Supreme Court New South Wales Medium Neutral Citation: In the matter of Wiggins Island Coal Export Terminal Pty Ltd [2018] NSWSC 1434 Hearing dates: 11 September 2018 Decision date: 21 September 2018 Jurisdiction: Equity - Corporations List Before: Black J Decision: The scheme of arrangement between the Plaintiff and the Senior Financiers is approved under s 411 of the Corporations Act 2001 (Cth). Catchwords: CORPORATIONS – arrangements and reconstructions – schemes of arrangement or compromise – application under s 411 of the Corporations Act 2001 (Cth) for orders approving proposed scheme of arrangement – whether scheme is fair and reasonable so that an intelligent and honest member of the relevant class, properly informed and acting alone, might approve it. Legislation Cited: - Corporations Act 2001 (Cth) s 411 Cases Cited: - Re Atlas Iron Ltd (No 2) [2016] FCA 481 - Re BIS Finance Pty Ltd [2018] NSWSC 3 - Re Boart Longyear Limited (No 2) [2017] NSWSC 1105 - Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) [2011] NSWSC 1465; (2011) 86 ACSR 584 - Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358; 77 ACSR 592 - Re David Jones Ltd (No 3) [2014] FCA 753 - Re Seven Network Ltd (No 3) [2010] FCA 400; (2010) 267 ALR 583 - Spark Infrastructure Holdings No 1 Limited [2010] NSWSC 1497; (2010) 79 NSWLR 756; (2010) 81 ACSR 511 - Re Wiggins Island Coal Export Terminal Pty Ltd [2018] NSWSC 1342 Category: Principal judgment Parties: Wiggins Island Coal Export Terminal Pty Ltd (Plaintiff) Representation: Counsel: J Lockhart SC/M Izzo (Plaintiff) J R Williams (Senior Financiers) Solicitors: Ashurst (Plaintiff) Allens (Senior Financiers) File Number(s): 2018/246651 Judgment 1. The Plaintiff, Wiggins Island Coal Export Terminal Pty Ltd ("WICET") seeks orders under s 411(4)(b) of the Corporations Act 2001 (Cth) approving a scheme of arrangement between it and lenders ("Senior Financiers") under a Senior Syndicated Facilities Agreement dated 9 September 2011, as amended from time to time ("Senior SFA"). I made those orders at the conclusion of the second court hearing on 11 September 2018. These are my reasons for making those orders. I have drawn on the helpful submissions of Mr Lockhart and Mr Izzo, who appeared for WICET, in preparing these reasons. 2. By way of background, WICET operates the Wiggins Island Coal Export Terminal ("Terminal") in the Port of Gladstone, Queensland. On 15 August 2018, the Court made orders pursuant to s 411(1) of the Corporations Act approving despatch of the scheme booklet and convening a meeting of the Senior Financiers to consider and, if thought fit, agree to the scheme: Re Wiggins Island Coal Export Terminal Pty Ltd [2018] NSWSC 1342 ("First Court Hearing Judgment"). The scheme meeting was held on 31 August 2018 and the statutory majorities in favour of the scheme were achieved. Role of the Court at the second court hearing 1. As Mr Lockhart and Mr Izzo point out, the principles applicable to the exercise of the Court's discretion to approve a scheme at the second court hearing are well established. In determining whether to approve a scheme at a second court hearing, the Court will have regard to matters including whether the Court's orders convening the scheme meeting were complied with; whether the resolution to approve the scheme was passed by the requisite majority and whether other statutory requirements have been satisfied; whether all conditions to which the scheme is subject have been met or waived, other than in respect of Court approval and lodgement of the Court's orders with the Australian Securities & Investments Commission ("ASIC"); whether the scheme is fair and reasonable so that an intelligent and honest member of the relevant class, properly informed and acting alone, might approve it; whether the proponent has brought to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion; and whether there was full and fair disclosure to creditors of all information material to the decision whether to vote for or against the scheme: Re David Jones Ltd (No 3) [2014] FCA 753 at [3]; Re Atlas Iron Ltd (No 2) [2016] FCA 481 at [6]. The Court has a discretion to approve a scheme and is not bound to approve it merely because it has made orders for the convening of meetings or because the statutory majorities have been achieved: Re Seven Network Ltd (No 3) [2010] FCA 400; (2010) 267 ALR 583 at [31]; Re Atlas Iron Ltd (No 2) above. The Court will recognise that creditors are generally the best judges of their own commercial interest in that regard: Re Seven Network Ltd (No 3) above at [33]; Re BIS Finance Pty Ltd [2018] NSWSC 3 at [10]. Compliance with orders convening the scheme meeting 1. As I noted above, in determining whether to approve a scheme, the Court will have regard to whether the Court's orders convening the scheme meeting were complied with. There is evidence that the explanatory materials for the scheme meeting were despatched, in accordance with orders made at the first court hearing, to email addresses for the Senior Financiers as advised by their solicitors. In several cases, emails