FEDERAL COURT OF AUSTRALIA

AGL Energy Services (Queensland) Pty Limited v AGL Energy Services Pty Limited [2010] FCA 452

THE COURT ORDERS THAT:

1.         The Plaintiff place an advertisement in The Australian newspaper, in a form substantially equivalent to the form of Annexure A to these orders, on Friday, 16 April 2010.

2.         The proceeding be stood over part-heard to 10:15 am on 19 April 2010.

3.         The proceeding be listed at 10:15 am on 29 April 2010 for the hearing of any application to approve the scheme of arrangement between the Plaintiff and its sole member, AGL Sales Pty Limited.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

ANNEXURE A

Notice of hearing to approve scheme of arrangement

(Form 6, rule 3.4)

TO all the creditors and members of AGL Energy Services (Queensland) Pty Limited (ACN 104 759 471) (ESQ)

TAKE NOTICE that at 10.15am on 29 April 2010, the Federal Court of Australia at Law Courts Building, Queens Square, Sydney, will hear an application by ESQ seeking the approval of a scheme of arrangement between the above-named company and its member (the Scheme). The effect of the Scheme is to provide for:

(a)       the transfer to AGL Energy Services Pty Limited (ACN 074 821 720) (Transferee Company) of all of the assets of ESQ;

(b)       the transfer to Transferee Company of all of the liabilities, including creditors, of ESQ;

(c)       the continuation by Transferee Company of all legal proceedings pending by or against ESQ; and

(d)       the deregistration of ESQ by ASIC without winding up.

The application will be heard by the Court if a resolution proposing the Scheme has been passed by a meeting of the member of ESQ prior to the Court hearing.

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on ESQ a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on the plaintiff at its address for service at least 1 day before the date fixed for the hearing of the application.

The address for service of ESQ is:

c/o Gilbert + Tobin

Level 37, 2 Park Street

Sydney NSW  2000 (Attention: Colleen Platford).

Gilbert + Tobin Lawyers

Level 37, 2 Park Street

Sydney NSW 2000

REASONS FOR JUDGMENT

1                     The plaintiff, AGL Energy Services (Queensland) Pty Limited (the Company), has applied to the Court under s 411 of the Corporations Act 2001 (Cth) (the Act) for orders convening a meeting of the only member of the Company, AGL Sales Pty Limited (the Company Member), to consider a purported scheme of arrangement between the Company and the Company Member.  The Company is a proprietary company limited by shares and is a member of the AGL Group consisting of AGL Energy Limited and its subsidiaries.  The Company’s issued share capital consists of 5,796,100 shares, all of which are held by the Company Member.  The principal activity of the Company is to own and manage electricity co-generation facilities in Queensland. 

2                     The real object of the purported scheme is to effect an amalgamation between the Company and the defendant, AGL Energy Services Pty Limited (the Transferee), which is also a member of the AGL Group.  It is proposed that the assets and liabilities of the Company will be transferred to the Transferee in connection with a restructure of the AGL Group and that the Company will be deregistered without winding up.  Various members of the AGL Group are involved in the restructure, which will involve the transfer of some or all of the undertaking, property and liabilities of several members of the AGL Group to other members of the AGL Group and the deregistration of the transferor companies. 

3                     The proposal is expressed to be a scheme between the Company Member and the Company.  The proposed scheme states that it is to provide for three matters, being the transfer to the Transferee of all the assets and liabilities of the Company, the continuation by or against the Transferee of all legal proceedings pending or against the Company, and the deregistration of the Company by the Australian Securities and Investments Commission (the Commission) without winding up.  All of those matters are proposed to be effected pursuant to s 413 of the Act.  While the proposal is expressed to be a scheme of arrangement between the Company Member and the Company, I have some reservations as to whether, in its propounded form, it is in fact properly characterised as a compromise or arrangement between the Company and the Company Member within the meaning of s 411 of the Act. 

4                     The only operative provisions of the scheme in its propounded form are that, from the date when the scheme is implemented :

·        the assets of the Company will be transferred to the Transferee. 

·        all liabilities of the Company will be transferred to and become liabilities of the Transferee,

·        all legal proceedings pending by or against the Company will be continued by or against the Transferee and

·        the Company will be deregistered without winding up. 

That is the effect of clause 4 of the scheme as propounded.  Clause 5 provides that the scheme is to bind the Company and the Company Member and provides for further assurance in order to complete or perfect the transfer of the assets and liabilities of the Company to the Transferee. 

5                     However, while the proposed transfer will have a significant effect on the Company Member, in that the value of its shares will be significantly diminished, there appears to me to be nothing of a compromise or arrangement involved in the scheme as propounded.  In order to explain the concern, it is necessary to say something more about the structure of Part 5.1 of the Act. 

