should enter liquidation or Mesa should execute a DOCA.
The majority of the High Court rejected these arguments and confirmed that holding DOCAs can be a valid use of the DOCA process, provided they are formally constituted in accordance with the requirements of Part 5.3A of the Corporations Act.
In particular, the High Court held that it is permissible to have a DOCA where:
- there is no distribution of property to creditors; and
- there is an ongoing (even indefinite) moratorium while further investigations are conducted and options explored by the deed administrators.
The judgment of the High Court has now settled the validity of holding DOCAs in the Australian market. It has generally been welcomed in Australia as a sensible and commercial result in accordance with market expectations and practice.
Cross-border insolvency: Zetta Jet
In the Zetta Jet case, the Federal Court examined the applicability of Australia’s voidable transaction provisions to the insolvencies of foreign companies.
The case involved the insolvency of Zetta Jet Pte Ltd, a Singapore incorporated company that was subject to US Chapter 11 proceedings. The Chapter 11 proceedings were recognised as a foreign non-main proceeding in Australia pursuant to the Cross Border Insolvency Act 2008 (Cth) (Australia’s legislation adopting the UNCITRAL Model Law on Cross-Border Insolvency (Model Law)).
Subsequently, the US bankruptcy trustee sought to recover misappropriated funds on the basis that the payment was voidable as an ‘uncommercial transaction’ under section 588FF of the Corporations Act.
However, section 588FF applies to ‘companies’ as defined in the Corporations Act, which only includes Australian incorporated companies and foreign incorporated companies registered in Australia (but does not include foreign incorporated companies that have not registered in Australia).
The bankruptcy trustee therefore sought to argue that article 23 of the Model Law should be read to expand the concept of a ‘company’ for these purposes where recognition had been granted to a foreign insolvency provision. Article 23 indicates that a foreign representative ‘has standing to initiate actions’ under the relevant provisions ‘as if the foreign [insolvency] proceeding in relation to a “company” was an Australian [insolvency] proceeding in relation to a “company”’.
The Federal Court rejected these arguments, holding that article 23 was merely a provision giving the foreign representative standing to appear in the Australian courts, but it did not give rise to any substantive legal effect. As a result, it is currently impossible for a foreign representative to utilise the Australian voidable transaction provisions to challenge a pre-insolvency transaction unless the insolvent company is Australian incorporated or registered in Australia.
Trading trusts: Amerind
On 19 June 2019, the High Court of Australia delivered its highly anticipated judgment in Amerind on the position of employee claims against trading trusts under receivership. As discussed in the 2019 Asia-Pacific Restructuring Review, a considerable number of companies in Australia carry on business in a trustee capacity, and therefore the matter is of considerable importance.
Unanimously dismissing the appeal, the Court held that section 433(3) of the Corporations Act required the receivers to apply the statutory priority regime when paying debts incurred by a trading trust.
In reaching its decision, the Court held that the ‘property of the company’ available for payment of creditors of a trustee company includes so much of the trust assets as the trustee company is entitled, in exercise of its right of indemnity. However, proceeds of the trustee’s right of exoneration may be applied only in satisfaction of trust liabilities to which the right relates.
Section 433 applies in connection with property subject to a ‘circulating security interest’. The majority held that, while the right of indemnity was not itself property of the company subject to a circulating security interest, the underlying inventory (to which the trustee company would have recourse through the indemnity) was property of the company subject to such an interest.
While not directly at issue, the Court considered that similar reasoning would apply under section 561 of the Corporations Act, the provision applying if a distribution was to be made to creditors by a liquidator rather than a receiver.
The Amerind decision brings some degree of clarity to what has been a complex and contentious issue in Australian insolvency law. However, not all of the uncertainties have been resolved in this area and further litigation can be expected.
Phoenix Bill: creditor-defeating transactions
‘Phoenix activity’ – where company directors seek to avoid paying liabilities (such as tax and employee entitlements) through the stripping and transfer of assets from one company to another – has long been a source of complaint in the Australian insolvency community.
In February 2019, the government introduced the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (Cth) (the Phoenix Bill) in an effort to prevent such transactions.
Among the measures introduced is a prohibition on ‘creditor-defeating dispositions’ by a company. Creditor-defeating dispositions are transfers of assets by a company for less than market value that hinder creditors’ access to the company’s assets in liquidation. Importantly, it is not necessary to prove insolvency at the time of the transaction if the company enters into formal insolvency, or ceases trading, within the following 12 months.
Certain creditor-defeating dispositions will be voidable. However, unlike normal voidable transactions, it is ASIC (the corporate regulator) that has the power to make such orders (rather than requiring a court order). A company officer that fails to prevent the company from making a creditor-defeating disposition (and other persons that facilitate such a disposition) may be subject to a civil or criminal penalty. The Phoenix Bill did not originally attract much attention, but the potentially draconian and broad-ranging nature of these powers has now come under criticism. One concern voiced is that these powers will jeopardise legitimate restructurings, including those pursued under the new insolvent trading ‘safe harbour’ regime.
The original Phoenix Bill lapsed following the dissolution of Parliament in April 2019 but was reintroduced following the federal elections by the new Parliament in July 2019, and it therefore could be passed and come into law in the near future.