were initially not successfully transmitted because of the size of the attachment, and subsequent emails were then successfully transmitted containing the materials in two tranches (Doumani 27.8.18 [9]–[10]). In one case, a failure message was received from one email address but the solicitors for the Senior Financiers confirmed that that address was no longer operative and should be disregarded, and the explanatory materials were served on that Senior Financier at other email addresses (Doumani 27.8.18 [12]–[14]). The scheme meeting was held and conducted in accordance with the Court's orders (McDonough 31.8.18 [7]–[9]) and there is evidence as to receipt and collation of proxy forms and proofs of debt and the admission of proofs of debt (McDonough 31.1.18 [10]–[13]). Requisite majority and other statutory requirements 1. The Court will also have regard to whether the resolution to approve the scheme was passed by the requisite majority and whether other statutory requirements have been satisfied. In this case, 21 of the 22 Senior Financiers submitted a Voting Proof of Debt and Proxy Form; one of the 22 Senior Financiers which submitted a Voting Proof of Debt and Proxy Form abstained; and the remaining Senior Financiers voted in favour of the resolution to approve the scheme. The votes of Bank of China Limited, Sydney Branch and Bank of China Limited, Macau Branch were properly counted as one vote by number on the basis that they are branches of a single legal entity and their vote cannot be split: Spark Infrastructure Holdings No 1 Limited [2010] NSWSC 1497; (2010) 79 NSWLR 756; (2010) 81 ACSR 511. In the result, 20 Senior Financiers voted in favour of the resolution to approve the scheme (McDonough 31.8.18 [24]) and (disregarding the abstention) that resolution was passed unanimously by a 100% majority of Senior Financers present and voting by number and by value. A scheme is nonetheless required to implement the transaction where two Senior Financiers have not consented to it. Even if the abstention were treated as a vote, the percentage of Senior Financers present and voting which were in favour of the resolution was 95.24% by number and the percentage of the Senior Debt voted held by those in favour was 97.95% by value. On either basis, the statutory majorities under s 411(4)(a)(i) of the Corporations Act were comfortably achieved. Votes of Senior Financiers who held notes ("GiLTS") issued under a GiLTS Note Trust Deed and GiLTS Subscription Agreement or had some interest directly or through an affiliate or as a trust party were tagged, but had no impact on the outcome. 2. Mr Lockhart and Mr Izzo submit, and I accept, that the other statutory requirements in respect of the scheme were also satisfied. No issue under s 411(17) arises where a creditors scheme could not be effected as a takeover under Chapter 6 of the Corporations Act. On 17 August 2018, ASIC was provided with a copy of the scheme booklet as approved by the Court (Yang 10.9.18) and ASIC has had a reasonable opportunity to examine the explanatory statement and make submissions to the Court in relation to it. WICET published a notice of this hearing in a national newspaper in the form required by rule 3.4 of the Supreme Court (Corporations) Rules 1999 (NSW) (Allard 10.9.18 [9]). Satisfaction of conditions 1. As I noted above, the Court will have regard to whether all conditions to which the scheme is subject have been met or waived, other than in respect of Court approval and lodgement of the Court's orders with ASIC. There is evidence that each of the conditions precedent in cl 2 of the scheme has been satisfied (Allard 10.9.18 [18]–[22]). 2. Mr Lockhart and Mr Izzo also point out that other conditions precedent in Schedule 2 of the Amendment Deed (SSFA) have been satisfied or are expected to be satisfied prior to 28 September 2018 (Allard 10.9.18 [23]–[24]). It seems to me that that is not necessary for approval of the scheme, which could be approved even if it involved the entry into other agreements that were subject to conditions precedent that were still to be satisfied, at least where those other agreements would not alter the terms of the scheme in a way not consented to by creditors or approved by the Court. Whether the scheme is fair and reasonable 1. The Court will have regard to whether the scheme is fair and reasonable so that an intelligent and honest member of the relevant class, properly informed and acting alone, might approve it. Mr Lockhart and Mr Izzo submit, and I accept, that several considerations support a conclusion that the scheme is fair and reasonable. First, as I have noted above, the scheme received the overwhelming support of Senior Financiers entitled to vote on it and no Senior Financier voted against it. Second, WICET did not receive any notice of appearance from any person seeking to object to the scheme at this hearing (Clemente 10.9.18) and no-one appeared at this hearing to oppose the scheme. Third, the independent expert report of Deloitte (which I reviewed in the First Court Hearing Judgment [14]–[16]) expressed the view that, unless the scheme is implemented, an event of default would likely occur under the Senior SFA, when the Senior Debt became due and payable on 28 September 2018, and that would likely lead to a receivership in which Senior Financiers would not receive a full recovery for 12.6 years, whereas the scheme would allow an anticipated recovery after 8 years (if the debt is refinanced) or 11.3 years (if the debt is not refinanced), and avoids the risk of covenant breaches and the possibility that WICET could lose the right to occupy the Terminal premises in a receivership. 