6                     Section 411(1) relevantly provides that, where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or between a part 5.1 body and its members, the Court may, on the application of the body or of any creditor or member of the body, order a meeting of the creditors or the members of the body to be convened.  Where the Court makes such an order, the Court may approve the explanatory statement required by
s 412(1)(a) of the Act.  Section 412 requires that, where a meeting is convened under s 411, the body must, with every notice convening the meeting that is sent to a creditor or member, send an explanatory statement explaining the effect of the compromise or arrangement and setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement. 

7                     The pivotal aspect of s 411 is contained within s 411(4), which provides that a compromise or arrangement is binding on the creditors or on the members if and only if at a meeting convened in accordance with an order under s 411(1) the compromise or arrangement is agreed to by the requisite majority or a resolution in favour of the compromise or arrangement is passed by the requisite majority and the compromise or arrangement is approved by an order of the Court.  Thus a compromise or arrangement can affect and bind a creditor or member even though not supported by the creditor or member and, indeed, if opposed by the creditor or member, so long as the prerequisites of s 411(4) are satisfied.

8                     Section 413 of the Act is concerned with the facilitation of reconstruction and amalgamation of Part 5.1 bodies.  Under s 413(1), where an application is made to the Court for the approval of a compromise or arrangement under s 411 and it is shown to the Court that the compromise or arrangement has been proposed for the purposes of or in connection with a scheme for the reconstruction of a Part 5.1 body or the amalgamation of two or more Part 5.1 bodies and that, under that scheme, the whole or any part of the undertaking or of the property of a body concerned in the scheme (referred to as the transferor body) is to be transferred to a company (referred to as the transferee company), the Court may either by the order approving the compromise or arrangement, or by a later order, provide for all of the matters specified in s 411(1). 

9                     The matters specified in s 413(1) include the transfer to the transferee company of the whole or a part of the undertaking and of the property or liabilities of the transferor body, the continuation by or against the transferee company of any legal proceedings pending by or against the transferor body and the deregistration by the Commission without winding up of the transferor body, if it is a company.  The terms liabilities and property used in s 413(1) are defined in s 413(4) in terms that are not presently relevant.  Under s 413(2), where an order made under s 413 provides for the transfer of property or liabilities, then, by virtue of that order, that property is transferred to and vests in, or those liabilities are transferred to and become the liabilities of, the transferee company.

10                  Section 413(3) requires that, where an order is made under s 413, each body to which the order relates must, within 14 days after the making of the order, lodge an office copy of the order with the Commission.  That signifies, clearly enough, that the orders made under s 413 are to operate on both the transferor body and the transferee company. 

11                  It is apparent that there are two requirements or prerequisites for the making of an order under s 413.  The first is that there must be an application to the Court for the approval of a compromise or an arrangement within the meaning of s 411.  The second is that it must be shown to the Court that that compromise or arrangement has been proposed for the purposes of or in connection with a scheme for the reconstruction or the amalgamation of bodies and that, under that scheme, the whole or any part of the undertaking or the property of a body concerned in the scheme is to be transferred to a company.

12                  Clearly enough, what is presently proposed involves an amalgamation or a reconstruction within the meaning of s 413.  The reservation that I have concerns the question of whether or not the first of the two requirements or prerequisites is satisfied, namely, that there is an application to the Court for the approval of a compromise or arrangement within the meaning of s 411.  If what has been propounded is not a compromise or an arrangement within s 411, there must be a real question as to whether the Court has jurisdiction to make orders under s 413.

13                  I am satisfied that what is proposed is not a compromise or arrangement between the Company and its creditors.  That satisfaction is derived from the analysis to which I have just adverted.  That is to say, a clear distinction is drawn between the compromise or arrangement contemplated by s 411, on the one hand, and a scheme for the reconstruction or amalgamation of bodies, as contemplated by s 413, on the other hand.

14                  A scheme for reconstruction or amalgamation within s 413 is not, of itself, a compromise or arrangement between a Part 5.1 body and its creditors within s 411.  However, before the jurisdiction under s 413 can be exercised, there must be such a compromise or arrangement.  As a practical matter, it may be that the compromise or arrangement is one that does not need to rely on s 411(4), because it is something that could be effected privately between a company and its members, as in this case, between the Company and the Company Member.  However, there is nothing untoward, in invoking the powers conferred on the Court by s 411 as a prerequisite to enlivening the further provisions of s 413 (see, for example, Re Clydesdale Bank Limited (1950) SC 30 at 36 ff, where a clear distinction was drawn between a compromise or arrangement and a scheme of reconstruction or amalgamation under s 206 and s 208 of the Companies Act 1948 (United Kingdom), which correspond with ss 411 and 413 of the Act). 

