28/05/2020

Justice Black’s recent decision in Re Wollongong Coal to revive a terminated scheme of arrangement confirms that the general position that a scheme cannot be amended once approved is subject to some nuance.

Amendment or termination of a scheme after approval

It is a well-established principle that a scheme of arrangement, once approved by a Court, cannot be amended or varied by the Court. Similarly, the Court is generally prevented from approving a scheme which contains provisions that carry within themselves a machinery for variation of the scheme. In order to amend a subsisting scheme of arrangement, the scheme parties are required to propose a second scheme of arrangement which overrides the prior scheme to the extent of any inconsistency once approved.

However, from the perspective of market participants, this principle creates some difficulty as the implementation of a scheme of arrangement is a costly and lengthy process. Helpfully, there is a line of authority which suggests that a scheme of arrangement, once approved, may be amended in certain limited circumstances without the need to resort to the implementation of a second amending scheme. However, there is still some discussion as to the source of the Court’s power to make such an amendment

Relevant principles

Inherent power of the Court

Rule 1.12 of the Uniform Civil Procedure Rules (UCPR) provides that:

  1. "Subject to these rules, the court may, by order, extend or abridge any time fixed by these rules or by any judgment or order of the court."
  2. "The court may extend time under this rule, either before or after the time expires, and may do so after the time expires even if an application for extension is made after the time expires." (Our bolding)

In NSW, this rule is rendered operative in relation to corporation matters by rule 1.10 of the Supreme Court (Corporations) Rules 1999 (NSW).  Similar rules apply in other Australian jurisdictions.

In regard to schemes of arrangement, it is reasonably well established in Australia that the power to extend or abridge time periods pursuant to Rule 1.12 includes the power to abridge the time that things are required to be done pursuant to an approved scheme. Santow J said:

"Once approved, there is no ‘scheme’ separate from the order of the court. Rather, any ‘scheme’ of the proposal decided at the relevant meetings is subsumed into and by the order of the court."

The time provisions of a scheme of arrangement are therefore amendable by the Court pursuant to the Court’s power to extend or abridge the time for compliance with its orders. The contrary conclusion of the Privy Council in Kempe v. Ambassador Insurance Company (Bermuda) [1998] 1 WLR 271 has not been followed in Australia.

The “Slip Rule”

Rule 36.17 of the UCPR (the Slip Rule) provides that:

"If there is a clerical mistake, or an error arising from an accidental slip or omission, in a judgment or order, or in a certificate, the court, on the application of any party or of its own motion, may, at any time, correct the mistake or error."

This rule has been relied upon to enliven the power of the Court to amend timing provisions within a scheme of arrangement with retrospective effect, in circumstances where the Court was satisfied that both the parties to the scheme and the Court were operating under a mistake of fact that a certain act would be completed by a prescribed date.

The Corporations Act

Consideration has also been given as to whether s 1322(4)(d) of the Corporations Act (2001) (Cth) may be relied upon to establish a Court’s power to make an order amending timing provisions in an approved scheme of arrangement. Relevantly, that section provides that:

"Subject to the following provisions of this section but without limiting the generality of any provision of this Act, the Court may, on application of any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: […]

(d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;"

It has been confirmed that a scheme of arrangement is a ‘proceeding’ related to a corporation for the purposes of the Corporations Act. However, there is some doubt as to whether the remedial power conferred on the Court under s 1322(4)(d) is broad enough to capture the individual steps of a scheme, which while indispensable to a scheme taking effect, are not directly related to a corporate proceeding.

The decision in Re Wollongong Coal

Factual background

The application before the Court related to the approved schemes of arrangement (Schemes) between each of Wollongong Coal Limited (WCL) and Jindal Steel & Power (Australia) Pty Ltd (JSPAL) (together, the Plaintiffs) and the persons who were lenders under two loan facilities (Secured Scheme Creditors). Both Plaintiffs are members of Jindal Steel & Power Group, an Indian steel and energy group.

The approved Schemes had the effect of restructuring the existing loan facilities by offering the Secured Scheme Creditors the opportunity to participate in two restated facilities, with the cumulative effect being a reduction to the principal amount outstanding upon particular milestones occurring and an extension of the repayment schedule. The Schemes also facilitated the proposed sale of non-mining assets that, subject to the Schemes, formed part of the Secured Scheme Creditors’ security (with the effect that the assets may be realised other than on a forced-sale basis). An independent expert concluded that if the Schemes were implemented, the likely outcome for the Plaintiffs would be further time to maximise the value of their assets and obtain the regulatory approval necessary to restart mining operations, provision of the additional liquidity required to restart mining operations, and an improvement to the solvency position of the Plaintiffs.

At the time of the hearing before Black J, the Schemes had terminated automatically by their terms at 11.59pm on 29 March 2020 as the ‘CP Satisfaction Long Stop Date’ had passed without certain required payments being made by JSPAL to satisfy a condition precedent to the implementation of the Schemes. A waiver was provided in respect of these outstanding payments by the requisite majority of Secured Scheme Creditors on 30 March 2020. However, the waiver was obtained too late – if this waiver had been obtained even one day earlier, the Schemes would not have terminated.

Application before court

The Plaintiffs sought orders to amend the Schemes. Specifically, they sought orders to retrospectively extend the ‘CP Satisfaction Long Stop Date’ and the ‘Settlement Long Stop Date’ with the effect that the Schemes did not terminate at 11.59pm on 29 March 2020 but remained on foot until the following day when the Secured Scheme Creditors obtained the requisite waiver, and so continued thereafter.

Orders made

On 29 April 2020, Black J made the requested orders amending the Schemes to retrospectively amend the ‘CP Satisfaction Long Stop Date’ to 1 April 2020 and the ‘Settlement Long Stop Date’ to 6 May 2020, effectively reviving the Schemes. Black J’s orders are significant as they confirm that parties to an approved scheme of arrangement which has been terminated by its terms may successfully apply to a Court to amend the scheme without having to resort to the implementation of a second scheme of arrangement.

Reasons for decision

The decision in Re Wollongong Coal confirms that Courts in Australia have the ability to retrospectively amend the timing provisions attached to a scheme of arrangement once approved, in order to allow the scheme to achieve its intended objectives. Black J preferred to rely on the inherent power of Court under the UCPR as the legislative basis for this ability:

"I would myself prefer to base that extension [of power] on r 1.12 of the UCPR, treating the terms of the scheme as having been subsumed into the Court’s orders in respect of the scheme. However, if it were necessary to do so, I would follow the decision of Santow J in Re AGL Gas Networks as to the operation of UCPR r 36.17, where that decision has been followed in subsequent cases and delivers a constructive outcome. It also seems to me that s 1322(4)(d) of the Corporations Act may well be applicable in the relevant circumstances although I, like other judges addressing this question, do not find it necessary to finally determine that question."

In considering the application of the Slip Rule to the above facts, his Honour expressed doubt as to whether a failure to provide a longer period for satisfaction of a condition precedent could properly qualify as a “slip”.

In reaching his decision, his Honour also gave particular weight to the fact that the application to amend the Scheme was supported by the substantial majority of scheme creditors by number and value, and that a failure to make the requested orders would provide no practical utility and result in considerable wasted costs in requiring that a new meeting be convened to consider a new or revised scheme.

Black J’s decision in this matter is likely to become the new Australian authority regarding the Court’s power to amend timing provisions in a scheme of arrangement once approved.

 

Note: Gilbert + Tobin advised the supporting scheme creditors in respect of the Schemes.

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