FEDERAL COURT OF AUSTRALIA

Quintis Limited, in the matter of Quintis Limited (subject to deed of company arrangement) (receivers and managers appointed) (No 2) [2018] FCA 1510

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to r 39.05 of the Federal Court Rules 2011 (Cth), Order 1(a) made on 4 September 2018 be amended nunc pro tunc by substituting the words “Schedule 1” for the words “Schedule 2”.

2.    Pursuant to ss 411(4)(b) and 411(6) of the Corporations Act 2001 (Cth) (Act) the scheme of arrangement between the plaintiffs and the holders of the 8.75% Senior Secured Notes (Scheme Creditors) issued pursuant to the terms of the Indenture by the first plaintiff on or around 27 July 2016, in the form which is Schedule 1 to the explanatory statement in the proceedings (Scheme), be approved with the following modifications:

(a)    the First Lien Indenture (as that term is defined in the Scheme) be in the form of Exhibit F;

(b)    the Second Lien Indenture (as that term is defined in the Scheme) be in the form of Exhibit G;

(c)    the Note Subscription and Purchase Agreement (as that term is defined in the Scheme) be in the form of Exhibit H; and

(d)    the Amended Collateral Trust Deed (as that term is defined in the Scheme) be in the form of Exhibit J.

3.    Pursuant to s 411(12) of the Act, the plaintiffs be exempt from compliance with s 411(11) of the Act.

4.    The plaintiffs be granted liberty to apply.

5.    These orders be entered forthwith.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

YATES J:

Introduction

1    On 4 September 2018, I made orders requiring the plaintiffs to convene a meeting of the holders of the 8.75% Senior Secured Notes (also referred to as the Original Notes) under an Indenture dated 27 July 2016 (the meeting) to consider and, if thought fit, agree (with or without modification) to a scheme of arrangement between them and the plaintiffs: Quintis Limited, in the matter of Quintis Limited (subject to deed of company arrangement) (receivers and managers appointed) [2018] FCA 1400 (my earlier reasons). My earlier reasons set out the background to, and features of, the scheme. In these reasons, I will adopt the abbreviations used in my earlier reasons.

2    The meeting has been duly convened and held. The scheme creditors have agreed to the scheme. Voting forms and proxies were submitted in respect of 98.5% of the debt entitled to be voted, with 25 scheme creditors admitted to vote. Each scheme creditor present and voting at the meeting voted in favour of the scheme, thus inevitably satisfying the statutory majorities required under s 411(4)(a) of the Act. The plaintiffs now seek an order from the Court approving the scheme, subject to certain alterations. The present application is supported by the Deed Administrators.

Evidence

3    The following affidavits have been read in support of the present application:

    Shaun Robert Fraser, sworn 2 October 2018;

    Christopher Michael Prestwich, sworn 2 October 2018, 3 October 2018, and 4 October 2018;

    Jeremy Hollingsworth, affirmed 3 October 2018; and

    Scott Bradley Kershaw, sworn 3 October 2018.

Dispatch of the explanatory statement

4    Order 2(a) made on 4 September 2018 required the Scheme Meeting Materials (defined in the orders as the explanatory statement, the notice of meeting, a voting proof of debt form, and a proxy form, as approved by the Court) to be sent to the scheme creditors through the DTC system. I am satisfied that Order 2(a) has been complied with.

5    Under the terms of the Indenture dated 27 July 2016, BNY is the trustee of the Original Notes. One of its functions is to give notices to the noteholders. BNY’s records show that the Original Notes are held by a single holder—Cede and Company as nominee for DTC. DTC is a depository in the United States that offers depository services for securities that are freely tradable under US securities law. During the course of BNY’s trusteeship, all notices to noteholders have been issued through a system operated by DTC called LENS (the acronym for Legal Notice System). Under this system, notices given to DTC are distributed to entities described as Participants, who are usually banks or brokerage firms who hold securities on their own account or on behalf of their clients. It is the responsibility of the Participants to further distribute notices to their customers, including intermediaries and ultimate beneficial owners. The evidence discloses that distribution of notices in this way is a standard market practice in the United States.

