The Ten Group of Companies (Ten Group) entered into voluntary administration on 14 June 2017 and appointed Mark Korda, Jarrod Villani and Jenny Nettleton of Korda Mentha as joint and several administrators (Administrators) of each of the companies within the Ten Group.
On 7 August 2017, the Administrators invited the submission of recapitalisation and acquisition proposals in respect of the Ten Group. This invitation ultimately led to the submission of two proposed Deed of Company Arrangements (DOCA):
- A DOCA submitted by Birketu Pty Ltd (Birketu) and Illyria Nominees Television Pty Ltd (Illyria) on 18 August 2017 (BI DOCA). The BI DOCA provided, for among other things, three proposed recapitalisation structures:
- following consent being granted by the Court under section 444GA of the Corporations Act 2001 (Cth) (Act), 75% of the shares held by each of the Ten Group entities be transferred to Birketu and Illyria for zero consideration;
- Australian Securities and Investments Commission (ASIC) and Australian Securities Exchange (ASX) relief would be sought in order to allow each entity in the Ten Group to issue 1.07 billion options (the equivalent to 80% of the equity capital of the Ten Group) to Birketu and Illyria for zero consideration; or
- a proposal that contained a qualified email from the Commonwealth Bank of Australia (CBA) which purported to be evidence of CBA’s willingness to continue to finance the Ten Group until 15 December 2017 (as opposed to the existing termination date of 31 August 2017). This offer remained open for acceptance until 5.00pm, 25 August 2017.
- A DOCA was also submitted by CBS International Television Australia Pty Ltd, CBS Broadcasting, Inc and Showtime Distribution B.V. (collectively, CBS). The DOCA submitted by CBS proposed, among other things, the acquisition of the assets of the Ten Group by refinancing the existing secured debt owed by the Ten Group (CBS DOCA).
The CBS DOCA was preferred by the Administrators and Receivers of the Ten Group. Accordingly, the section 439A Report issued by the Administrators on 4 September 2017 presented the creditors of the Ten Group with the anticipated outcome of the recapitalisation process proposed in the CBS DOCA.
The matter of Ten Network Holdings Limited (Administrators Appointed) (Receivers and Managers Appointed) and Others  NSWSC 1247 concerned an application made by WIN Corporation Pty Ltd (WIN) (an affiliate and creditor of the Ten Network), Birketu and Andrew Lancaster (the Chief Executive of WIN and a director of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) (Holdings) in the Supreme Court of New South Wales for the purpose of obtaining the following:
- An adjournment of the second creditor’s meeting on the basis that the section 439A Report and Supplemental Report (Reports) prepared by the Administrators were inadequate and deficient;
- An order that CBS not be entitled to vote; and
- Whether the shareholders of Holdings be entitled to vote at the second creditor’s meeting.
Between filing the application and its hearing the Administrators provided to creditors a Supplemental Report that sought to address a number of the matters raised by the plaintiffs.
A broad summary of the 11 alleged deficiencies of the Reports (thereby seeking to justify an adjournment of the second creditor’s meeting) and the Court’s comments in respect of each of the allegations is set out in the below table:
|Alleged deficiencies in section 439A Report
|Justice Black’s comments
|The section 439A Report failed to include an independent expert’s valuation of the business conducted by the Ten Group companies.
|Justice Black noted that an expert report concerning the companies in the Ten Group would require too much time, particularly in the context of an administration.
Any delay to the second creditor’s meeting in order for an expert report to be tendered would be damaging to the company – as it would be detrimental to leave the company in a position of likely insolvency and uncertainty for an extended period of time.
Justice Black took note of the fact that the administrators provided the Plaintiffs with a draft expert report (prepared by KPMG) – Justice Black noted that the Plaintiffs did not seek to tender or make submissions in relation to the draft report.
Section 439A requires the Administrators to report on the ‘information known to the Administrators’, Black J was not satisfied that the Administrators knew any information in respect of the independent expert report which would have required them to have provided further disclosure in the section 439A Report.
|The section 439A Report did not include information regarding the terms of the Proposed BI DOCA. Further, the Plaintiffs heavily criticised the 3 alternatives presented in the Report.
The Administrators and the Ten Group (collectively, Ten Parties) contended that they were not required to disclose the BI DOCA in the section 439A Report as the BI DOCA was conditional on an offer by CBA to provide further financial support to the Ten Group until the end of 2017. This offer was open for acceptance until 25 August 2017 and there was no evidence before the Court that the offer by CBA had been extended.
|In Justice Black’s view, the BI DOCA had lapsed. Accordingly, there would be no utility in providing the creditors of the Ten Group with information about a proposal that was no longer open for acceptance.
| The section 439A Report does not provide information as to the Administrators’ belief that the CBS DOCA was preferential to the BI DOCA as it would be beneficial to the creditors.