2. Mr Lockhart and Mr Izzo fairly draw attention to letters dated 27 August 2018 and 6 September 2018 received from the solicitors representing WIPS holders which are the plaintiffs in other proceedings to which I referred in paragraph 34 of the First Court Hearing Judgment (Allard 10.9.18 [12]-[15]). I there noted that: "[WICET's holding company ("HoldCo")] has issued 550,000 redeemable preference shares in the capital of HoldCo known as "WIPS", and the proceeds received from the issue of these shares were advanced to WICET under the HoldCo Loan (Allard 9.8.18 [24]–[25]). The WIPS were issued under a subscription agreement with HoldCo ("WIPS Subscription Agreement") and terms of issue in schedule 3 to that agreement ("WIPS Terms of Issue") (Ex AA-1, 1093–1141). By cl 1.9 of the WIPS Terms of Issue, Holdco promises, to the maximum extent permitted by law, to pay dividend entitlements to WIPS holders when and to the extent that HoldCo has funds legally available for payment. In other proceedings in this Court, two WIPS holders have contended that HoldCo has failed to pay dividend entitlements arising from the WIPS Terms of Issue since December 2016; WICET has not properly applied the Cashflow Waterfall and HoldCo has failed to enforce its right to receive interest payments under the HoldCo Loan Agreement; WICET has failed to correctly set or vary the Terminal Handling Charge; and WICET has failed to calculate and charge to each ToP Shipper the correct true up payment referrable to the Terminal Handling Charge for the quarter ending 30 June 2015. The WIPS holders claim payment of $186.9 million or damages in those proceedings; judgment for amounts totalling $23.8 million plus accrued interest on unpaid dividends or damages or an order for the payment of $35.8 million in dividends; and other relief." 1. The WIPS holders contended in those letters that the scheme was not fair because two features of it, a removal of $76m from the Proceeds Account (as defined) (and a division of the Cashflow Waterfall (as defined) into different waterfalls for operating costs and finance costs, infringed their contractual rights under the Shareholders Agreement and were "not necessary to protect the legitimate interests of the Senior Financiers". The WIPS holders invited WICET and the Senior Financiers to amend the scheme to remove the two features to which they object. WICET and the Senior Financiers did not accept that invitation. 2. It appears the payment out of the Proceeds Account occurred earlier this year rather than as an aspect of the scheme (Allard 10.9.18 [26]). I referred to the treatment of the Cashflow Waterfall in the First Court Hearing Judgment as follows: "the Intercreditor Terms contain (in cll 11.2 and 11.4) two sets of cashflow waterfalls which prescribe the order in which different creditors are to be paid out of WICET's AUD and USD proceeds accounts respectively ("Cashflow Waterfall"). Mr Lockhart and Mr Izzo point out that, broadly speaking, the Cashflow Waterfall provides for payment of, first, operating costs; next, senior finance costs; next, principal under the Senior SFA; next, if certain conditions are satisfied, certain permitted payments in respect of the Junior Debt and the HoldCo Loan Debt. The Intercreditor Terms are proposed to be amended, again outside the proposed scheme but as a condition precedent to it, so that the Cashflow Waterfall is divided into different waterfalls for payment of operating costs from the operating cost component of the Terminal Handling Charge (from an AUD proceeds account) and finance costs from the finance cost component of the Terminal Handling Charge (from a USD proceeds account)." 1. I also referred to the contractual mechanism by which the Intercreditor Terms were to be amended in the First Court Hearing Judgment, although I did not express a concluded view in respect of that mechanism where I noted that it may be in issue at the second scheme hearing, if there was opposition to the scheme, or in any challenge to the transaction brought in any separate proceedings. I will also not express a concluded view as to those matters in this judgment, for the reasons noted below. 