6    I am satisfied on the evidence that the Scheme Meeting Materials were submitted to BNY who, in turn, dispatched the documents through LENS. The evidence satisfies me that, by this process, the Scheme Meeting Materials were sent to the scheme creditors. I further note that, subsequent to the dispatch of the Scheme Meeting Materials and prior to the holding of the meeting, the plaintiff’s’ solicitors, Allens, through Mr Prestwich (a partner in the firm), communicated with scheme creditors holding USD 249,960,000 of the face value of the Original Notes (it being remembered that the total face value of the Original Notes on issue is USD 250,000,000).

7    Order 2(b) made on 4 September 2018 required the Scheme Meeting Materials to be dispatched electronically to the three major scheme creditors. I am satisfied that this order has been complied with.

Alterations to the scheme

8    The plaintiffs apply under s 411(6) of the Act for the Court’s approval of the scheme subject to certain alterations. Section 411(6) provides:

The Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just.

9    The alterations take the form of amendments to a number of transactional documents that comprise schedules to the scheme document—specifically, the First Lien Indenture, the Second Lien Indenture, the Amended Collateral Trust Deed, and the Note Subscription and Purchase Agreement.

10    The amendments fall into three groups.

11    The first group are amendments that were before the scheme creditors at the meeting. By a separate resolution, unanimously passed, the scheme creditors resolved that, when seeking the Court’s approval of the scheme, the plaintiffs also seek orders pursuant to s 411(6) that the documents be so amended.

12    The second group are further amendments to the Collateral Trust Deed. These amendments were not before the scheme creditors at the meeting. They were sought after the meeting by the incoming trustee. These amendments have been agreed to by all the intended parties to the Collateral Trust Deed.

13    The third group of amendments are further amendments to the First Lien Indenture, the Second Lien Indenture and the Note Subscription and Purchase Agreement. These amendments were not before the scheme creditors at the meeting.

14    The power conferred by s 411(6) is a broad, discretionary power that is to be exercised judicially, having regard to its statutory purpose and in light of the whole of the circumstances of the case: In the matter of Boart Longyear Limited (No 2) [2017] NSWSC 1105 (Boart Longyear) at [92] and [108]. It is not limited to the making of alterations that are merely technical or minor in nature. The power extends to alterations that are substantive, provided of course that (in the words of the provision) the alterations are “just”: Boart Longyear at [92]; see also Snowside Pty Ltd as trustee for the Snowside Trust v Boart Longyear Ltd [2017] NSWCA 215 at [22]-[26].

15    I was taken to the amendments in each group.

16    As to the first group, and by way of general summary, the amendments concern: the completion of necessary details and the removal of matter indicating that completion is necessary (all documents); the insertion of provisions aiding the protection of the trustee under the First Lien Indenture and the Second Lien Indenture and the trustee under the Collateral Trust Deed; clarification in relation to the redemption provisions of the First Lien Indenture and the Second Lien Indenture; the insertion of anti-bribery provisions in the First Lien Indenture and the Second Lien Indenture; and certain machinery matters in the First Lien Indenture and the Second Lien Indenture dealing with counterpart documents, notice details and office details. The plaintiffs submit that these amendments reflect changes that are minor or technical in nature. By and large, I think this is correct. Certainly, a number of amendments are minor, technical or peripheral (indeed, in some cases, trifling). In some cases, however, the amendments are more than minor, technical or peripheral, such as the provisions inserted for the protection of the respective trustees and the anti-bribery provisions. The provisions in aid of the protection of the trustees seem reasonable. The anti-bribery provisions are directed to ensuring compliance by the relevant parties with their legal obligations. It is difficult to see how reasonable objection could be taken to these amendments. But, perhaps of overwhelming significance is the fact that the secured creditors present and voting at the meeting (representing, as I have noted, 98.5% of the debt entitled to be voted) have given their unanimous imprimatur to the amendments and have resolved that the plaintiffs should seek them as part of the Court’s approval of the scheme.