Related creditor voting of assigned claims
Amendments have been made to the Insolvency Practice Rules (Corporations) 2016 (Cth) to limit the ability of ‘related parties’ to cast votes in creditors’ meetings in respect of assigned debt.
The change emerged from concerns that (in some cases) directors, shareholders or other parties related to an insolvent company were acquiring debts of the company for nominal consideration and then using these claims to influence or control the creditor vote on matters such as the identity of the external administrator (and thereby seek to evade proper investigation of pre-insolvency conduct).
The new rule requires that where a ‘related party’ has been assigned a debt, the value of the debt for voting purposes at a creditors’ meeting must be determined by the value of the consideration given for the debt (rather than its face value).
In addition, an external administrator is required to ask creditors of the company who hold their debt as an assignee to provide the administrator with evidence of the debt and the consideration given for it (regardless of whether the creditor is a related party).
These rules will apply to voting on important matters such as whether to approve a DOCA, and should therefore be borne in mind by parties planning a restructuring. Acquirers of secondary debt should also note that in some cases they may need to disclose their trade price to external administrators.
The outlook for restructuring and insolvency activity in Australia over the coming year is uncertain. In July, the Reserve Bank of Australia cut interest rates to a record low of 1 per cent, suggesting some unease about the outlook for the Australian economy.
Nevertheless, default rates are continuing to sit at a low level, particularly outside of the retail, real estate and construction sectors.
 This was in part due to a significant drop in coal prices, which in turn made the WICET pricing structure for shipping coal uneconomic for the coal producers.
 WICET was essentially a project type structure, where the actual underlying assets were not owned by WICET, but were subject to a concession.
 In the matter of Wiggins Island Coal Export Terminal Pty Ltd  NSWSC 1342.
 Orders to continue pre-trial proceedings for the complaint were granted by the Supreme Court of New South Wales on 10 August 2018, but the matter is yet to progress.
 In the matter of Wiggins Island Coal Export Terminal Pty Ltd  NSWSC 1434.
 In the matter of Wiggins Island Coal Export Terminal Pty Ltd  NSWSC 831.
 Re Quintis Limited (subject to deed of company arrangement) (receivers and managers appointed) (No. 2)  FCA 1510. A concern was raised ahead of the second court hearing by Bybrook (a company claiming to have a repurchase agreement in respect of some of the Original Notes) in respect of the value ascribed to the Original Notes in the Kordamentha report on the outcome for scheme creditors if the scheme was or was not passed. The court did not consider that these matters disclosed any basis upon which the court should not approve the scheme and noted that neither Bybrook or anyone else formally opposed the scheme at the hearing.
 It also had shares listed on the Toronto Stock Exchange and Namibian Stock Exchange.
 Corporations Act 2001 (Cth), section 433(3).
 Such as Weaver v Noble Resources Ltd  WASC 182; Re Lewis; Diverse Barrel Solutions Pty Ltd (subject to deed of company arrangement)  FCA 53; Mirabela Nickel Ltd (subject to deed of company arrangement)  NSWSC 836; Re Nexus Energy Ltd (subject to deed of company arrangement)  NSWSC 1910; Re BCD (Operations) NL (subject to deed of company arrangement)  VSC 259; Re Kupang Resources Limited (subject to deed of company arrangement) (recs and mgrs apptd)  NSWSC 1895; Re Ten Network Holdings Limited (subject to deed of company arrangement) (recs and mgrs apptd)  NSWSC 1529.
 Re Paladin Energy Limited (subject to deed of company arrangement)  NSWSC 11.
 These reasons included suggestions that the administrators or independent expert had not considered the prospect of future rises in the price of uranium, the possibility of various alternatives to the DOCA, which might have obtained a higher return and the suggestion that appetite for the new secured notes suggested PEL could have raised further capital.
 Re Paladin Energy Limited (subject to deed of company arrangement)  NSWSC 11, paragraph 70.
 Mighty River International v Hughes (2018) 92 ALJR 822. See further discussion of the case: Paul Apáthy, Mark Clifton, Rowena White and Tom McClintock ‘“Holding” DOCAs confirmed as valid by High Court of Australia’ (2018) available from: https://www.herbertsmithfreehills.com/latest-thinking/holding-docas-confirmed-as-valid-by-high-court-of-australia.
 Re Zetta Jet Pte Ltd; King v Linkage Access Limited  FCA 1979.
 Re Zetta Jet Pte Ltd  FCA 1130.
 Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia & Ors  HCA 20 (Amerind).
 This ultimately refers to security over ‘circulating assets’ as that term is defined in section 340 of the Personal Property Securities Act 2009 (Cth).
 ‘Related creditor’ for the purposes of a vote, in relation to a company, means a person who, when the vote was cast, was a related entity as defined in the Corporations Act, and a creditor, of the company: Insolvency Practice Schedule (Corporations) 2016, section 75-41(4).
 The term ‘assign’ is not defined for these purposes, and therefore it presumably bears its normal legal meaning.
 Insolvency Practice Rules (Corporations) 2016, Rule 75-110(7). The debt will still be entitled to its full value for distribution purposes.
 Insolvency Practice Rules (Corporations) 2016, Rule 75-95(1A).