2. I recognise that, in determining whether to approve a scheme, the Court may have regard not only to the interests of the members or creditors who are bound by a scheme, but also the interests of other affected parties, including at least shareholders and potentially other claimants against the company: Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358; 77 ACSR 592. In Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) [2011] NSWSC 1465; (2011) 86 ACSR 584 at [26], Barrett J noted that the Court may have regard, in approving a scheme, to its impacts upon "others with a legitimate interest in the deployment of the company's assets". His Honour also noted (at [27]) that: "[T]he court's consideration is not confined to the direct results of the relevant schemes' operation. If a scheme is proposed and will take effect in a wider and inseparable context – particularly a contractual context – involving indirect consequences, it is appropriate for those consequences to be taken into account." 1. I approved that observation in Re Boart Longyear Limited (No 2) [2017] NSWSC 1105 at [84], but also observed (at [281]), with reference to authority, that: "… the Court should not approach the question of approval of a scheme by postulating some other scheme that could have but does not exist: Re Application of NRMA Ltd (No 1) above at [29]; Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) above at [28]ff. It seems to me that the Court particularly should not take that approach at the invitation of persons who are not party to and not bound by such a scheme." I also noted that: "I have observed above that I accept that the Court may have regard to other affected interests, but it does not seem to me that that can extend to, for example, not approving a creditors' scheme that is supported by substantially all creditors and is not intrinsically unfair because another constituency would prefer a different scheme. I also have regard to the fact that the case law establishes that less weight should be given to the interests of a party affected by a scheme which would have no real economic interest in an insolvency: Re City of Melbourne Bank Ltd (1897) 19 ALT 80; Re Centro Properties Ltd (in its capacity as responsible entity of Centro Property Trust) above at [112]. That proposition has particular weight here where I have held that an external insolvency administration is the likely alternative to the approval of the schemes." 1. I am not persuaded that the Court should reach substantive findings as to matters raised in inter partes correspondence by the WIPS holders, which are apparently sophisticated and well-advised third parties which chose not to appear or raise these objections before the Court. It does not seem to me that a second scheme hearing is an appropriate forum for the Court to determine contested questions as to the contractual arrangements between WICET and WIPS holders, where those holders do not appear and would not be bound by any findings that the Court might make. I also recognise that the WIPS holders could have sought either interlocutory relief to restrain implementation of the scheme if they contended it was inconsistent with their contractual rights, on giving an appropriate undertaking as to damages, or could have sought final relief on an urgent basis to restrain implementation of the arrangements. No such relief was sought. 2. WICET submits that the WIPS holders' claims that their contractual rights are infringed are misconceived. I also consider it preferable that I do not address that question, where it is not necessary to do so and where that question may have to be determined in the other proceedings between WICET and WIPS holders. It is sufficient to recognise that, as Mr Lockhart and Mr Izzo point out, the evidence indicates that it would likely take 12.6 years for Senior Financiers to be paid out in a receivership of WICET, and neither GiLTS holders nor WIPS holders (whose return comes through repayments under the Holdco Loan (as defined)) would receive anything until the Senior Financers were paid out under that receivership, by reason of the "Term Out" provision in cl 17.15 of the Senior SFA and the enforcement waterfall in cl 3.1 of the Intercreditor Terms. Mr Lockhart and Mr Izzo submit, and I accept, that, given the risks of a receivership and the time it would take before the WIPS holders had any prospect of repayment in a receivership, it is not established that they are worse off if the scheme proceeds than if it does not. 3. There is also force in Mr Lockhart's and Mr Izzo's submission that, although there are occasions where a Court might entertain an argument that a scheme should not be approved because it would involve a statutory contravention, there is no precedent for refusing to sanction a scheme because it might arguably infringe a private law right, let alone a contractual right of a person not party to the scheme. It is not necessary to express a final view as to that matter where the WIPS holders did not seek to appear in opposition to the scheme. 4. I am satisfied that the Court should not withhold its approval of the scheme on fairness grounds by reason that the WIPS holders have expressed the views to which I have referred in correspondence with WICET's solicitors. Orders 1. For these reasons, I made orders as proposed by WICET approving the scheme. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 September 2018