15                  The element of compromise or arrangement that is necessary to satisfy s 411 need not be of any great magnitude or significance, so long as what is proposed can fairly be characterised as a compromise or arrangement between a company, on the one hand, and its members, on the other.  That will suffice to enliven the Court’s powers under s 413, so long as the compromise or arrangement is proposed for the purposes of, or in connection with, a scheme for the reconstruction or amalgamation.  Clearly enough, what is being proposed is for the purposes of, and in connection with, such a scheme.

16                  There are two stages involved in the exercise of power under s 413, insofar as the Court is called upon, not only to approve the supporting compromise or arrangement under s 411, but also to make orders providing for all of the matters referred to in s 413.  While what is being propounded is not a compromise or arrangement between the Company and its creditors, its creditors may well be affected by the proposal.  That is to say, by virtue of having claims against the Company, whether those claims be mere claims in debt or in respect of continuing contractual obligations, creditors would be affected by any order made under s 413.

17                  The proposal involves the transfer of all of the property and assets of the Company to the Transferee.  That will have the effect that the Company’s assets and property will be available for the creditors of the Transferee.  Thus, while it may well be that the creditors of the Company will not, as a consequence, be materially prejudiced by the proposal in any way, they nevertheless have an interest in the consequences of making of orders under s 413.  That is accepted by the Company.   

18                  Accordingly, the Company has proposed that the application to the Court for orders under s 413 be advertised so as to draw the attention of creditors to the intended application.  Any advertisement of the intended application, however, should state specifically the nature of the orders that are being sought, namely, that there will be a transfer by the Company to the Transferee of all of the Company’s undertaking and all of its assets, that there will be an assumption by the Transferee of all of the liabilities of the Company and that that will be followed by the deregistration the Company.

19                  At this stage, I am not disposed to order that a meeting of the Company Member be convened.  However, the Company proposes to reformulate the compromise or arrangement that it will propound for the purposes of approval under s 411(4).  Accordingly, I propose to stand the matter over to enable the proposed compromise or arrangement between the Company and the Company Member to be reworded, so that it can clearly be seen to be a compromise or arrangement between the Company and the Company Member within s 411.  Nevertheless, I am disposed to direct the publication of an advertisement, in anticipation of making an order convening a meeting of the Company Member for the purposes of s 411. 

20                  Although, on one view, it may be otiose, the Company has prepared an explanatory statement, such as would satisfy s 412.  When I say otiose, the Act requires it, but it is hardly necessary for the Company Member to be informed of the detail that is contained in the proposed explanatory statement.  However, the Company has been mindful of the possible effect of the proposal on its creditors and those of the Transferee, and gone to some lengths to ensure that there will be evidence before the Court that the proposed orders under s 413 will not be prejudicial to the interests of either group of creditors.  Ernst & Young Transaction Advisory Services Limited (Ernst & Young) have therefore been retained to provide an opinion as to whether the creditors of the Company will be adversely affected as a result of the proposal. 

21                  The report by Ernst & Young discloses that, as at 31 December 2009, the Company’s total liabilities were $4,147,000, compared with total assets of $30,875,000, giving net assets or total equity of $26,728,000.  The Transferee, on the other hand, had total liabilities of $10,785,000, as against total assets of $20,863,000, giving net assets or total equity of $10,078,000.  The effect of the amalgamation will be that the Transferee will have net assets or total equity of $36,806,000, being total assets of $51,738,000, and total liabilities of $14,932,000.

22                  The details of the assets are not disclosed in Ernst & Young’s report.  To the extent that the assets consist of rights under contracts that might be affected by the proposed amalgamation, that could be a matter of some significance.  That is to say, if the effect of the amalgamation were to give rise to some event of default that would enable valuable contracts to be terminated, that would be a matter that must be considered by the Court in the exercise of its discretion to make orders, under s 413, that might bind other, unsecured creditors.  However, the Company has also taken substantial steps to engage in a due diligence exercise to ensure that, to the extent that there are valuable contracts that constitute assets of the Company, the other parties to the contracts will be notified and their consents obtained if necessary, thereby ensuring that that such valuable asset will not be lost.  Ultimately, of course, they are matters for consideration by the Court when it comes to consider making the orders sought under s 413.

23                  It is normal in a proceeding brought under s 411 for the Court to examine the proposed scheme, with a view to determining whether it is one that the Court might approve, assuming it is otherwise approved or agreed to by the members or creditors.  In the present circumstances, of course, there is no doubt that whatever compromise or arrangement is proposed will be approved or agreed to by the Company Member.  The only real issue of substance will be whether or not the Court is satisfied that the orders under s 413 are likely to have any prejudicial effect on third parties, namely, creditors of the Company or creditors of the Transferee.  As I have said, that is a matter for another occasion. 

Associate:

Dated:  11 May 2010