07/05/2020

The economic fallout of the COVID-19 pandemic has created enormous financial stress for many borrowers, including issuers of notes and other debt securities. Borrowers impacted by this fallout are prudently reviewing their ability to comply with financial covenants under their borrowing arrangements, and where appropriate seeking lender waivers or consents to amendments to avoid breaching their finance agreements. 

While loan restructuring will often involve relatively streamlined bilateral commercial discussions between a borrower and its senior lenders, arranging for noteholders to pass the requisite resolutions to permit note restructures often presents a more challenging process for issuers.  Where noteholder engagement is low (which is often the case), these challenges typically include the need to pursue the ultimate beneficial holders for their input through a complicated chain of custodian arrangements.  Navigating relatively long notice requirements and other formalities set out in the meetings provisions can also result in a slow and cumbersome process.  

COVID-19 impact on noteholder meetings

The continuing COVID-19 government lockdown has created new challenges for note restructures, including outdated provisions in note terms which contemplate that noteholders will attend physical meetings in person to vote on relevant matters which require noteholder approval.  Given this is no longer feasible under the new COVID-19 related restrictions on public gatherings, issuers and note trustees may need to explore the feasibility of convening virtual meetings (e.g. by telephone conference or audio/visual link), instead of holding physical meetings. 

Although note terms are unlikely to be helpful in this regard (i.e. very few would contemplate virtual noteholders’ meetings), they commonly confer powers on the note trustee (or where there is no note trustee involved, the issuer) to prescribe rules on how noteholders’ meetings are to be held.  If these powers are drafted broadly enough, they may give note trustees (or issuers) the ability to prescribe supplementary meeting procedures to allow for the convening of virtual noteholder meetings and thereby permit noteholders to exercise their rights despite the Covid-19 related public gathering restrictions.

In considering prescribing new rules to facilitate virtual noteholders meetings, Australian note trustees and issuers can seek guidance from the courts and the Federal Government on the convening of virtual meetings.  Although this guidance does not relate to noteholders’ meetings, it indicates the issues that courts will take into account when considering the validity of virtual noteholders’ meetings.

Federal Government determination

The most recent guidance was introduced on 6 May 2020 in the form of a Federal Government determination relating to the holding of meetings under the Corporations Act 2001 (Corporations Act), the Corporations Regulations 2001, the Insolvency Practice Rules or the Passport Rules (“New Determination”). 

As discussed here, in order to facilitate the continuation of business amidst the COVID-19 related restrictions, the New Determination allows companies to hold meetings remotely via virtual meetings subject to certain conditions being satisfied. The New Determination is temporary and will last for 6 months only. During this period it will modify the operation of the meeting provisions in relevant legislation and regulations so that:

  • companies that are required or permitted to hold meetings are able to hold those meetings remotely as virtual meetings.  One or more technologies can be used to enable all participants to attend without being physically present;  
  • all persons participating in the meeting will be taken for all purposes to be present at the meeting while participating.  This means that determining persons present for purposes such as achieving a quorum may be met using technology;
  • votes must be taken by a poll, and not a show of hands, to give each person entitled to vote the opportunity to vote in real time and, if practical, to record their vote in advance of the meeting;
  • it is necessary to allow those attending the meeting to speak (e.g. by asking a question) by using technology that allows that opportunity to participants;
  • a proxy may be appointed using the relevant technology specified in the notice of meeting;
  • notices of meeting may be sent to those entitled to attend using one or more technologies which must include the contents of the notice and any other information to be provided with the notice.  Alternatively, those entitled to attend may be provided details of an online location where they can view the contents of the notice and any other information.  For example, it is often the case that a company has email addresses for some but not all of its members.  It will now be permissible for the company to send the notice of meeting via email where an email address is available, and to send all other members a letter or postcard setting out where the recipient could view or download the notice and other material;
  • the person required to give the notice of meeting must include information about how persons entitled to attend and participate in the meeting can do so (including by proxy).  The notice must explain how participants can vote and ask questions and must include any other information they need to know to participate using the selected technology; and
  • if a person has already sent out a notice of an Annual General Meeting (AGM) or other meeting before the determination came into force, that person must issue another notice at least seven days before the meeting with information about how to participate in the meeting electronically.  