17    The amendments in the second group (further amendments to the Collateral Trust Deed) are of similar scope and character. They concern further provisions for the protection of the trustee. A number of these provisions are of a minor or technical nature. Some are merely measures of a machinery nature. Some might be considered to be of a more substantive nature, but not different in essential character to the amendments agreed to by the secured creditors at the meeting. Some amendments are matters of detail directed to protecting the trustee when it is required to comply with its legal obligations, including with respect to its obligations concerning anti-money laundering, or “know your customer” or similar identification checks and procedures. I do not think that these measures can be characterised as minor, technical or peripheral. But, that said, they are also of a kind approved by the scheme creditors in meeting. It would have been desirable for these amendments to have been raised in time for the secured creditors to consider them at the meeting. Nonetheless, and once again, I do not see how reasonable objection could be taken to them. Moreover, I am satisfied that it is likely that, had the secured creditors been asked to consider them, no reasonable objection would have been raised. None of the amendments sought in this group strike at the substance of the commercial arrangements sought to be implemented by the scheme.

18    The amendments in the third group (further amendments to the First Lien Indenture, the Second Lien Indenture and the Note Subscription and Purchase Agreement) are of a minor, technical, peripheral or machinery nature. It is not necessary for me to comment on them further.

19    In all the circumstances, I am persuaded that I should accede to the plaintiffs’ application. I am satisfied that it would be just to approve the scheme subject to the alterations sought by the proposed amendments to the transactional documents.

Conditions precedent

20    As I noted in my earlier reasons, the scheme is subject to a number of conditions precedent which cannot be waived. Satisfactory evidence has been adduced that the conditions to be fulfilled before the Court’s approval is given have all been complied with.

A query with respect to the independent expert’s report

21     As I noted in my earlier reasons, KordaMentha provided an expert report (the KordaMentha report) which expressed the opinion that the expected dividend that would be available to scheme creditors on a liquidation of the plaintiffs would be 56.7 cents in the dollar. The KordaMentha report also expressed the opinion that if the scheme is implemented, the plaintiffs will be solvent, and that the implied value of the scheme creditors’ interest will be 88.6 cents in the dollar.

22    On 3 October 2018, the day before the present hearing, the plaintiffs’ solicitors received a letter (bearing the same date) from Quinn Emanuel Urquhart & Sullivan (Quinn Emanuel), the solicitors for a company called Bybrook Capital LLP (Bybrook). Bybrook claims to have a repurchase agreement in respect of certain of the Original Notes. It is not a scheme creditor.

23    In the letter, Quinn Emanuel state that Bybrook holds a “meaningful interest” in the valuations made in the KordaMentha report and that Bybrook has concerns regarding “potential deficiencies” in that report based on a “high level” review conducted by Ferrier Hodgson on Bybrook’s instructions. In their letter, Quinn Emanuel acknowledged that Bybrook has no standing in respect of the scheme and that Bybrook takes no position in respect of the approval of the scheme. Even so, Emanuel Quinn requested that a report prepared by Ferrier Hodgson dated 2 October 2018 (the Ferrier Hodgson report) be brought to the urgent attention of the authors of the KordaMentha report (Ms Nettleton and Mr Kershaw) for consideration and comment. The plaintiffs complied with this request. Properly, they also brought the matter to the Court’s attention at the hearing of the present application.

24    The Ferrier Hodgson report assesses the value of the Original Notes (this is not done separately in the KordaMentha report) and states that this value is less than the value implied in the KordaMentha report. The Ferrier Hodgson report does not express a view on the value of the scheme consideration, which comprises the value of the new notes to be issued and the equity in Holdco (see [15] of my earlier reasons) because the author of the report was unable to value the equity component. Nonetheless, the Ferrier Hodgson report provides an illustrative value of “the total Replacement Securities” (including the equity component) which is less than the value of the scheme consideration assessed in the KordaMentha report. The Ferrier Hodgson report also takes issue with certain of the assumptions in the KordaMentha report, but acknowledges that the author has insufficient information to form a view on the reasonableness of a number of those assumptions.

25    Mr Kershaw, one of the authors of the KordaMentha report, has reviewed the Ferrier Hodgson report. In his affidavit of 3 October 2018, he has said that nothing in the Ferrier Hodgson report causes him to change the views he expressed in the KordaMentha report.

26    The plaintiffs submit that the Ferrier Hodgson report appears not to have been prepared for the purposes of the scheme but for use by Bybrook in connection with its repurchase agreement. The plaintiffs suggest that, seen in this light, Bybrook would have an interest in a low valuation of the relevant securities. This may be so, but I express no further view on that matter.