A further criticism was that the Administrators incorrectly characterised the CBS DOCA as ‘better’ due to having less transaction risk.
|It was in Justice Black’s view that the Administrators adequately provided reasons for their opinion that the execution of the CBS DOCA would be in the best interests of the creditors.
|The section 439A Report fails to adequately particularise the refinancing documentation and total value of the transactions contemplated by the CBS Transaction Deed under the CBS DOCA.
|Justice Black noted that this information is included in the Supplemental Report.
Further, the Plaintiffs failed to establish a basis upon which further information concerning the CBS refinancing proposal would assist in the decision to be made by the creditors.
| The section 439A Report fails to include adequate information concerning the likelihood of the conditions precedent to the proposed transfer of shares in Ten Network Holdings Ltd to CBS under section 444G of the Act not being satisfied by the sunset date of 15 December 2017, and the intentions of the Administrators and CBS if these conditions precedent are not satisfied, including the terms of any alternative transaction.
The representative for the Ten Parties claimed that there was no “real risk” in respect to the approval of the share transfer under section 444G of the Act.
|The noted that the matter of conditions precedent to the DOCA is addressed in the Supplemental Report.
In Justice Black’s view, the Administrators could make no further disclosure than to provide an opinion that they considered the application under section 444G of the Act likely to succeed, and also acknowledge the fact that it may also fail. Such information would not make a substantial difference in informing the creditors.
|The section 439A Report fails to include a declaration as to any expected tax benefit to CBS (in Australia or any other jurisdiction) as a result of CBS acquiring shares in Ten Network Holdings Ltd.
|This matter was addressed by the Administrators in the Supplemental report to the extent that it was noted that the Administrators were not aware of any tax benefit to CBS as a result of the proposed acquisition.
In Justice Black’s view, such matters are irrelevant to the decision making process of the creditors.
Justice Black also noted that there was no requirement for the Administrators to include such information in the section 439A Report as it was not available to the Administrators, and could not be obtained within a reasonable amount of time.
|The section 439A Report fails to include adequate information concerning the reasons for, and advantages and disadvantages of a creditor’s trust, the operation and commercial significance of the warranty claim provision of the proposed creditors’ trust deed, the reason for the Receivers’ reappointed by CBS under its security and the total costs of the receivership.
|The Court noted that these matters are addressed in the Reports.
Justice Black was not satisfied that there was any inadequacy in the disclosure on this issue.
|The section 439A Report fails to provide adequate information on the extent to which the Ten Group will be capable of trading as a going concern if the CBS DOCA was approved.
|The section 439A Report discloses that the Ten Group have had their debt refinanced by CBS and have access to a $30million facility provided by CBS.
Given the fact that CBS had already made a significant investment in the Ten Group, Justice Black was of the view that it reasonable to infer that CBS would wish to preserve the value of its investment by ensuring the Ten Group remained solvent and continued to trade.
|The section 439A Report fails to provide adequate information in relation to the entitlement of CBS to vote as a creditor as a second creditor’s meeting.
|The Court found that there was nothing further to be disclosed in this regard as CBS’ entitlement to vote arose by operation of Part 5.3A of the Act.
|The section 439A Report fails to provide adequate information in relation to the extent to which the Administrators or CBS have negotiated the contracts between the Ten Group and Fox.
|Justice Black accepted the Administrators’ submission that they had not been involved in the negotiation process. Further, the Court was not satisfied that further information on this matter would assist the decision making process of the creditors.
|The section 439A Report fails to provide adequate information in relation to the ‘discriminatory’ treatment of creditors under the proposed CBS DOCA and fails to address the risk of the proposed DOCA being set aside under section 445D of the Act.
|Justice Black noted that the section 439A Report sets out the following:
Accordingly, in Justice Black’s opinion, the treatment of creditors did not involve an unusually high level of risk or discrimination.
The Plaintiffs could not satisfy the Court that there was any further information in relation to the CBS DOCA, BI DOCA, or any other recapitalisation proposal, that the creditors of the Ten Group were entitled to be made aware of prior to the commencement of the second creditor’s meeting. Accordingly, the Court dismissed the application brought by the Plaintiffs to adjourn the second creditor’s meeting on the grounds that the Reports were inadequate and deficient in their disclosure. The Court found that any further adjournment of the second creditor’s meeting should be a matter for the creditors at the second creditor’s meeting and not a matter for the Court to decide.
Further, the Court did not accept the submission that CBS or the shareholders of Holdings were entitled to vote at the second creditor’s meeting.
The Courts reasoning in this matter is informative as it provides insight into the range of factors taken into account by the Court when considering whether a report prepared pursuant to section 439A of the Act (and any Supplemental Report) contains the information necessary to enable creditors to make an informed decision. This decision also reaffirms that ultimately it is for the creditors to decide the outcome of companies in administration absent some matter that requires the Court to interfere prior to that decision being made.
This article was written by Sherry Napadow, Solicitor, and Grant Whatley, Partner, in our Sydney office.
Publication Editor: Grant Whatley.