Although the New Determination does not apply to noteholders meetings, there is no reason why similar procedures could not be developed, with appropriate modifications, for virtual noteholders’ meetings. The New Determination is indicative of what matters must be addressed for an effective virtual meeting to be held.

Guidance from the courts

Australian note trustees and issuers may also find further guidance on this topic from two recent cases which have considered how virtual meetings may be validly convened.

Virgin Australia Holdings Ltd (Administrators Appointed)

Note trustees or issuers who are considering the need to convene virtual noteholder meetings during the lockdown restrictions will take comfort from the recent decision of the Federal Court of Australia in the matter of Virgin Australia Holdings Ltd (Administrators Appointed) ACN 100 686 226 & Ors [2020] FCA 571.  The court considered whether to grant an application to permit the meetings of the creditors of Virgin Australia Holdings Ltd to be conducted exclusively by video-link or telephone and whether notice of such meetings could be sent via email.

The Insolvency Practice Rules (Corporations) 2016 (Cth) (Insolvency Practice Rules), which regulate meetings of creditors, provide that notice of a meeting must specify the date, time and place of the meeting.  Whilst the court held that at least in the Insolvency Practice Rules, “place” refers to a specified physical place, once this place has been specified in the notice, in light of the COVID-19 pandemic and the restrictions on public gatherings, the court can then make orders confirming that meetings of creditors can be conducted by video-link or telephone.

One of the most important points noted by the court was that there is no practical impediment to meetings of creditors being held via electronic means and it is appropriate (if not necessary) that these occur, given the current circumstances.  

In permitting the notice to be given by email, the court applied BBY Limited [2015] NSWSC 974, holding that it is now commonplace to permit external administrators to give notices to creditors by email and other electronic publication, including publication on appropriate websites.

The court noted that the present circumstances provided a reason for it to apply flexibility in the application (and perhaps adaption) of existing laws, and to exercise any discretion to ensure that the Australian community and economy are supported during the challenging times arising out of the Covid-19 lockdown.

Re Avita Medical Ltd [2020]

Most recently in Re Avita Medical Ltd [2020] FCA 592, the Federal Court of Australia made orders allowing Avita Medical Limited (Avita) to hold a virtual shareholder meeting to consider and vote on a proposed scheme of arrangement. 

Due to the recent restrictions resulting from COVID-19, Avita was unable to follow its usual practice of convening and holding its general meetings in Victoria.  As such, Avita sought an order to enable a virtual meeting of its members to occur without requiring the physical presence of two or more persons in the same place.  The court was satisfied that the technology proposed by Avita, which would allow shareholders and property holders to register, observe, lodge questions or motions, and vote during the scheme meeting, would enable effective participation in the meeting and voting as well as the recording of voting as required.  In granting the order, the court referred to the Virgin judgment as well as Techfront Australia Pty Limited (administrators appointed) [2020] FCA 542 where the court also allowed company administrators to hold creditors' meetings by telephone or audio-visual conference instead of a physical meeting.

Reference was also made to the Australian Securities Investments Commission’s (ASIC’s) updated guidelines for meetings of companies in response to COVID-19, regarding upcoming annual general meetings (AGMs) and financial reporting requirements.  The guidelines note that ASIC intends to take a ‘no action’ position on non-compliance with provisions of the Corporations Act that may restrict the holding of virtual AGMs.  However, this position is conditional on the technology providing members as a whole a reasonable opportunity to participate in the meeting, including being able to ask questions of the auditor and about management and voting occurring by a poll rather than a show of hands.

Importantly, the court accepted that since the scheme meeting was to be made pursuant to a court order, a company’s constitution (if it does not permit virtual meetings) may be overridden by the exercise of the court’s statutory powers under section 411 of the Corporations Act.

Castle Trust Direct Plc. Re

A similar outcome resulted from the UK High Court of Justice in Castle Trust Direct Plc. Re, [2020] 4 WLUK 63.  The main issue before the court was whether to grant an application to convene a remote creditors’ meeting to approve two related schemes of arrangements.  The applicants proposed to hold the meetings via telephone to allow creditors to dial in and consult with each other in real time.  A voting mechanism was also proposed, whereby the meeting would be paused to allow creditors to vote by telephone. Once the votes had been tallied, the meeting would resume to declare the results.