27    The plaintiffs submit that, while the Ferrier Hodgson report makes certain assertions regarding the KordaMentha report, and seeks to draw certain comparisons with it, there is no evidence that the Ferrier Hodgson report has been prepared with regard to the Expert Code of Conduct. Further, the plaintiffs submit that the Ferrier Hodgson report is directed to an evaluation of the Original Notes and the consideration that the scheme creditors would receive under the scheme. They submit that the Ferrier Hodgson report does not answer the same questions as the KordaMentha report. In particular, it does not address solvency; it does not form a view as to the value of a return to creditors in a liquidation; and it does not express a view as to the value of the equity component of the scheme consideration. Further, the Ferrier Hodgson report acknowledges that it has been prepared with certain limitations (the author has not had access to, or sought, the documents that were reviewed in the preparation of the KordaMentha report; the author does not have, and has not sought, information about how the cash flows in the KordaMentha report were prepared; and the Ferrier Hodgson report contains “illustrative values” only as opposed to concluded views).

28    Further, the plaintiffs submit that, while the Ferrier Hodgson report suggests a different valuation outcome to that expressed in the KordaMentha report, the Ferrier Hodgson report does not suggest that the scheme is not fair and reasonable. Moreover, there is no suggestion that the plaintiffs would not be solvent post-implementation of the scheme.

29    The plaintiffs submit that, in these circumstances, and in particular where the Ferrier Hodgson report is not put forward by any party who wishes to rely on it in opposition to the scheme, the existence of the Ferrier Hodgson report does not disclose any basis upon which the Court should not proceed to approve the scheme.

30    I accept those submissions. In addition, the scheme creditors appear to be sophisticated investors who have had full opportunity to consider and evaluate the explanatory statement and the KordaMentha report, and to raise any matters of concern in relation to them. No scheme creditor, or indeed any other person (including Bybrook), has come forward to oppose the scheme. Mr Fraser, one of the Receivers, has given evidence that, following the sale process referred to in my earlier reasons (see [7] thereof), he engaged in a number of discussions with the main secured creditors (who hold in excess of 99% of the face value of the Original Notes and who have provided significant additional funding: see [21] of my earlier reasons) in relation to various options available for the future of the Quintis group, in particular the recapitalisation of the group via the scheme. It would be extraordinary to think that these creditors had not satisfied themselves fully of the appropriateness of the scheme and of the future commercial prospects of the plaintiffs as they affect those creditors’ financial interests.

The Deed Administrators

31    As noted above, the Deed Administrators support the Court’s approval of the scheme, as indeed they supported the convening of the scheme meeting in the first place. They have filed written submissions explaining the benefits to the unsecured creditors should the scheme be approved. I have read and taken into account the submissions made. It is not necessary for me to comment further on the matters advanced other than to state that I accept that approval of the scheme will result in a significantly improved position for the unsecured creditors as a whole, compared to the position they would be in should the plaintiffs be placed in liquidation.

ASIC

32    ASIC has not provided a statement under s 411(17)(b) of the Act simply because, in the context of a creditors’ scheme, matters relating to avoidance of Ch 6 of the Act are not relevant. It has nonetheless considered the scheme (see [33]-[34] of my earlier reasons) and has stated that it does not intend to appear in this application or to make submissions. For the avoidance of doubt, I should express my acceptance that the scheme has not been proposed for the purpose of allowing a person to avoid the operation of any provision of Ch 6 of the Act.

Generally

33    I am satisfied that the scheme is fair and reasonable as between the plaintiffs and the scheme creditors. In reaching that view, I take into account not only the recommendation of the Receivers and the opinions expressed in the KordaMentha report (discussed in my earlier reasons) but also the overwhelming support given by the scheme creditors and the fact that no person has come forward to oppose the scheme. Also relevant to the Court’s approval is the support of the Deed Administrators. The injection of a substantial amount of new funding should enable the Quintis group to continue as a going concern, hopefully for the benefit of numerous and various groups of stakeholders.

Disposition

34    Orders as sought by the plaintiffs should be made.

Associate:

Dated:    11 October 2018

SCHEDULE OF PARTIES