The court granted the application, holding that the word “meeting” in the context of the UK Companies Act 2006 does not require a physical meeting.  The court decided that physical presence at the meeting was not necessary, as long as technology gave participants a real opportunity to collectively consult on a matter and to decide if it was in their interest.  The court recognised that the ‘coming together’, ordinarily required in a meeting, could be achieved through technology.

Relevance for Australian note trustees and issuers

In the context of Australian wholesale note programs, it is rare for noteholders to physically attend meetings.  Instead, beneficial noteholders will submit their voting instructions through Austraclear which will appoint a proxy to cast the votes on their behalf at the meeting.  Written resolutions signed by Austraclear on the instructions of the beneficial noteholders are also relatively common and avoid the need for a meeting to be convened. 

Issuers of retail notes who are seeking restructuring approvals, or note trustees seeking direction under retail note programmes, are more likely to rely on meetings (rather than written resolutions) to obtain input from noteholders given there is no clearing system involved.  Even then, very few noteholders ever attend noteholder meetings in person. 

However, to the extent meetings are required to be held, the above judgments (although not directly applicable to convening noteholder meetings) would be persuasive authority if a similar issue arose in relation to a meeting of noteholders. These cases also offer useful guidance if note trustees and issuers wish to ensure that any virtual noteholders’ meetings convened by them will be treated by the courts as valid. 

Practical tips for virtual noteholders’ meetings

Set out below are some practical tips for note trustees and issuers to consider when convening noteholders’ meetings.  These tips take into account the key considerations of the judgments mentioned above, the conditions for convening virtual meetings outlined in the New Determination and the latest ASIC guidelines for AGMs.

If virtual noteholders’ meetings prove to be successful in the current environment, they may lead to changes to the way in which noteholders’ meetings are held in a post-COVID-19 world and corresponding updates to note trust deeds to accommodate these changes.

Prior to the meeting

Being well prepared before the meeting will enable the meeting to run as smoothly as possible.  To this end, note trustees and issuers should ensure that:

  • the notice convening the meeting contains details of the technology that will be used for the meeting as well as logistical details;
  • the type of technology used to convene the meeting is appropriate.  For example, for large meetings it may be best to hold an audio only meeting as video links can impact connectivity;
  • the dial-in details or conference link to the meeting have been provided, well in advance, to all attendees;
  • clear instructions have been provided on how to join the meeting and operate the technology during the meeting, including how to vote and ask questions (including by proxy).  It may be sensible to give attendees who are not comfortable with technology a practice run before the actual meeting;
  • a system is in place to verify the identity of the attendees;
  • a meeting agenda has been circulated to attendees;
  • it has been established who will host the virtual meeting and operate the technology;
  • if necessary, different time zones have been accounted for and peak bandwidth constraint times (e.g., on the hour and half hour) avoided; and
  • the call is opened 10-15 minutes before the start time to allow a prompt start and deal with any IT issues.

During the meeting

While the meeting is happening, the note trustee or issuer should:

  • first, require all attendees to identify themselves and mark attendance to ensure that the minimum quorum is achieved;
  • regularly ensure that all attendees are able to hear what is being said, understand the matter which is being discussed and have the opportunity to ask questions or comment and consult with one another;
  • ensure adequate minutes are being taken as usual and not recorded.  The minutes should also note if any technological issues were encountered, to prevent it from recurring in a future meeting.  While it may seem convenient to record the meeting and draw up the minutes afterwards, recording meetings is not generally recommended;
  • consider requiring votes to be taken by a poll (rather than a show of hands);
  • provide attendees with enough time to record their vote in advance of the meeting (including through proxy arrangements, if applicable).  The votes should then be tallied, registered and declared at the end of the meeting; and
  • if possible, ensure that IT support is on standby so that any technical issues which occur can be resolved speedily.

 

You may also be interested in:

Before the music stops – a COVID-19 survival toolkit for debt capital markets issuers

Don’t find (de)fault, find a remedy” – a COVID-19 survival toolkit for debt capital markets trustees

COVID-19: Material adverse change and material adverse effect clauses

New regulations facilitate remote witnessing and attestation in NSW in response to COVID-19

COVID-19: Structured Finance Support Fund gives the Australian securitisation industry a boost

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